ACCOUNTS RECEIVABLE Estimated uncollectible accounts at 12/31/01 220,000

Risk of Accounting Loss What amount should Soward report for accounts receivable, before allowances for sales
1. In its December 31, balance sheet, Butler Co. reported trade accounts receivable of $250,000 returns and uncollectible accounts, at December 31, 2001?
and related allowance for uncollectible accounts of $20,000. What is the total amount of risk a. $1,850,000 c. $1,735,000
of accounting loss related to Butler’s trade accounts receivable, and what amount of that risk is b. $1,775,000 d. $815,000 AICPA 0593 I-12
off-balance sheet risk?
AICPA, Adapted a. b. c. d. Bad Debt Expense
Risk of Accounting Loss $0 $230,000 $230,000 $250,000 *. Which method of recording uncollectible accounts expense is consistent with accrual
Off-Balance Sheet Risk $0 $ 0 $ 20,000 $ 20,000 accounting?
a. b. c. d.
Collection Allowance Yes Yes No No
2. On June 1, 1989, Pitt Corp. sold merchandise with a list price of $5,000 to Burr on account. Direct write-off Yes No Yes No
Pitt allowed trade discounts of 30% and 20%. Credit terms were 2/15, n/40 and the sale was AICPA 0595 F-35(02-08-5)
made FOB shipping point. Pitt prepaid $200 of delivery costs for Burr as an accommodation.
On June 12, 1989, Pitt received from Burr a remittance in full payment amounting to 5. Ward Co. estimates its uncollectible accounts expense to be 2% of credit sales. Ward's credit
a. $2,744 c. $2,944 sales for 2000 were $1 million. During 2000, Ward wrote off $18,000 of uncollectible accounts.
b. $2,912 d. $3,112 AICPA 0590 I-10 Ward's allowance for uncollectible accounts had a $15,000 balance on January 1, 2000. In its
December 31, 2000 income statement, what amount should Ward report as uncollectible
Receivables - Gross accounts expense?
3. The following information relates to Jay Co.’s accounts receivable for 1992: A. $23,000 C. $18,000
Accounts receivable, 1/1/92 $ 650,000 B. $20,000 D. $17,000 AICPA 0593 I-51
Credit sales for 1992 2,700,000
Sales returns for 1992 75,000 FEU DMX 2016
Accounts written off during 1992 40,000 6. William Co. determined that the net value of its accounts receivable at December 31, 2001
Collections from customers during 1992 2,150,000 based on an aging of the receivables, was $650,000. Additional information is as follows:
Estimated future sales returns at 12/31/92 50,000 Allowance for uncollectible accounts – 1/1/01 $ 60,000
Estimated uncollectible accounts at 12/31/92 110,000 Uncollectible accounts written off during 2001 36,000
What amount should Jay report for accounts receivable, before allowances for sales returns Uncollectible accounts recovered during 2001 4,000
and uncollectible accounts, at December 31, 1992? Accounts receivable at 12/31/01 700,000
a. $1,200,000 c. $1,085,000 For 2001, what would be William’s bad debt expense?
b. $1,125,000 d. $925,000 AICPA 0593 I-12 a. $10,000 c. $30,000
b. $22,000 d. $42,000 AICPA 1194 F-45
4. The following information relates to Soward Co.’s accounts receivable for 2001:
Accounts receivable, 1/1/01 $1,300,000 7. Inge Co. determined that the net value of its accounts receivable at December 31, 2000,
Credit sales for 2001 2,700,000 based on an aging of the receivables, was $325,000. Additional information is as follows:
Sales returns for 2001 75,000 Allowance for uncollectible accounts -- 1/1/00 $ 30,000
Accounts written off during 2001 40,000 Uncollectible accounts written off during 2000 18,000
Collections from customers during 2001 2,150,000 Uncollectible accounts recovered during 2000 2,000
Estimated future sales returns at 12/31/01 50,000 Accounts receivable at 12/31/00 350,000
 For 2000, what would be Inge's uncollectible accounts expense? 10. If Brighton Corporation determines its bad debt expense by using the aging schedule of its
A. $5,000 C. $15,000 accounts receivable, the bad debt expense for the 2000-01 fiscal year would be
B. $11,000 D. $21,000 AICPA 1194 F-45 A. $82,875 C. $70,350
B. $66,950 D. $79,475
8. Wren Company had the following account balances at December 31, 2000:
Accounts receivable $ 900,000 11. The book value of the net accounts receivable written off by Brighton Corporation during the
Allowance for doubtful accounts (before any provision for 2000 2000-01 fiscal year is
doubtful accounts expense) 16,000 A. $76,500 C. $73,100
Credit sales for 2000 1,750,000 B. $79,900 D. $79,475
Wren is considering the following methods of estimating doubtful accounts expense for 2000:
➢ Based on credit sales at 2% Net Realizable Value
➢ Based on accounts receivable at 5% 12. An analysis and aging of Hom Company’s accounts receivable at December 31, 2001
What amount should Wren charge to doubtful accounts expense under each method? disclosed the following:
AICPA 0588 I-51 A. B. C. D. Accounts receivable $850,000
Percentage of Credit Sales $51,000 $51,000 $35,000 $35,000 Allowance for uncollectible accounts per books 50,000
Percentage of Accounts Receivable $45,000 $29,000 $45,000 $29,000 Amounts deemed uncollectible 64,000
The net realizable value of the accounts receivable at December 31 should be
Questions 11 through 13 are based on the following information. CMA 1289 4-21 to 23 a. $836,000 c. $786,000
Brighton Corporation uses the allowance method of accounting for bad debts on its internal reports b. $800,000 d. $736,000 AICPA 1186 II-16
and has used a historical rate of 1.5% of credit sales to estimate its bad debt expense. The aging
schedule of Brighton's accounts receivable at November 30, 2001, based upon past collection Aging of Accounting Receivable
experience is presented as follows. 13. At the end of September, an enterprise has outstanding accounts receivable of 350 on third-
quarter credit sales, composed as follows:
Days Account Outstanding Amount Probability of Collection Month Credit Sales Still Outstanding at the End of September
0-30 days $640,000 .98 July 600 100
31-60 days 180,000 .92 August 900 170
61-90 days 95,000 .75 September 500 80
over 90 days 40,000 .60 The percentage of receivables in the 31-to-60-day age group at the end of September is
$955,000 A. 22.86% C. 48.57%
Total sales for the 2000-01 fiscal year were $6,500,000, of which 85% were on credit. The B. 28.57% D. 71.43% CIA 1196 IV-42
allowance for uncollectible accounts had a credit balance of $76,500 on December 1, 2000, and a
debit balance of $3,400 on November 30, 2001, before any entry to record bad debt expense for Allowance for Uncollectible Accounts
the 2000-01 fiscal year. *. When the allowance method of recognizing uncollectible accounts is used, the entry to record
the write-off of a specific account
9. If Brighton Corporation continues to determine its bad debt expense by using the historical a. Decreases both accounts receivable and the allowance for uncollectible accounts.
percentage of credit sales, the bad debt expense for the 2000-01 fiscal year would be b. Decreases accounts receivable and increases the allowance for uncollectible accounts.
A. $82,875 C. $66,950 c. Increases the allowance for uncollectible accounts and decreases net income.
B. $86,275 D. $70,350 d. Decreases both accounts receivable and net income. AICPA 1194 F-12
(02-08-6)
Write-Off 16. The following accounts were abstracted from Pika Co.’s unadjusted trial balance at December
*. Mill Co.’s allowance for uncollectible accounts was $100,000 at the end of 1989 and $90,000 31, 2001:
at the end of 1988. For the year ended December 31, 1989, Mill reported bad debt expense of Debit Credit
$16,000 in its income statement. What amount did Mill debit to the appropriate account in Accounts receivable $2,000,000
1989 to write off actual bad debts? Allowance for uncollectible accounts 16,000
a. $6,000 c. $16,000 Net credit sales $6,000,000
b. $10,000 d. $26,000 AICPA 1190 II-9 Pika estimates that 3% of the gross accounts receivable will become uncollectible. After
(03-05) adjustment at December 31, 2001, the allowance for uncollectible accounts should have a
credit balance of
14. An analysis of a company's $150,000 accounts receivable at year-end resulted in a $5,000 a. $180,000 c. $44,000
ending balance for its allowance for uncollectible accounts and a bad debt expense of $2,000. b. $164,000 d. $60,000 AICPA 0590 I-9
During the past year, recoveries on bad debts previously written off were correctly recorded at
$500. If the beginning balance in the allowance for uncollectible accounts was $4,700, what *. The following information pertains to Tara Co.’s accounts receivable at December 31, 1992?
was the amount of accounts receivable written off as uncollectible during the year? Days outstanding Amount Estimated % uncollectible
A. $1,200 C. $2,200
0 – 60 $120,000 1%
B. $1,800 D. $2,800 CIA 1196 IV-33
61 – 120 90,000 2%
Over 120 100,000 6%
Percentage of Sales Method
$310,000
15. At January 1, 2000, Jamin Co. had a credit balance of $260,000 in its allowance for
uncollectible accounts. Based on past experience, 2% of Jamin's credit sales have been During 1992, Tara wrote off $7,000 in receivables and recovered $4,000 that had been written
uncollectible. During 2000, Jamin wrote off $325,000 of uncollectible accounts. Credit sales for off in prior years. Tara’s December 31, 1991, allowance for uncollectible accounts was
2000 were $9 million. In its December 31, 2000 balance sheet, what amount should Jamin $22,000. Under the aging method, what amount of allowance for uncollectible accounts
report as allowance for uncollectible accounts? should Tara report at December 31, 1992?
A. $115,000 C. $245,000 a. $9,000 c. $13,000
B. $180,000 D. $440,000 AICPA 0595 F-9 b. $10,000 d. $19,000 AICPA 0593 I-17
(03-05)
Percentage of Accounts Receivable Method
*. The following accounts were abstracted from Roxy Co.’s unadjusted trial balance at December 17. The following information pertains to Eire Co.’s accounts receivable at December 31, 2001:
31, 1989: Days Outstanding Amount Estimated % Uncollectible
Debit Credit 0 – 60 $240,000 1%
Accounts receivable $1,000,000 61 – 120 180,000 2%
Allowance for uncollectible accounts 8,000 Over 120 200,000 6%
Net credit sales $3,00,000 $620,000
Roxy estimates that 3% of the gross accounts receivable will become uncollectible. After During 2001, Eire wrote off $14,000 in receivables and recovered $8,000 that was written off in
adjustment at December 31, 1989, the allowance for uncollectible accounts should have a prior years. Its December 31, 2000 allowance for uncollectible accounts was $44,000. Under
credit balance of the aging method, what amount of allowance for uncollectible accounts should Eire report at
a. $90,000 c. $38,000 December 31, 2001?
b. $82,000 d. $30,000 AICPA 0590 I-9 a. $18,000 c. $26,000
(03-05) b. $20,000 d. $38,000 AICPA 0593 I-17
18. On March 31, 2000, Vale Co. had an unadjusted credit balance of $1,000 in its allowance for Allowance for Discounts
uncollectible accounts. An analysis of Vale's trade accounts receivable at that date revealed 21. Delta, Inc. sells to wholesalers on terms of 2/15, net 30. Delta has no cash sales but 50% of
the following: Delta’s customers take advantage of the discount. Delta uses the gross method of recording
Age Amount Estimated Uncollectible sales and trade receivables. An analysis of Delta’s trade receivables balances at December
0 - 30 days $60,000 5% 31, 1993, revealed the following:
31 - 60 days 4,000 10% Age Amount Collectible
Over 60 days 2,000 $1,400 0 – 15 days $100,000 100%
What amount should Vale report as allowance for uncollectible accounts in its March 31, 2000 16 – 30 days 60,000 95%
balance sheet? 31 – 60 days 5,000 90%
A. $4,800 C. $3,800 Over 60 days 2,500 $500
B. $4,000 D. $3,000 AICPA 1193 I-18 $167,500
In its December 31, 1993 balance sheet, what amount should Delta report for allowance for
Adjusting Entries discounts?
FEU DMX 2016 a. $1,000 c. $1,675
Questions 57 and 58 are based on the following information. CMA 1288 4-13 & 14 b. $1,620 d. $2,000 AICPA 0594 F-15
Fidler Company has estimated its bad debt expense by using 1% of net sales. However, the
company is contemplating aging its accounts receivable and using this as a basis for estimating its 22. Clarion, Inc. sells to wholesalers on terms of 2/15, net 30. Clarion has no cash sales but 50%
bad debts, as it is believed that this will provide a better estimate of the uncollectible accounts. The of Clarion’s customers take advantage of the discount. Clarion uses the gross method of
following aging schedule was prepared as of November 30 of the current year, the end of the fiscal recording sales and trade receivables. An analysis of Clarion’s trade receivables balances at
year. December 31, 1993, revealed the following:
Age of Account Amount Percent Estimated to Be Uncollectible Age Amount Collectible
Under 60 days $730,000 1 0 – 15 days $200,000 100%
61-90 days 40,000 6 16 – 30 days 120,000 95%
91-120 days 18,000 9 31 – 60 days 10,000 90%
Over 120 days 72,000 25 Over 60 days 5,000 $500
Net sales for the year were $4,200,000. There is a debit balance of $14,000 in the allowance for $335,000
uncollectible accounts as of November 30 of the current year. In its December 31, 1993 balance sheet, what amount should Delta report for allowance for
discounts?
19. If Fidler estimates its bad debts by aging the accounts receivable, the adjusting entry to a. $2,000 c. $3,350
allowance for uncollectible accounts made on November 30 of the current year will be for b. $3,240 d. $4,000 AICPA 0594 F-15
A. $56,000 C. $29,320
B. $43,320 D. $15,320 Net Receivables
23. On the December 31, 1989 balance sheet of Mann Co., the current receivables consisted of
20. If Fidler estimates its bad debts by continuing to use the percentage of net sales, the balance the following:
in the allowance for uncollectible accounts after the adjusting entry is made at November 30 of Trade accounts receivable $93,000
the current year will be Allowance for uncollectible accounts (2,000)
A. $56,000 C. $42,000 Claim against shipper for goods lost in transit (November 1989) 3,000
B. $29,320 D. $28,000 Selling price of unsold goods sent by Mann on consignment at 130 % of
 cost (not included in Mann’s ending inventory) 26,000 a. $0 c. $14,850
Security deposit on lease of warehouse used for storing some inventories 30,000 b. $14,700 d. $15,000 AICPA 0587 II-20
Total $150,000
At December 31, 1989, the correct total of Mann’s current net receivable was 28. Black Co. requires advance payments with special orders for machinery constructed to
a. $94,000 c. $124,000 customer specifications. These advances are nonrefundable. Information for 2000 is as
b. $120,000 d. $150,000 AICPA 1190 I-5 follows:
Customer advances-balance 12/31/99 $118,000
Other Measurement Issues Advances received with orders in 2000 184,000
24. On June 1, 2000, Pitt Corp. sold merchandise with a list price of $5,000 to Burr on account. Advances applied to orders shipped in 2000 164,000
Pitt allowed trade discounts of 30% and 20%. Credit terms were 2/15, n/40 and the same was Advances applicable to orders canceled in 2000 50,000
made FOB shipping point. Pitt prepaid $200 of delivery costs for Burr as an accommodation. In Black’s December 31, 2000 balance sheet, what amount should be reported as a current
On June 12, 2000, Pitt received from Burr a remittance in full payment amounting to liability for advances from customers?
a. $2,744 c. $2,944 a. $0 c. $138,000
b. $2,912 d. $3,112 AICPA, Adapted b. $88,000 d. $148,000 AICPA 1194 F-25

Questions 16 and 17 are based on the following information. Gleim Accounts Receivable – Disposition
EGC Co. recorded two sales on March 1 of $20,000 and $30,000 under credit terms of 3/10, n/30. 29. Seller Co. transfers loans to Buyer Co. in a transaction appropriately accounted for as a sale.
Payment for the $20,000 sale was received March 10. Payment for the $30,000 sale was received The loans have a fair value of $1,650 and a carrying amount of $1,500. Seller also receives an
on March 25. option to call (purchase) the same or similar loans from Buyer and undertakes to repurchase
delinquent loans. Furthermore, the loans have a fixed rate, but Seller agrees to provide Buyer
25. Under the gross method and the net method, net sales in the March income statements should a return at a variable rate. Thus, the transaction effectively includes an interest rate swap. The
appear as which of the following amounts following are the relevant fair values:
a. b. c. d. Cash received $1,575
Gross method $48,500 $48,500 $49,400 $49,400 Interest rate swap 60
Net method $48,500 $49,400 $48,500 $49,400 Recourse obligation 90
Call option 105
26. What would gross sales be for the month of March? Seller should recognize a gain of
a. b. c. d. A. $45 C. $150
Gross method $50,000 $50,000 $49,400 $48,500 B. $90 D. $240 Gleim
Net method $50,000 $48,500 $48,500 $50,000
Assignment of Receivables
27. Lin Co., a distributor of machinery, bought a machine from the manufacturer in November for 30. On January 1, Garfield College assigned $500,000 of accounts receivable to the Scholastic
$10,000. On December 30, Lin sold this machine to Zee Hardware for $15,000 under the Finance Company in a transaction accounted for as a secured borrowing. Garfield gave a 14%
following terms: 2% discount if paid within 30 days, 1% discount if paid after 30 days but note for $450,000 representing 90% of the assigned accounts and received proceeds of
within 60 days, or payable in full within 90 days if not paid within the discount periods. $432,000 after deduction of a 4% fee. On February 1, Garfield remitted $80,000 to Scholastic,
However, Zee has the right to return this machine to Line I Zee is unable to resell the machine including interest for 1 month on the unpaid balance. As a result of this $80,000 remittance,
before expiration of the 90-day payment period, in which case Zee’s obligation to Lin is accounts receivable assigned and notes payable will be decreased by what amounts?
canceled. In Lin’s net sales for the year ended December 31, how much should be included for A.G. Helling A. B. C. D.
the sale of this machine to Zee? A/R Assigned $80,000 $80,000 $72,000 $74,750
 Notes Payable $74,750 $80,000 $74,750 $80,000 Aug. 1 The receivable records were transferred to Lily Factors. Lily estimated that
$2,900 of the accounts will prove to be uncollectible.
Factoring 31 Lily collected $234,000 during August after allowing for $9,000 of sales discounts.
FEU DMX 2016 Sales returns and allowances during August totaled $2,400.
31. Oxford Company sold $300,000 of its accounts receivables without recourse to a factoring Sept. 20 Lily wrote off a $2,000 account after learning of the company's bankruptcy.
agency. The purchaser assessed a finance charge of 5%. It also retained 5% to cover 30 Lily collected $151,720 during September. Sales returns and allowances during
adjustments (sales returns, discounts, etc.). Oxford should record September totaled $880.
A. A debit to cash of $300,000. Oct. 10 Slunk and Lily made a final cash settlement.
B. A credit to accounts receivable of $300,000.
C. A credit to liability on transferred accounts receivable of $300,000. 34. What initial proceeds did Slunk receive on August 1?
D. Interest expense of $15,000. Gleim A. $373,000 C. $393,000
B. $389,000 D. $400,000
32. An enterprise often factors its accounts receivable. The finance company requires an 8%
reserve and charges a 1.5% commission on the amount of the receivable. The remaining 35. What net cash proceeds did Slunk ultimately realize from the factoring?
amount to be advanced is further reduced by an annual interest charge of 16%. What A. $389,000 C. $380,000
proceeds (rounded to the nearest dollar) will the enterprise receive from the finance company B. $385,720 D. $376,720
at the time a 110,000 account that is due in 60 days is turned over to the finance company?
A. 81,950. C. 96,895. 36. What was the factor's net income from the factoring?
B. 83,630. D. 99,550. CMA 0683 1-13 A. $11,000 C. $3,280
B. $9,000 D. $2,000
33. Goth Co. has decided to factor its accounts receivable. Assume a factor charges a 2% fee
plus an interest rate of 18% on all monies advanced to the company. Monthly sales are Transfer of a Partial Interest
$100,000, and the factor advances 90% of the receivables submitted after deducting the 2% 37. Athens Corporation sold an 80% pro rate interest in a $2,000,000 note receivable to Sparta
fee and the interest. Credit terms are net 60 days. Assuming that the factor has approved the Company for $1,920,000. The note was originally issued at face value. Future benefits and
customer's credit in advance and that no sales returns and allowances are recognized, the costs of servicing the note are immaterial. If the provisions of SFAS 125 are followed, the
cost to the company of this arrangement is amount of gain or loss Athens should recognize on this transfer of a partial interest is
A. $14,640 C. $2,640 a. ($80,000) c. $320,000
B. $4,640 D. $2,000 Gleim b. $0 d. $400,000 Gleim

Questions 290 through 292 are based on the following information. Gleim
Slunk Corp. factored $400,000 of accounts receivable with Lily Factors, Inc., on a without-recourse
basis. The factor charge was 1.75% of the amount of receivables, and an additional 4% was
retained to cover probable adjustments. In addition to the factor charge, a finance charge was
withheld equal to 12% annually for any amounts advanced prior to the due dates of the
receivables. This charge was based on 100% of the face value. The average credit term was 30
days from the date of transfer. According to the terms of the factoring agreement, Slunk was to
handle returned goods, allowances, and shipping disputes. Lily was to collect the cash and
acknowledge sales discounts, but such discounts were to be charged to Slunk. Credit losses were
to be absorbed by Lily. Slunk has not recorded any bad debt expense related to the factored
receivables. The following transactions pertain to this factoring arrangement:
SHORT-TERM NOTES RECEIVABLE
Measurement
Initial Recording – Short-term & Long-term
38. On December 31, 1991, Jet Co. received two $10,000 notes receivable from customers in
exchange for services rendered. On both notes, interest is calculated on the outstanding
principal balance at the annual rate of 3% and payable at maturity. The note from Hart Corp.
made under customary trade terms, is due in nine months and the note from Maxx, Inc. is due
in five years. The market interest rate for similar notes on December 31, 1991, was 8%. The
compound interest factors to convert future values into present values at 8% follow:
Present value of $1 due in nine months .944
 Present value of $ 1 due in five years .680 2001, Kay discounted the note at a bank at an interest rate of 12%. Kay’s proceeds from the
At what amount should these two notes receivable be reported in Jet’s December 31, 1991, discounted note were.
balance sheet? A. $48,400 C. $52,250.
AICPA 0592 I-5 a. b. c. d. B. $52,640 D. $51,700 AICPA, Adapted
Hart $9,440 $9,652 $10,000 $10,000
Maxx $6,800 $7,820 $ 6,800 $ 7,820 Rate Used for Accrual of Interest
43. Jayne Corp. discounted its own $50,000, 1-year note at a bank, at a discount rate of 12%,
when the prime rate was 10%. In reporting the note of Jayne’s balance sheet prior to the
Notes Receivable Discounting note’s maturity, what rate should Jayne use for the accrual of interest?
FEU DMX 2016 a. 10.0% c. 12.0%
Proceeds – Noninterest-Bearing Note b. 10.7% d. 13.6% AICPA 0586 II-14
39. On July 1, 2000, Lee Co. sold goods in exchange for a $200,000 8-month noninterest-bearing
note receivable. At the time of the sale, the note's market rate of interest was 12%. What
Interest Receivable
amount did Lee receive when it discounted the note at 10% on September 1, 2000? *. Rand, Inc. accepted from a customer a $40,000, 90-day, 12% interest-bearing note dated
A. $180,000 C. $190,000 August 31, 1989. On September 30, 1989, Rand discounted the note at the Apex State Bank
B. $186,667 D. $188,000 AICPA 1191 I-17 at 15%. However, the proceeds were not received until October 1, 1989. In Rand’s
September 30, 1989 balance sheet, the amount receivable from the bank, based on a 360-day
Proceeds – Interest-Bearing Note
year, includes accrued interest revenue of
*. Garr Co. received a $60,000, 6-month, 10% interest-bearing note from a customer. After a. $170 c. $300
holding the note for two months, Garr was in need of cash and discounted the note at the b. $200 d. $400 AICPA 0590 I-12
United Local Bank at 12%. The amount of cash Garr received from the bank was (03-05)
a. $60,480 c. $61,740
b. $60,630 d. $62,520 AICPA 0590 I-5
44. Ayn, Inc. accepted from a customer an $80,000, 90-day, 12% interest-bearing note dated
(03-05) August 31, 2001. On September 30, 2001, Ayn discounted the note at the Nadir State Bank at
15%. However, the proceeds were not received until October 1, 2001. In Ayn’s September
40. Halen, Inc. received from a customer a 1-year $500,000 note bearing annual interest of 8%. 30, 2001 balance sheet, the amount receivable from the bank, based on a 360-day year,
After holding the note for 4 months, Halen discounted the note at Regional Bank at an includes accrued interest revenue of
effective interest rate of 10%. What amount of cash did Halen receive from the bank?
a. $340 c. $600
a. $540,000 c. $504,000 b. $400 d. $800 AICPA 0590 I-12
b. $520,667 d. $486,000 AICPA 1193 I-15
Total Interest Revenue Earned
41. Roth, Inc. received from a customer a 1-year, $500,000 note bearing annual interest of 8%. 45. Sap Co. purchased from Azalea Co. a $20,000, 8%, 8-year note that required five equal
After holding the note for 6 months, Roth discounted the note at Regional Bank at an effective
annual year-end payments of $5,009. The note was discounted to yield a 9% rate to Sap. At
interest rate of 10%. What amount of cash did Roth receive from the bank? the date of purchase, Sap recorded the note at its present value of $19,485. What should be
A. $540,000 C. $513,000 the total interest revenue earned by Sap over the life of this note?
B. $528,400 D. $486,000 AICPA 1193 I-15 a. $5,045. c. $8,000
b. $5,560 d. $9,000 AICPA 1194 F-38
42. On July 1, 2000, Kay Corp. sold equipment to Mando Co. for $100,000. Kay accepted a 10%
note receivable for the entire sales price. This note is payable in two equal installments of LONG-TERM NOTES RECEIVABLE
$50,000 plus accrued interest on December 31, 2000 and December 31, 2001. On July 1,
Initial Recording required to deposit $5,000 in a noninterest-bearing escrow account. The amount held in
46. On December 30, 2000, Chang Co. sold a machine to Door Co. in exchange for a noninterest- escrow is to be returned to Dale after all principal and interest payments have been made.
bearing note requiring ten annual payments of $10,000. Door made the first payment on Interest on the note is payable on the first day of each month beginning July 1, 1989. Dale
December 30, 2000. The market interest rate for similar notes at date of issuance was 8%. made timely payments through November 1, 1989. On January 2, 1990, Yola received
Information on present value factors is as follows: payment of the first principal installment plus all interest due. At December 31, 1989, Yola’s
Period Present Value of 1 at 8% Present Value of Ordinary Annuity of interest receivable on the loan to Dale should be
9 0.50 6.25 a. $0 c. $10,000
10 0.46 6.71 b. $5,000 d. $15,000 AICPA 1190 II-3
In its December 31, 2000 balance sheet, what amount should Chang report as note (03-05)
receivable? FEU DMX 2016
a. $45,000 c. $62,500 Interest Income
b. $46,000 d. $67,100 AICPA, Adapted Non-Interest Bearing Note
48. On January 1, 1999, Mill Co. exchanged equipment for a $200,000, noninterest-bearing note
Carrying Amount due on January 1, 2002. The prevailing rate of interest for a note of this type at January 1,
*. On December 30, 1994, Chang Co. sold a machine to Door Co. in exchange for a noninterest- 1999 was 10%. The present value of $1 at 10% for three periods is 0.75. What amount of
bearing note requiring ten annual payments of $10,000. Door made the first payment on interest revenue should be included in Mill’s 2000 income statement?
December 30, 1994. The market interest rate for similar notes at date of issuance was 8%. A. $0 C. $16,500
Information on present value factors is as follows: B. $15,000 D. $20,000 AICPA 1190 I-35, 0589 I-59
Period Present value of 1 at 8% Present value of ordinary annuity of $1 at 8%
49. On January 1, 2001, Saucerer Company bought a building with an assessed value of
9 0.50 6.25
$220,000 on the date of purchase. Saucerer gave as consideration a $400,000 noninterest-
10 0.46 6.71
bearing note due on January 1, 2004. There was no established exchange price for the
In its December 31, 1994, balance sheet, what amount should Chang report as note building, and the note had no ready market. The prevailing rate of interest for a note of this
receivable? type at January 1, 2001 was 10%. What amount of interest expense should be included in
a. $45,000 c. $62,500 Saucerer’s 2001 income statement?
b. $46,000 d. $67,100 AICPA 0595 F-8 a. $22,000 c. $33,333
(03-05) b. $30,000 d. $40,000 AICPA
Interest Receivable Items 46 and 47 are based on the following information. AICPA 1193 I-46 & 47
47. On December 1, 1991, Tigg Mortgage Co. gave Pod Corp. a $200,000, 12% loan. Pod On January 2, 1992, Emme Co. sold equipment with a carrying amount of $480,000 in exchange
received proceeds of $194,000 after the deduction of a $6,000 nonrefundable loan origination for a $560,000 noninterest bearing note due January 2, 1995. There was no established exchange
fee. Principal and interest are due in 60 monthly installments of $4,450, beginning January 1, price for the equipment. The prevailing rate of interest for a note of this type at January 2, 1992,
1992. The repayments yield an effective interest rate of 12% at a present value of $200,000 was 10%. The present value of 1 at 10% for three periods is 0.75.
and 13.4% at a present value of $194,000. What amount of accrued interest receivable
should Tigg include in its December 31, 1991, balance sheet? *. In Emme’s 1992 income statement, what amount should be reported as interest income?
a. $4,450 c. $2,000 a. $9,000 c. $50,000
b. $2,166 d. $0 AICPA 0592 I-16 b. $45,000 d. $60,000
*. On June 1, 1989, Yola Corp. loaned Dale $500,000 on a 12% note, payable in five annual *. In Emme’s 1992 income statement, what amount should be reported as gain(loss) on sale of
installments of $100,000 beginning January 2, 1990. In connection with this loan, Dale was machinery?
 a. ($30,000) loss. c. $120,000 gain. FEU DMX 2016
b. $30,000 gain. d. $270,000 gain. Annual Amortization
54. Leaf Co. purchased from Oak Co. a $20,000, 8%, 5-year note that required five equal annual
Items 46 and 47 are based on the following information. AICPA, Adapted year-end payments of $5,009. The note was discounted to yield a 9% rate to Leaf. At the date
On January 2, 2000, Emme Co. sold equipment with a carrying amount of $480,000 in exchange of purchase, Leaf recorded the note at its present value of $19,485. What should be the total
for a $600,000 noninterest bearing note due January 2, 2003. There was no established exchange interest revenue earned by Leaf over the life of this note?
price for the equipment. The prevailing rate of interest for a note of this type at January 2, 2000, A. $5,045 C. $8,000
was 10%. The present value of 1 at 10% for three periods is 0.75. B. $5,560 D. $9,000 AICPA 1194 F-38

50. In Emme’s 2000 income statement, what amount should be reported as interest income? *. Ace Co. sold to King Co. a $20,000, 8%, 5-year note that required five equal annual year-end
a. $15,000 c. $48,000 payments. This note was discounted to yield a 9% rate to King. The present value factors of
b. $45,000 d. $60,000 an ordinary annuity of $1 for five periods are as follows:
8% 3.992
51. In Emme’s 2000 income statement, what amount should be reported as gain(loss) on sale of 9% 3.890
machinery? What should be the total interest revenue earned by King on this note?
a. ($30,000) loss. c. $120,000 gain. a. $9,000 c. $5,560
b. $30,000 gain. d. $150,000 gain. b. $8,000 d. $5,050 AICPA 0592 I-41
(03-16)
When Nominal Rate is not Equal to the Prevailing Rate Comprehensive
52. An enterprise received a 2-year, 190,000 note on January 1, 2000 in exchange for property it Questions 30 and 31 are based on the following information. (02-08-30 & 31)
sold. According to the terms of the note, interest of 5% is payable annually on January 1, 2001 On January 2, 2000,Emme Co. sold equipment with a carrying amount of $480,000 in exchange for
and January 1, 2002, when the face amount is also due. There was no established exchange a $600,000, non-interest bearing note due January 2, 2003. There was no established exchange
price for the property. The prevailing rate of interest for a note of this type was 12% at the price for the equipment. The prevailing rate of interest for a note of this type at January 2, 2000
beginning of 2000 and 14% at the beginning of 2001. What interest rates should be used to was 10%. The present value of 1 at 10% for three periods is 0.75.
calculate the amount of interest income from this transaction for the years ended December
31, 2000 and 2001, respectively? *. In Emme’s 2000 income statement, what amount should be reported as interest income?
A. 0% and 5%. C. 12% and 12%. a. $15,000 c. $48,000
B. 5% and 5%. D. 12% and 14%. CIA 1185 IV-15 b. $45,000 d. $60,000
Monthly Amortization *. In Emme’s 2000 income statement, what amount should be reported as gain (loss) on sale of
53. On December 1, 1995,Money Co. gave Home Co. a $200,000, 11% loan. Money paid equipment?
proceeds of $194,000 after the deduction of a $6,000 nonrefundable loan origination fee. a. $(30,000) c. $120,000
Principal and interest are due in 60 monthly installments of $4,310, beginning January 1, 1996. b. $30,000 d. $150,000
The repayments yield an effective interest rate of 11% at a present value of $200,000 and
12.4% at a present value of $194,000. What amount of income from this loan should Money Notes Receivable Discounting
report in its 1995 income statement? Proceeds
a. $0 c. $2,005 *. On July 1, 1989, Jay Corp. sold equipment to Mando Co. for $100,000. Kay accepted a 10%
b. $1,833 d. $7,833 AICPA R96 F-5 note receivable for the entire sales price. This note is payable in two equal installments of
$50,000 plus accrued interest on December 31, 1989 and December 31, 1990. On July 1,
 1990, Kay discounted the note at an interest rate of 12%. Kay’s proceeds from the discounted
note were Comprehensive
a. $48,400 c. $50,350 58. On January 1, Davis College assigned $500,000 of accounts receivable to the Scholastic
b. $49,350 d. $51,700 AICPA 1190 II-1 Finance Company. Davis gave a 14% note for $450,000 representing 90% of the assigned
(03-05) accounts and received proceeds of $432,000 after deduction of a 4% fee. On February 1,
Davis remitted $80,000 to Scholastic, including interest for 1 month on the unpaid balance. As
Notes Receivable – Partial Sale Resulting in Surrender of Control a result of this $80,000 remittance, accounts receivable assigned and notes payable will be
55. Simpson Corporation sells an 80% pro rata interest in a $1 million note receivable to Bruns decreased by what amounts?
Company for $960,000. The note was originally issued at face value. Future benefits and costs A.G. Helling a. b. c. d.
of servicing the note are immaterial. The amount of gain or loss Simpson should recognize on A/R assigned $80,000 $80,000 $72,000 $74,750
this transfer of a partial interest is Notes payable $74,750 $80,000 $74,750 $80,000
A. $(40,000) C. $160,000
B. $0 D. $200,000 Gleim Financial Statement Presentation and Disclosure Requirements
Note Receivable
56. Simpson Corporation owns a $1 million note that it wishes to sell. Burns Corporation is *. Frame Co. has an 8% note receivable dated June 30, 1991, in the original amount of
interested in purchasing the note and has given Simpson four options. Option 1 is to buy an $150,000. Payments of $50,000 in principal plus accrued interest are due annually on July 1,
80% pro rata interest in the note for $960,000. Option 2 is to buy a 75% pro rata interest in the 1992, 1993, and 1994. In its June 30, 1993, balance sheet, what amount should Frame report
note for $900,000. Option 3 is to buy an 85% pro rata interest in the note for $970,000. Option as a current asset for interest on the note receivable?
4 is to buy a 90% pro rata interest in the note for $990,000. The note was originally issued at a. $0 c. $8,000
face value. Future benefits and costs of servicing the note are immaterial. If the provisions of b. $4,000 d. $12,000 AICPA 1193 I-17
SFAS 125 are followed, which option will supply the largest gain for Simpson Corporation? (03-05)
A. Option 1. C. Option 3.
B. Option 2. D. Option 4. Gleim 59. Holder Co. has an 8% note receivable dated June 30, 1999 in the original amount of
$300,000. Payments of $100,000 in principal plus accrued interest are due annually on July 1,
Impaired loans receivable 2001, 2001 and 2002. In its June 30, 2001 balance sheet, what amount should Holder report
*. Seco Corp. was forced into bankruptcy and is in the process of liquidating assets and paying as a current asset for interest on the note receivable?
claims. Unsecured claims will be paid at the rate of forty cents on the dollar. Hale holds a a. $0 c. $16,000
$30,000 noninterest-bearing note receivable from Seco collateralized by an asset with a book b. $8,000 d. $24,000 AICPA 1193 I-17
value of $35,000 and a liquidation value of $5,000. The amount to be realized by Hale on this
note is Contingent Liabilities
a. $5,000 c. $15,000 FEU DMX 2016
b. $12,000 d. $17,000 AICPA 0591 II-14 60. On November 1, 2001, Love Co. discounted with recourse at 10% a 1-year, noninterest-
(03-05) bearing $20,500 note receivable maturing on January 31, 2002. What amount of contingent
liability for this note must Love disclose in its financial statements for the year ended
57. Punn Co. has been forced into bankruptcy and liquidated. Unsecured claims will be paid at December 31, 2001?
the rate of $0.30 on the dollar. Mega Co. holds a noninterest-bearing note receivable from a. $0 c. $20,333
Punn in the amount of $50,000, collateralized by machinery with a liquidation value of b. $20,000 d. $20,500 AICPA 1193 I-41
$10,000. The total amount to be realized by Mega on this note receivable is
a. $25,000 c. $15,000
b. $22,000 d. $10,000 AICPA 1185 II-17
Account Analysis
61. Wendell Company recognizes bad debt expense at year-end by adjusting the allowance for
uncollectible accounts receivable. During the year ended November 30 of the current year,
Wendell wrote off accounts receivable totaling $34,500. At the end of the year, the company
recognized bad debt expense for the year, through an adjusting entry, in the amount of
$16,500. Because of these two events, Wendell Company's working capital was
A. Decreased by $51,000. C. Decreased by $18,000.
B. Decreased by $34,500. D. Decreased by $16,500. CMA 1288 4-29
ANSWER EXPLANATIONS
1. REQUIRED: The total amount of risk of accounting loss related to trade accounts receivable
and the amount that is off-balance-sheet risk.
DISCUSSION: (B) Butler’s risk of accounting loss is measured by the net receivables balance
($250,000 accounts receivable – $20,000 allowance for uncollectible accounts = $230,000).
SFAS 105 defines accounting loss as “the loss that may have to be recognized due to credit
and market risk as a direct result of the rights and obligations of a financial instrument.”
However, assuming that the carrying amount of these trade receivables approximates their fair
value, the accounting loss cannot exceed the amount recognized as an asset. No off-balance-
sheet risk of accounting loss results from reported accounts or notes receivable. Off-balance-
sheet risk arises because of the existence of conditional rights and obligations that may
expose the entity to a risk of accounting loss exceeding the amount recognized in the balance
sheet, for example, recourse obligations on receivables sold.
NOTE: This question is based on SFAS 105, a pronouncement that will be superseded when
SFAS 133 finally because effective after June 15, 2000.
Answer (A) is incorrect because, in this case, the risk of accounting loss is a the carrying
amount ($230,000). Answer (C) is incorrect because no off-balance-sheet risk results from
reported accounted receivable. Answer (D) is incorrect because, in this case, the risk of
accounting loss is the carrying amount ($230,000), and no off-balance sheet risk results from
reported accounts receivable.
2. REQUIRED: The amount of the full payment.
DISCUSSION: (C) A trade discount is a means of establishing a price for a certain quantity,
for a particular class of customers, or to avoid having to reprint catalogs whenever prices
change. Neither the buyer nor the seller reflects trade discounts in the accounts. Assuming
that the 30% discount is applied first, the initial discount is $1,500 (30% x $5,000). And the
second discount is $700 [20% x ($5,000 – $1,500)]. Hence, the base price is $2,800. (If both
discounts apply, it make no difference which is taken first.) Because the buyer paid within the
discount period, the cash equivalent price is $2,744 (98% x $2,800). Given that the goods
were shipped FOB shipping point, title passed when they were delivered to the hipper, and the
buyer is responsible for payment of delivery costs. Accordingly, the full amount owed by the
buyer was $2,944 ($2,744 + $200 delivery costs).
Answer (A) is incorrect because $2,744 does not include the delivery costs. Answer (B) is
incorrect because $2,912 assumes that the delivery costs are part of the list price. It also
ignores the cash discount. Answer (D) is incorrect because $3,112 assumes that the delivery
costs are part of the list price. It also ignores the cash discount, but adds back the delivery
costs.
3. REQUIRED: The year-end balance in accounts receivable.
DISCUSSION: (C) The $1,085,000 ending balance in accounts receivable is equal to the
$650,000 beginning debit balance, plus debits for $2,700,000 of credit sales, minus credits for
$2,150,000 of collections, $40,000 of accounts written off, and $75,000 of sales returns. The
$110,000 of estimated uncollectible receivables and the $50,000 of estimated sales returns
are not relevant because they affect the allowance accounts but not gross accounts
receivable.
Accounts Receivable (in 000’s)
1/1/00 $ 650 $75 Sales returns
Credit sales 2,700 2,150 Collections
40 Write-offs
12/31/00 $1,085
Answer (A) is incorrect because $1,200,000 does not subtract write-offs and sales returns
from accounts receivable. Answer (B) is incorrect because $1,125,000 does not subtract
sales returns from accounts receivable. Answer (D) is incorrect because estimated future
sales returns and uncollectible accounts affect their respective allowance accounts, not gross
accounts receivable.
4. REQUIRED: The year-end balance in accounts receivable.
DISCUSSION: The $1,735,000 ending balance in accounts receivable is equal to the
$1,300,000 beginning debit balance, plus debits for $2,700,000 of credit sale, minus credits for
$2,150,000 of collections, $40,000 of accounts written off, and $75,000 of sales returns. The
$220,000 of estimated uncollectible receivables and the $50,000 of estimated sales returns
are not relevant because the affect the allowance accounts but not gross accounts receivable.
Accounts Receivable (in 000’s)
1/1/01 $1,300 $ 75 Sales returns
Credit sales 2,700 2,150 Collections
40 Write-off
$1,735
Answer (A) is incorrect because $1,850,000 does not subtract write-offs and sales returns
from accounts receivable. Answer (B) is incorrect because $1,775,000 does not subtract
write-offs from accounts receivable. Answer (D) is incorrect because estimated future sales
returns and uncollectible accounts affect their respective allowance accounts, not gross
accounts receivable.
5. Answer (B) is correct. When bad debt expense is estimated on the basis of net credit sales, a
cost (bad debt expense) is being directly associated with a revenue of the period (net credit
sales). Thus, uncollectible accounts expense is $20,000 (2% x $1,000,000 credit sales).
Answer (A) is incorrect because $23,000 assumes that $20,000 is the required ending balance
in the allowance account (expense = write-offs + the change in the allowance). Answer (C) is
 incorrect because $18,000 equals the write-offs for 2000. Answer (D) is incorrect because
$17,000 is the ending balance in the allowance account.
6. REQUIRED: The bad debt expense.
DISCUSSION: (B) The allowance for uncollectible accounts before year-end adjustment is
$28,000 ($60,000 beginning balance – $36,000 write-offs + $4,000 recovered). The balance
should be $50,000 ($700,000 year-end A/R – $650,000 net value based on aging). Thus, the
allowance account should be credited and bad debt expense debited for $220,000 ($50,000
desired balance – $28,000).
Answer (A) is incorrect because $10,000 is the difference between gross and net accounts
receivable ($50,000) and the balance in the allowance account at the beginning of the yea
($60,000). Answer (C) is incorrect because $30,000 equals $50,000 minus the difference
between the $60,000 allowance and the $36,000 written off, reduced by the $4,000
recovered. Answer (D) is incorrect because $42,000 equals the $60,000 allowance, plus
$36,000 written off, reduced by $4,000 recovered, minus $50,000.
7. Answer (B) is correct. The allowance for uncollectible accounts before year-end adjustment is
$14,000 ($30,000 beginning balance - $18,000 write-offs + $2,000 recovered). The balance
should be $25,000 ($350,000 year-end A/R - $325,000 net value based on aging). Thus, the
allowance account should be credited and uncollectible accounts expense debited for $11,000
($25,000 desired balance - $14,000).
Answer (A) is incorrect because $5,000 is the difference between gross and net accounts
receivable ($25,000) and the balance in the allowance account at the beginning of the year
($30,000). Answer (C) is incorrect because $15,000 equals $25,000 minus the difference
between the $30,000 allowance and the $18,000 written off, reduced by the $2,000 recovered.
Answer (D) is incorrect because $21,000 equals $30,000 allowance, plus $18,000 written off,
reduced by $2,000 recovered, minus $25,000.
8. Answer (D) is correct. Doubtful accounts expense is estimated in two ways. The first, which
emphasizes asset valuation, is based on an aging of the receivables to determine the balance
in the allowance for uncollectible accounts. Bad debt expense is the amount necessary to
adjust the allowance account to this estimated balance. The second, which emphasizes
income measurement, recognizes bad debt expense as a percentage of sales. The
corresponding credit is to the allowance for uncollectible accounts. Under the first method, if
doubtful accounts are estimated to be 5% of gross accounts receivable, the allowance account
should have a balance of $45,000 (5% x $900,000), and the entry is to debit doubtful accounts
expense and credit the allowance for $29,000 ($45,000 - $16,000 existing balance). Under the
second method, bad debt expense is $35,000 (2% x $1,750,000).
Answer (A) is incorrect because $51,000 equals 2% of credit sales plus the balance of the
allowance account, and $45,000 equals 5% of gross accounts receivable. Answer (B) is
incorrect because $51,000 equals 2% of credit sales plus the balance of the allowance
account. Answer (C) is incorrect because $45,000 equals 5% of gross accounts receivable.
9. Answer (A) is correct. Credit sales were $5,525,000 (85% x $6,500,000 total sales). Thus, the
charge to expense is $82,875 (1.5% x $5,525,000). The percentage-of-credit-sales method is
an income statement-oriented or matching approach. Thus, the current balance in the
allowance account is ignored when making the entry to record bad debt expense.
Answer (B) is incorrect because the $3,400 debit balance in the allowance for uncollectible
accounts is not added to the bad debt expense calculated by using the historical percentage of
credit sales. Answer (C) is incorrect because $66,950 is the bad debt expense calculated by
using the aging schedule of accounts receivable. The bad debt expense calculated by using
the historical percentage of credit sales is $82,875 ($6,500,000 x 85% x 1.5%). Answer (D) is
incorrect because $70,350 is the bad debt expense for the year using the aging schedule of
accounts receivable. The bad debt expense calculated by using the historical percentage of
credit sales is $82,875 ($6,500,000 x 85% x 1.5%).
10. Answer (C) is correct. Under the aging method, the first step is to determine the appropriate
balance needed in the allowance account to cover the probable bad debts. As calculated
below, the allowance account should have a credit balance of $66,950. Given a current debit
balance of $3,400, the entry to record bad debt expense should be $70,350 ( $66,950 +
$3.400)
Answer (A) is incorrect because $82,875is the bad debt expense based on the percentage of
credit sales. Answer (B) is incorrect because $66,950 equals the desired balance in the
allowance account at year-end based on an aging of receivables. Answer (D) is incorrect
because $79,475 equals the bad debt expense for the year using the historical percentage of
credit sales, minus the debit balance in the allowance account at year-end.
11. Answer (B) is correct. The company began the year with a credit balance of $76,500 in the
allowance account, and ended the year with a debit balance of $3,400. Accordingly, write-offs
during the year must have totaled $79,900 ($76,500 + $3,400).
Answer (A) is incorrect because $76,500 is the credit balance in the allowance for uncollectible
accounts at the beginning of the year. The change in this account, as reflected by the ending
debit balance, is the book value of the net accounts receivable written off during the fiscal
year. Answer (C) is incorrect because the ending debit balance in the allowance for
uncollectible accounts must be added, not subtracted, from the beginning credit balance to
find the change in this account which is the book value of the net accounts receivable written
off during the fiscal year. Answer (D) is incorrect because the $3,400 debt balance in the
allowance for uncollectible accounts is not subtracted from the bad debt expense calculated by
using the historical percentage of credit sales. The book value of the net accounts receivable
 written off during the fiscal year is the change in the allowance for uncollectible accounts from
the beginning to ending balances.
12. REQUIRED: The net realizable value of accounts receivable.
DISCUSSION: (C) The net realizable value of accounts receivable is equal to the $850,000
gross accounts receivable minus the $64,000 estimate of the accounts estimated to be
uncollectible. The $50,000 balance in the allowance account is not used because it is an
unadjusted balance.
Answer (A) is incorrect because $836,000 is the gross accounts receivable account, minus the
amount deemed uncollectible, plus the allowance for uncollectible accounts. Answer (B) is
incorrect because $800,000 is the gross accounts receivable account minus the allowance for
uncollectible accounts. Answer (D) is incorrect because $736,000 is the gross accounts
receivable account minus the allowance for uncollectible accounts and the amount deemed
uncollectible.
13. Answer (C) is correct. Receivables from August sales still outstanding at the end of September
are in the 31-to-60-day age group. This group represents 48.57% of total receivables [170 ÷
(100 + 170 + 80)].
Answer (A) is incorrect because 22.86% is the proportion of receivables in the 0-to-30-day age
group at the end of September. Answer (B) is incorrect because 28.57% is the proportion of
receivables in the 61-to-90-day age group at the end of September. Answer (D) is incorrect
because 71.43% is the proportion of outstanding receivables that are from 0 to 60 days old at
the end of September.
14. Answer (C) is correct. Under the allowance method, uncollectible accounts are written off by a
debit to the allowance account and a credit to accounts receivable. The $500 of recovered bad
debts is accounted for by a debit to accounts receivable and a credit to the allowance account.
The $2,000 bad debt expense is also credited to the allowance account. The amount of
accounts receivable written off as uncollectible is $2,200 [$5,000 ending allowance - ($4,700
beginning allowance + $500 recoveries + $2,000 bad debt expense)].
Answer (A) is incorrect because $1,200 results from subtracting the recoveries instead of
adding them. Answer (B) is incorrect because $1,800 results from subtracting bad debt
expense from the allowance account. Answer (D) is incorrect because $2,800 results from
subtracting the recoveries and bad debt expense from the allowance account.
15. Answer (A) is correct. The beginning balance in the allowance account is $260,000, write-offs
equal $325,000, and bad debt expense is $180,000 ($9,000,000 x .02). Thus, the ending
balance in the allowance account is $115,000.
Allowance
Write-offs $325,000 $260,000 1/1/00
180,000 Bad debt expense
$115,000 12/31/00
Answer (B) is incorrect because $180,000 equals the bad debt expense ($9,000,000 x .02).
Answer (C) is incorrect because $245,000 results from debiting $180,000 instead of crediting
the allowance account for that amount. Answer (D) is incorrect because $440,000 ignores the
write-offs.
16. REQUIRED: The ending balance in the allowance for uncollectible accounts.
DISCUSSION: (D) The allowance for uncollectible accounts at year-end should have a credit
balance of $60,000. This amount is equal to the $2,000,000 of accounts receivable multiplied
by the 3% that is estimated to become uncollectible.
Answer (A) is incorrect because $180,000 is equal to 3% of net credit sales. Answer (B) is
incorrect because $164,000 equals 3% of net credit sales minus the unadjusted balance in the
allowance account. Answer (C) is incorrect because $44,000 equals 3% of accounts
receivable minus the unadjusted balance in the allowance account.
17. REQUIRED: The allowance for uncollectible accounts under the aging method.
DISCUSSION: (A) The aging schedule determines the allowance for uncollectible accounts
based on year-end accounts receivable, their age, and their estimated collectibility. This year-
end amount is $18,000 [(1% x $240,000) + (2% x $180,000) + (6% x $200,000)].
Answer (B) is incorrect because $20,000 equals the beginning balance, plus the recovery,
minus write-offs, minus the amount determined by the aging schedule ($44,000 + $8,000 -
$14,000 – $18,000). Answer (C) is incorrect because $26,000 equals the beginning balance
minus the amount determined by the aging schedule ($44,000 + $8,000 – $14,000 – $18,000).
Answer (D) is incorrect because $38,000 equals the beginning balance, plus the recovery,
minus write-offs ($44,000 + $8,000 – $14,000).
18. Answer (A) is correct. The aging schedule determines the balance in the allowance for
uncollectible accounts. Of the accounts that are no more than 30 days old, the amount
uncollectible is $3,000 ($60,000 x 5%). Accounts that are 31-60 days old and over 60 days old
have estimated uncollectible balances of $400 ($4,000 x 10%) and $1,400, respectively.
Hence, the amount that should be in the allowance for uncollectible accounts is $4,800
($3,000 + $400 + $1,400). The $1,000 balance already in the account is disregarded because
the aging schedule determines the balance that should be in the account.
Answer (B) is incorrect because $4,000 equals the existing balance plus the estimated
uncollectible amount for the newest receivables. Answer (C) is incorrect because $3,800 is the
credit to the allowance account. Answer (D) is incorrect because $3,000 is the estimated
uncollectible amount for the newest receivables.
19. Answer (B) is correct. The aging method of estimating bad debts is a balance-sheet-oriented
approach. The objective of the adjusting entry is to establish a balance in the allowance
account that is sufficiently large to absorb any future bad debt write-offs. The aging method
determines the balance in the account following the entry. This balance should be
Under 60 days $730,000 x 1% = $ 7,300
61-90 days 40,000 x 6% = 2,400
91-120 days 18,000 x 9% = 1,620
Over 120 days 72,000 x25% = 18,000
Total bad debts expected $29,320
Since bad debts of $29,320 are expected, the journal entry should result in a credit balance
equal to that amount. The amount of the entry is therefore dependent on the existing balance.
Given a $14,000 debit balance, the amount of the debit to bad debt expense and the credit to
the allowance account will be $43,320 ($29,320 + $14,000).
Answer (A) is incorrect because $56,000 is calculated by adding 1% of sales, $42,000, to the
debit balance of $14,000. Answer (C) is incorrect because $29,320 does not take into account
the $14,000 debit balance already in the allowance account. Answer (D) is incorrect because
$15,320 is calculated by subtracting the $14,000 debit from the $29,320 balance in the
allowance for uncollectible accounts.
20. Answer (D) is correct. The percentage-of-sales method is an income-statement-oriented
approach. The objective is to record an expense based on the sales of the current year. The
amount computed will be the amount of the journal entry. This method results in expected bad
debts of $42,000 (1% x $4,200,000 sales). Since the allowance account already has a debit
balance of $14,000, the balance after the entry will be $28,000 ($42,000 credit - $14,000
debit).
Answer (A) is incorrect because $56,000 is the sum of the expected bad debts and the
$14,000 debit balance ($42,000 + $14,000) instead of the difference. Answer (B) is incorrect
because $29,320 is the balance in the allowance account under the aging method. Answer (C)
is incorrect because $42,000 is the expected bad debt (1% x $4,200,000). The $14,000 debit
balance needs to be subtracted.
21. REQUIRED: The amount to be reported as an allowance for discounts.
DISCUSSION: (A) The allowance for discounts should include an estimate of the expected
discount based on the eligible receivables. According to the analysis, receivables equal to
$100,000 are still eligible. Base on past experience, 50% of the customers take advantage of
the discount. Thus, the allowance should be $1,000 [$100,000 x 50% x 2% (the discount
percentage)].
Answer (B) is incorrect because $1,620 assumes that 50% of all collectible amounts are
eligible for the discount. Answer (C) is incorrect because $1,675 assumes that 50% of the
total gross receivables are eligible for the discount. Answer (D) is incorrect because $2,000
assumes 100% of eligible customers will take the discount.
22. REQUIRED: The amount to be reported as an allowance for discounts.
DISCUSSION: (A) The allowance for discounts should include an estimated of the expected
discount based on the eligible receivables. According to the analysis, receivables equal to
$200,000 are still eligible. Based on past experience, 50% of the customers take advantage of
the discount. Thus, the allowance should be $2,000 [$200,000 x 50% x 2% (the discount
percentage).
Answer (B) is incorrect because $3,420 assumes that 50% of all collectible amounts are
eligible for the discount. Answer (C) is incorrect because $3,350 assumes that 50% of the
total gross receivables are eligible for the discount. Answer (D) is incorrect because $4,000
assumes 100% of eligible customers will take the discount.
23. REQUIRED: The correct total of current net receivables.
DISCUSSION: (A) If a receivable is expected to be collected within the longer of 1 year or the
operating cycle, it is current. If the receivable is noncurrent, it should be classified as an
investment. Thus, the claim against the shipper is most likely a current receivable but the
deposit is not. The unsold consigned goods are in the possession of the consignee but are
the property of the consignor and are included in the consignor’s inventory. Sales revenue
from consigned goods should be included in inventory at cost, not in receivables at their sales
price. Consequently, current net receivables should equal $94,000 [($93,000 – $2,000) net
trade receivables + $3,000 claim)].
Answer (B) is incorrect because $120,000 includes the consigned goods at their sales price.
Answer (C) is incorrect because $124,000 results from adding, not subtracting, the allowance
balance and including the consigned goods. Answer (D) is incorrect because $150,000
includes the consigned goods and the deposit.
24
. REQUIRED: The amount of the full payment.
DISCUSSION: (C) A trade discount is a means of establishing a price for a certain quantity,
for a particular class of customers, or to avoid having to reprint catalogs whenever prices
change. Neither the buyer nor the seller reflects trade discounts in the accounts. Assuming
that the 30% discount is applied first, the initial discount is $1,500 (30% x $5,000), and the
second discount is $700 [20% x ($5,000 – $1,500)]. Hence, the base price is $2,800. (If both
discounts apply, it make no difference which is take first.) Because the buyer paid within the
discount period, the cash equivalent price is $2,744 (98% x $2,800). Given that the goods
were shipped FOB shipping point, title passed when they were delivered to the shipper, and
the buyer is responsible for payment of delivery costs. Accordingly, the full amount owed by
the buyer was $2,944 ($2,744 + $200 delivery costs).
 Answer (A) is incorrect because $2,744 does not include the delivery costs. Answer (B) is
incorrect because $2,912 assumes that the delivery costs are part of the list price. It also
ignores the cash discount. Answer (D) is incorrect because $3,112 assumes that the delivery
costs are part of the list price. It also ignores the cash discount, but adds back the delivery
costs.
25. REQUIRED: The correct amounts of net sales under the gross and the net methods.
DISCUSSION: (C) The gross method accounts for receivables at their face value. If a
discount is taken a sales discount is recorded and classified as an offset to sales in the income
statements to yield net sales. The expression “3/10, n/30” means that a 3% discount may be
taken if payment is made within 10 days of the invoice. The $20,000 payment was received
during this period. The $30,000 payment was not. Under the gross method, a $600 sales
discount offsets the $50,000 of gross sales to given net sales of $49,400. The net method
records receivables net of the applicable discount. If the payment is not received during the
discount period, an interest revenue account such as sales discounts forfeited is credited at
the end of the discount period or when the payment is received. Consequently, both sales
would be recorded net of discount ($48,500), and $900 (3% of $30,000) would be recorded as
an interest income item. The gross and net methods have the same income effect. The
difference is in how they present items in the income statement.
Answer (A) is incorrect because the gross method net sales of $48,500 includes the $900
discount lost. Answer (B) is incorrect because the net sales amounts should be reversed.
Answer (D) is incorrect because the net method records receivables net of all applicable
discounts.
26. REQUIRED: The gross sales for the month under the gross method and the net method.
DISCUSSION: (B) The gross method records March sales at the gross amount ($50,000).
Because the $20,000 receivable was paid within the discount period, sales discount is debited
for $600 at the payment date. The net method records March sales at the net amount
($48,500 or $50,000 minus 3% of $50,000). The $30,000 receivable was not paid within the
discount period, and the following entry must also be made:
Accounts receivable $900
Sales discounts forfeited $900
Answer (A) is incorrect because the net method records sales at the net amount. Answer (C)
is incorrect because the gross method records sales at the gross amount. Answer (D) is
incorrect because the gross sales amounts should be reversed.
27. REQUIRED: The sales revenue to be recognized when a right of return exists.
DISCUSSION: (A) SFAS 48, Revenue Recognition When Right of Return Exists, states that
the sale may be recognized at the time of sale if all of the following conditions are met.
1. The seller’s price is substantially fixed or determination.
2. The buyer has paid the seller, or the buyer is obligated to pay, and the obligation is not
contingent on resale.
3. The buyer’s obligation to the seller is unchanged by damage to or theft of or destruction of
the product.
4. The buyer has economic substance apart from the seller.
5. The seller does not have any significant obligations regarding resale of the product by the
buyer.
6. The amount of future returns can be reasonably estimated.
The buyer has the right to return the machine to the seller, and the obligation to pay is
contingent on resale. Thus, the second condition is not met, and no recognition of sales
revenue and cost of sales is allowable.
Answers (B), (C), and (D) are incorrect because no sales revenue should be recognized.
28. REQUIRED: The current liability for advances.
DISCUSSION: (B) The amount of $88,000 ($118,000 beginning balance + $184,000 advances
received - $164,000 advances credited to revenue after shipment of orders – $50,000 for
canceled orders) should be reported as a current liability for customer advances. Deposits or
other advance payments are liabilities because they involve a probable future sacrifice of
economic benefits arising from a current obligation. The advances applicable to canceled
orders are not refundable. Thus, no future sacrifice of economic benefits is necessary.
Answer (A) is incorrect because deposits or other advance payments should be recognized as
liabilities. Answer (C) is incorrect because $138,000 includes $50,000 applicable to orders
canceled. Answer (D) is incorrect because $148,000 results from subtracting advances
received and adding advances applied to shipments and advances for canceled orders.
29. Answer (C) is correct. The gain equals the net proceeds (cash, derivatives, or other assets
obtained in a transfer of financial assets, minus liabilities incurred) minus the carrying amount
of the assets derecognized. Any asset obtained that is not an interest in the transferred assets
is included in the proceeds. Moreover, any derivative obtained concurrently with the transfer of
financial assets is an asset obtained (or liability incurred) and is part of the proceeds. Thus, the
cash received and the fair values of the interest rate swap and the call option are debited as
part of the proceeds. Any liability incurred, even if related to the assets transferred, reduces
the proceeds, so the recourse obligation should be credited. After crediting the carrying
amount of the loans sold and measuring assets and liabilities at fair value, Seller should
recognize a gain on sale (a credit) of $150 ($1,575 cash + $60 interest rate swap + $105 call
option - $90 recourse obligation - $1,500 carrying amount).
Answer (A) is incorrect because $45 does not include the call option. Answer (B) is incorrect
because $90 does not include the interest rate swap. Answer (D) is incorrect because $240
does not include the recourse obligation.
30. Answer (A) is correct. When assigned accounts receivable are collected, the cash should be
remitted to the assignee. The accounts receivable assigned account should be decreased for
the amount collected ($80,000), and the note should be decreased by the amount remitted
($80,000) minus interest ($450,000 x 14% x 1/12 = $5,250).
Answer (B) is incorrect because notes payable should be decreased by the amount remitted.
Answer (C) is incorrect because accounts receivable should be decreased by the amount
collected. Answer (D) is incorrect because notes payable should be decreased by the amount
remitted, and the accounts receivable should be decreased by the amount collected.
31. Answer (B) is correct. The entry to record a nonrecourse sale of receivables is to debit cash
for the proceeds of the sale [(100% - 5% - 5%) x $300,000 = $270,000], debit a receivable
from the factor for the proceeds retained to cover probable adjustments (5% x $300,000 =
$15,000), and credit accounts receivable for the face value of the receivables transferred
($300,000). The difference of $15,000 (the finance charge) is debited to a loss on sale of
receivables.
Answer (A) is incorrect because cash is debited for $270,000. Answer (C) is incorrect
because the company will have no contingent liability. The accounts were transferred without
recourse. Answer (D) is incorrect because the company did not borrow money; it sold an
asset. Thus, "interest expense" is not an appropriate term.
32. Answer (C) is correct. The factor will hold out 8,800 (8% x 110,000) as a reserve against
returns and allowances and 1,650 (1.5% x 110,000) as a commission. That leaves 99,550 to
be advanced to the seller. However, interest at the rate of 16% annually is also to be withheld.
For 60 days that interest would amount to approximately 2,655 (assuming a 360-day year).
The proceeds to be given to the seller equal 96,895 (99,550 - 2,655).
Answer (A) is incorrect because the proceeds would be determined by reducing the 110,000
by 9.5% (8% reserve + 1.5% commission) and then reducing that amount by the interest
expense [16% x (60 ÷ 360)]. Answer (B) is incorrect because the proceeds would be
determined by reducing the 110,000 by 9.5% (8% reserve + 1.5% commission) and then
reducing that amount by the interest expense [16% x (60 ÷ 360)]. Answer (D) is incorrect
because the proceeds would be determined by reducing the 110,000 by 9.5% (8% reserve +
1.5% commission) and then reducing that amount by the interest expense [16% x (60 ÷ 360)].
33. Answer (B) is correct. The amount to be received immediately is $85,360.
Amount of receivables submitted $100,000
Minus: 10% reserve (10,000)
Minus: 2% factor's fee (2,000)
Amount accruing to the company $ 88,000
Minus: 18% interest for 60 days (on $88,000) (2,640)
Amount to be received immediately $ 85,360
The company will also receive the $10,000 reserve at the end of the 60-day period given that it
has not been absorbed by sales returns and allowances. Thus, the total cost to the company
to factor the sales for the month is $4,640 ($2,000 factor fee + interest of $2,640).
Answer (A) is incorrect because $14,640 includes the $10,000 reserve. Answer (C) is incorrect
because $2,640 omits the factor's fee. Answer (D) is incorrect because $2,000 omits the
interest.
34. Answer (A) is correct. The $400,000 amount should have been reduced by the 1.75% factor
charge, the 4% holdback, and the 1% finance charge [12% annually x (30 days ÷ 360 days)].
Thus, the total amount withheld was 6.75% of the $400,000 total, or $27,000, which left
proceeds of $373,000.
Answer (B) is incorrect because $389,000 fails to include the 4% retained to cover
adjustments. Answer (C) is incorrect because $393,000 fails to include the 4% for adjustments
and the 1% per month finance charge. Answer (D) is incorrect because $400,000 fails to
consider any of the withholdings.
35. Answer (D) is correct. The $400,000 amount should have been reduced by the $7,000 factor
charge (1.75% x $400,000) and the $4,000 finance charge {[12% x (30 days ÷ 360 days)] x
$400,000}, leaving $389,000 of possible collections. That amount should have been reduced
by $9,000 of discounts and $3,280 ($2,400 + $880) of sales returns. Thus, Slunk should have
received a total of $376,720. Because Slunk received $373,000 initially (see preceding
question), it should have received an additional $3,720 on October 10.
Answer (A) is incorrect because $389,000 fails to deduct discounts and returns. Answer (B) is
incorrect because $385,720 fails to deduct discounts. Answer (C) is incorrect because
$380,000 fails to deduct returns.
36. Answer (B) is correct. The factor received gross revenues of $11,000 (2.75% x $400,000).
From that amount, the factor deducted $2,000 of bad debt expense, leaving $9,000 of net
income.
Answer (A) is incorrect because $11,000 is the gross revenue before expenses. Answer (C) is
incorrect because the factor does not have to bear the cost of sales returns and allowances.
Answer (D) is incorrect because the factor does not bear the cost of sales discounts.
37. REQUIRED: The amount of gain or loss to be recognized on a transfer of partial interest in a
loan.
DISCUSSION: (C) The fair value of the note is $2,400,000 ($1,920,000  80%). The book
value is $2,000,000. Given no servicing asset or liability, Athens should debit cash for
$1,920,000, reduce the carrying amount of the note receivable by $1,600,000 ($2,000,000 x
80%), and recognize a $320,000 ($1,920,000 – $1,600,000) gain.
 Answer (A) is incorrect because a loss of $80,000 is equal to the $1,920,000 cash received
minus the $2,000,000 carrying value of the note. Answer (B) is incorrect because a gain
should be recognized equal to the pro rate (80%) difference between the fair value and the
carrying value of the note. Answer (D) is incorrect because $400,000 is equal to 100% of the
difference between the fair value and the carrying value of the note.
38. REQUIRED: The amounts of the notes.
DISCUSSION: (D) The presumption when a note is exchanged for services is that the interest
rate is fair. If the rate is not stated or is unreasonable, the note and the services should be
recorded at the fair value of the services or the market value of the note, whichever is more
clearly determinable. Absent these values, the present value of the note should be the basis
for recording both the note and the services. This present value is obtained by discounting all
future payments on the note using an imputed rate (APB 21). The 3% rate on the Maxx note
is unreasonable in light of the prevailing 8% rate for similar notes. This 5-yer note should
therefore be discounted at an imputed rate of 8%. Because annual interest on the principal is
to be paid at maturity, the lump-sum payment is due in 5 years is $11,500 {$10,000 + [5 years
x (3% x $10,000) interest]}. The present value of this amount is $7,820 (0.68 x $11,500).
However, APB 21 does not apply to receivables from customers arising in the normal course
of business that are due in customary trade terms not exceeding approximately 1 year. Thus,
in practice, the Hart note is most likely to be reported at its face amount ($10,000).
Answer (A) is incorrect because the Hart note is short-term and is most likely to be reported
without discounting. Moreover, the $6,800 value for the Maxx note does not include the
discounted interest. Answer (B) is incorrect because a value of $9,652 (rounded) for the hart
note is a discounted amount. Answer (C) is incorrect because the $6,800 value for the Maxx
note excludes the discounted interest due at maturity.
39. Answer (C) is correct. The maturity value of a noninterest-bearing note receivable is its face
amount. The discount fee is $10,000 [$200,000 maturity value x 10% x (6 months ÷ 12)].
Thus, the proceeds equal $190,000 ($200,000 - $10,000).
Answer (A) is incorrect because $180,000 assumes discounting for a full year. Answer (B) is
incorrect because $186,667 assumes discounting for 8 months. Answer (D) is incorrect
because $188,000 is based on a discount rate of 12%.
40. REQUIRED: The amount of cash received when a note is discounted.
DISCUSSION: (C) The maturity value of the note is $540,000. [$500,000 face value + (8% x
$500,000)]. The discount fee is $36,000 [10% x $540,000 x (8  12)]. Consequently, the
proceeds equal $504,000 ($540,000 – $36,000).
Answer (A) is incorrect because $540,000 is the maturity value. Answer (B) is incorrect
because $520,667 assumes a nominal rate of 10% and a discount rate of 8%. Answer (D) is
incorrect because $486,000 results from discounting the note for 1 year.
41. Answer (C) is correct. The maturity value of the note is $540,000 [$500,000 face value + (8% x
$500,000)]. The discount is $27,000 [10% x $540,000 x (6/12)]. Consequently, the proceeds
equal $513,000 ($540,000 - $27,000).
Answer (A) is incorrect because $540,000 is the maturity value. Answer (B) is incorrect
because $528,400 assumes a nominal rate of 10% and a discount rate of 8%. Answer (D) is
incorrect because $486,000 results from discounting the note for 1 year.
42. REQUIRED: The proceeds from a discounted note.
DISCUSSION: (D) Following the receipt of the $50,000 plus accrued interest on December
31, 2000, the remaining balance was $50,000. Because the second installment is due 1 year
after the first, the interest attributable to this balance is $5,000 ($50,000 x 10% x 1 year). On
July 1, 2001, the $55,000 maturity value ($50,000 note + $5,000 interest) is discounted at 12%
for the remaining 6months of the term of the note. The discount fee charged would be $3,300
($55,000 maturity value x 12% x 6/12). The net proceed are equal to the $55,000 maturity
value minus the $3,300 discount fee, or $51,700.
$50,000 x 10% x 1 year = $5,000 interest
$55,000 x 12% x 6/12 = $3,300 discount fee
Answer (A) is incorrect because $48,400 results from charging a discount fee for a full year.
Answer (B) is incorrect because $52,640 assumes the nominal interest rate is also 12%.
Answer (C) is incorrect because $52,250 assumes the discount rate is also 10%.
43. REQUIRED: The effective rate of interest on a discounted not.
DISCUSSION: (D) The note had a face value of $50,000. The proceeds from discounting the
note were $44,000 [$50,000 – ($50,000 x 0.12 x 1 year)]. Thus, Jayne paid $6,000 interest
($50,000 – $44,000) on $44,000 for 1 year. The effective interest rate was thus 13.6%
($6,000  $44,000).
Answers (A), (B), and (C) are incorrect because the rate used for the accrual of interest is the
effective interest rate.
44. REQUIRED: The accrued interest revenue recognized when a note is discounted.
DISCUSSION: (A) As determined below, the interest received by Ayn if it had held the 90-day
note to maturity would have been $2,400. The discount fee charged on a note with a maturity
value of $82,400 ($80,000 face + $2,400 interest) discounted at 15% for 60 days is $2,060.
the difference of $340 ($2,400 interest – $2,060 discount fee) should be reflected as accrued
interest revenue at the balance sheet date because the cash proceeds were not received until
the next period.
$80,000 x 12% x 90  360 = $2,400 interest
$82,400 x 15% x 60  360 = (2,060) discount fee
Accrued interest revenue $ 3,40
 Answers (B), (C), and (D) are incorrect because the accrued interest revenue is the difference
between the interest on the note if held to maturity minus the discounted value of the note.
45. REQUIRED: The total interest revenue earned on a discounted note receivable.
DISCUSSION: (B) Sap Co. will receive cash of $25,045 (5 x $5,009). Hence, interest
revenue is $5,560 ($25,045 – $19,485 present value).
Answer (A) is incorrect because $5,045 does not include the discount amortization. Answer
(C) is incorrect because $8,000 equals $20,000 times 8% nominal interest for 5 years.
Answer (D) is incorrect because $9,000 equals $20,000 times the 95 yield rate for 5 years.
46. REQUIRED: The carrying value of a noninterest-bearing note receivable at the date of
issuance.
DISCUSSION: (C) The purchase agreement calls for a $10,000 initial payment and equal
payments of $10,000 to be received at the end of each of the next 9 years. The amount
reported for the receivable should consist of the present value of the nine future payments.
The present value factor to be used is the present value of an ordinary annuity for nine periods
at 8% or 6.25. The note receivable should be recorded at $62,500 ($10,000 x 6.25).
Answer (A) is incorrect because $45,000 results from multiplying $90,000 ($10,000 payments
x 9 years) by 0.50. Answer (B) is incorrect because $46,000 results from multiplying the
$100,000 total by 0.46. Answer (D) is incorrect because $67,100 results from using the
present value of an ordinary annuity of $1 at 8% for 10 years instead of 9 years.
47. REQUIRED: The accrued interest receivable at year-end.
DISCUSSION: (C) Accrued interest receivable is always equal to the face value times the
nominal rate for the period of the accrual. Hence, the accrued interest receivable is $2,000
(4200,000 x 12% x 1/12).
Answer (A) is incorrect because $4,450 is the monthly installment. It includes principal as well
as interest. Answer (B) is incorrect because $2,166 is based on a present value of 4194,000
and an effective rate of 13.4%. It is the interest revenue from the loan. Answer (D) is incorrect
because 1 month’s interest should be accrued.
48. REQUIRED: The interest income from a noninterest-bearing note received for property.
DISCUSSION: (C) When a noninterest-bearing note is exchanged for property, and neither
the note nor the property has a clearly determinable exchange price, the present value of the
note should be determined by discounting all future payments using an appropriately imputed
interest rate. Mill Co. will receive $200,000 cash in 3 years. Assuming that 10% is the
appropriate imputed rate of interest, the present value (initial carrying value) of the note at
January 1, 1999 was $150,000 ($200,000 x 0.75). Interest revenue for 1999 was $15,000
($150,000 x 10%), and the entry was to debit the discount and credit interest revenue for that
amount. Thus, the carrying value of the note at January 1, 2000 was $165,000 ($200,000 face
amount – $35,000 unamortized discount). Interest revenue for 2000 is therefore $16,500
($165,000 carrying value x 10% interest rate).
Answer (A) is incorrect because interest should be recognized equal to the imputed rate times
the carrying value of the note. Answer (B) is incorrect because $15,000 was interest income
for 1999. Answer (D) is incorrect because $20,000 is 10% of the face amount of the note.
49. REQUIRED: The interest expense on a noninterest-bearing note.
DISCUSSION: (B) The purchase of a building without an established exchange price should
be recorded at the fair market value of the consideration given. A noninterest-bearning note
should be recorded at its fair market value or present value of the future cash flows discounted
at the prevailing rate of interest. The note and building should therefore be recorded at
$300,000 ($400,000 x 0.75) The amount of interest expense for the first year is $30,000 [the
carrying value of the note ($300,000 times the 10% interest rate prevailing at the date of
issuance of the note].
Answer (A) is incorrect because $22,000 results from applying the interest rate to the
assessment value of the building. Answer (C) is incorrect because $33,333 is a nonsense
number. Answer (D) is incorrect because 440,000 fails to consider the present value of the
note.
50. REQUIRED: The interest income from a noninterest-bearing note received for property.
DISCUSSION: (B) When a noninterest-bearing note is exchanged for property, and neither the
note nor the property has a clearly determinable exchange price, the present value of the note
should be the basis for recording the transaction. The present value is determined by
discounting all future payments using an appropriately imputed interest rate. Emme Co. wil
receive $600,000 cash in 3 years. Assuming that 10% is the appropriate imputed rate of
interest, the present value (initial carrying value) of the note at January 2, 2000 was $450,000
($600,000 x 0.75). Under the interest method, interest income for 2000 was $45,000
($450,000 x 10%), and the entry is to debit the discount and credit interest income for that
amount.
Answer (A) is incorrect because $15,000 is the difference between 10% of the face value and
10% of the carrying amount. Answer (C) is incorrect because interest income is based on the
present value of the note, not the carrying value of the equipment. Answer (D) is incorrect
because interest income is based on the carrying value of the note, not the face value.
51. REQUIRED: The amount reported as gain (loss) on the sale of machinery.
DISCUSSION: (A) Emme Co. sold equipment with a book value of $480,000 and received a
note with a present value of $450,000 ($600,000 x 0.75). Thus, Emme should report a
$30,000 loss ($80,000 – $450,000).
Answer (B) is incorrect because the present value of the note is $30,000 less than the book
value surrendered. Answer (C) is incorrect because $120,000 is the difference between the
 face value of the note and the carrying value of the equipment. Answer (D) is incorrect
because $150,000 is the discount (face value – a present value).
52. Answer (C) is correct. When the nominal interest rate on a note is not equal to the prevailing
market rate for this type of note, the face amount of the note is not equal to its fair value or
present value. In this case, the present value of the note should be determined by discounting
the 190,000 maturity value and the 9,500 annual interest payments using an appropriately
imputed rate of interest. Given that 12% was the prevailing rate of interest for a note of that
type at the issuance date, 12% should be used to determine both the fair value and the
interest income during the life of the note, regardless of fluctuations in prevailing interest rates.
Answer (A) is incorrect because the market rate of interest at the issuance date should be
used to calculate the amount of interest income. Answer (B) is incorrect because the market
rate of interest at the issuance date should be used to calculate the amount of interest income.
Answer (D) is incorrect because the market rate of interest at the issuance date should be
used to calculate the amount of interest income.
53. REQUIRED: The amount of income from the loan at year-end.
DISCUSSION: (C) Under the effective-interest method, the effective rate of interest is applied
to the net book value of the receivable to determine the interest revenue. Therefore, interest
revenue from the loan, for the month of December, equals $2,005 ($194,000 x 12.4% x 1/12).
Answer (A) is incorrect because one month’s interest should be accrued. Answer (B) is
incorrect because $1,833 is the accrued interest receivable, which equals the face value times
the nominal rate for the period ($200,000 x 11%x 1/12). Answer (D) is incorrect because
$7,833 equals the $6,000 origination fee plus the accrued interest receivable of $1,833.
54. Answer (B) is correct. Leaf Co. will receive cash of $25,045 (5 x $5,009). Hence, interest
revenue is $5,560 ($25,045 - $19,485 present value).
Answer (A) is incorrect because $5,045 does not include the discount amortization. Answer
(C) is incorrect because $8,000 equals $20,000 times 8% nominal interest for 5 years. Answer
(D) is incorrect because $9,000 equals $20,000 times the 9% yield rate for 5 years.
55. Answer (C) is correct. Assuming that the conditions for surrender of control have been met,
the conditions for a sale have also been met. The transferor should therefore derecognize the
partial interest in the asset sold, recognize the asset obtained at fair value, and recognize a
gain in earnings. The fair value of the note is $1,200,000 ($960,000 ÷ 80%). The book value is
$1,000,000. Given no servicing asset or liability, Simpson should record the receipt of the
$960,000 as cash, reduce the carrying amount of the note receivable by $800,000 ($1,000,000
x 80%), and recognize a $160,000 ($960,000 - $800,000) gain.
Answer (A) is incorrect because a loss of $40,000 is equal to the $960,000 cash received
minus the $1,000,000 carrying value of the note. Answer (B) is incorrect because a gain
should be recognized equal to the pro rata (80%) difference between the fair value and the
carrying value of the note. Answer (D) is incorrect because $200,000 is equal to 100% of the
difference between the fair value and the carrying value of the note.
56. Answer (A) is correct. Given that there is no servicing asset or liability, Simpson should record
the receipt of the $960,000 as cash, reduce the carrying amount of the note receivable by
$800,000 ($1,000,000 x 80%), which will result in a $160,000 ($960,000 - $800,000) gain.
Answer (B) is incorrect because option 2 results in a gain of only $150,000. Answer (C) is
incorrect because option 3 results in a gain of only $120,000. Answer (D) is incorrect because
option 4 results in a gain of only $90,000.
57. REQUIRED: The amount to be realized from a liquidation claim.
DISCUSSION: (B) The $50,000 note receivable is secured by the extent of $10,000. The
remaining $40,000 is unsecured, and Mega will be paid on this claim at the rate of $0.30 on
the dollar.
Secured claim $10,000
Unsecured ($40,000 x 0.30) 12,000
$22,000
Answer (A) is incorrect because $25,000 equals 30% of the note receivable plus the
liquidation value of the collateral [($50,000 x 0.30) + $10,000]. Answer (C) is incorrect
because $15,000 is the amount that would be realized if not collateral had been pledged (0.30
x $50,000). Answer (D) is incorrect because $10,000 is the liquidation value of the collateral.
58. REQUIRED: The decrease in assigned accounts receivable and notes payable when cash is
collected and remitted to the assignor.
DISCUSSION: (A) When assigned accounts receivable are collected, the cash should be
remitted to the assignee. The accounts receivable assigned accounts should be decreased
for the amount collected ($80,000), and the note should be decreased by the amount remitted
($80,000) minus interest ($450,000 x 14% x 1/12 = $5,250).
Answer (B) is incorrect because notes payable should be decreased by the amount remitted.
Answer (C) is incorrect because accounts receivable should be decreased by the amount
collected. Answer (D) is incorrect because notes payable should be decreased by the amount
remitted, and the accounts receivable should be decreased by the amount collected.
59. REQUIRED: The amount reported as a current asst for interest on a note receivable.
DISCUSSION: (C) Current assets are those reasonably expected to be realized in cash, sold,
or consumed during the longer of the operating cycle of a business or 1 year. Given that the
date of the balance sheet is 6/30/01, the interest to be paid on the next day, 7/1/01, should be
classified as a current asset.
 Answer (A) is incorrect because $16,000 of interest is reported as a current asset. Answer (B)
is incorrect because $8,000 is the interest to be earned in 2002. Answer (D) is incorrect
because $24,000 is the interest earned in 2000.

60. REQUIRED: The amount to be disclosed in the financial statements for a contingent liability.
DISCUSSION: (D) When a note receivable is discounted with recourse, the discounting firm
is responsible for the full amount of the note ($20,500) if the receivables are not paid.
Consequently, this amount should be disclosed in the footnotes.
Answer (A) is incorrect because a footnote should disclose the full potential liability. Answers
(B) and (C) are incorrect because Love may be responsible for the full amount of the note
($20,500).

61. Answer (D) is correct. Working capital is defined as current assets minus current liabilities.
Writing off receivables against the allowance account has no effect on working capital. By
establishing an allowance (contra asset account), the company had already provided for the
uncollectible accounts. Hence, net assets had already been reduced in a previous year when
the allowance was established. Debiting the allowance account and crediting a receivable at
the time of the write-off have no effect on net assets. The year-end journal entry required a
debit to an expense account and a credit to a contra-asset account. Its effect was to increase
the allowance by $16,500 and to decrease net current assets. Since no offsetting decrease in
current liabilities or increase in current assets occurred, the net change in working capital was
a decrease of $16,500.
Answer (A) is incorrect because $51,000 is the sum of the receivables written off of $34,500
and the adjusting entry of $16,500. The $34,500 written off decreased receivables and
increased the contra asset. Thus, working capital was not affected by that amount. Answer (B)
is incorrect because the $34,500 written off decreased receivables and increased the contra
asset. Thus, working capital was not affected by the write-offs. Answer (C) is incorrect
because the adjusting entry consisted of a debit to expense and a credit to a contra asset,
thereby reducing net current assets. Given that no offsetting decrease in current liabilities
occurred, working capital was decreased by $16,500.