Intermediate Accounting 8th Edition Spiceland Test Bank

Intermediate Accounting 8th Edition Spiceland Test BankCompleted download: https://testbankarea.com/download/intermediate-accounting-8th-edition- spiceland-test-bank/ Solutions Manual for Intermediate Accounting 8th Edition By J. David Spiceland Solutions Manual, answers keys, Instructors Resource Manual, Alt Problem Solutions are included. Completed download: https://testbankarea.com/download/intermediate-accounting-8th-edition- spiceland-solutions-manual/ Chapter 07 Cash and Receivables Chapter 07 Cash and Receivables Answer Key for Test Bank True / False Questions 14-1 1. Cash equivalents would include investments in marketable equity securities as long as management intends to sell the securities in the next three months. FALSE AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Gradable: automatic Learning Objective: 07-01 Define what is meant by internal control and describe some key elements of an internal control system for cash receipts and disbursements. Level of Difficulty: 1 Easy Topic Area: Cash and cash equivalents 2. From a financial accounting perspective, the main purposes of a system of internal control are to improve the accuracy and reliability of accounting information and to safeguard assets. TRUE AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Risk analysis Accessibility: Keyboard Navigation Blooms: Remember Gradable: automatic Learning Objective: 07-01 Define what is meant by internal control and describe some key elements of an internal control system for cash receipts and disbursements. Level of Difficulty: 1 Easy Topic Area: Internal control 14-2 3. In a good system of internal control, the person who initiates a transaction should be allowed to effectively control the processing of the transaction through its final inclusion in the accounting records. FALSE AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Risk analysis Accessibility: Keyboard Navigation Blooms: Remember Gradable: automatic Learning Objective: 07-01 Define what is meant by internal control and describe some key elements of an internal control system for cash receipts and disbursements. Level of Difficulty: 1 Easy Topic Area: Internal control 4. Depending on the circumstances, the classification of a compensating balance may be either current or noncurrent, and the arrangement should be disclosed in the notes. TRUE AACSB: Reflective thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Gradable: automatic Learning Objective: 07-02 Explain the possible restrictions on cash and their implications for classification in the balance sheet. Level of Difficulty: 1 Easy Topic Area: Restricted cash and compensating balances 14-3 5. Under IFRS, an overdraft in a cash account at one bank can be offset against a positive balance in the account at another bank for purposes of reporting cash on the company's balance sheet. TRUE AACSB: Reflective thinking AICPA: BB Global AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Gradable: automatic Learning Objective: 07-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to cash and receivables. Level of Difficulty: 1 Easy Topic Area: IFRS-Cash and cash equivalents 6. The net method of accounting for cash discounts requires adjusting entries for discounts taken. FALSE AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Gradable: automatic Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts. Level of Difficulty: 1 Easy Topic Area: Cash discounts 14-4 7. Recognizing sales returns when merchandise is returned could result in an overstatement of income in the period of the related sale. TRUE AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Evaluate Gradable: automatic Learning Objective: 07-04 Describe the accounting treatment for merchandise returns. Level of Difficulty: 2 Medium Topic Area: Sales returns 8. If cash has been collected from a customer, recognizing estimated sales returns results in recognizing a refund liability. TRUE AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Gradable: automatic Learning Objective: 07-04 Describe the accounting treatment for merchandise returns. Level of Difficulty: 2 Medium Topic Area: Sales returns 14-5 9. The income statement approach to estimating bad debts requires an adjusting entry at the end of the period to reduce receivables to net realizable value. FALSE AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Gradable: automatic Learning Objective: 07-06 Describe the two approaches to estimating bad debts. Level of Difficulty: 2 Medium Topic Area: Uncollectible accounts receivable-Income statement approach 10. Under IFRS, accounts receivable can be accounted for at fair value whenever company management wants to do so. FALSE AACSB: Diversity AACSB: Reflective thinking AICPA: BB Global AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Gradable: automatic Learning Objective: 07-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to cash and receivables. Level of Difficulty: 1 Easy Topic Area: IFRS-Accounts receivable 14-6 11. Under IFRS, accounts receivable can be accounted for as "available for sale" if that approach is elected upon initial recognition of the receivable. TRUE AACSB: Diversity AACSB: Reflective thinking AICPA: BB Global AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Gradable: automatic Learning Objective: 07-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to cash and receivables. Level of Difficulty: 1 Easy Topic Area: IFRS-Accounts receivable 12. Using the balance sheet approach, bad debt expense is an indirect result of estimating the net realizable value of accounts receivable. TRUE AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Gradable: automatic Learning Objective: 07-06 Describe the two approaches to estimating bad debts. Level of Difficulty: 1 Easy Topic Area: Uncollectible accounts-Balance sheet approach 14-7 13. Discounts on notes receivable are recognized as interest earned over the term of the related note. TRUE AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Gradable: automatic Learning Objective: 07-07 Describe the accounting treatment of short-term notes receivable. Level of Difficulty: 1 Easy Topic Area: Notes receivable-noninterest-bearing 14. If a long-term noninterest-bearing note is received in exchange for merchandise sold, the amount of sales revenue recognized will be greater than the amount of the note. FALSE AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Gradable: automatic Learning Objective: 07-07 Describe the accounting treatment of short-term notes receivable. Level of Difficulty: 2 Medium Topic Area: Notes receivable-noninterest-bearing 14-8 15. Unless specific sales criteria are met, the factoring of accounts receivable with recourse is accounted for as a loan. TRUE AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Gradable: automatic Learning Objective: 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale. Level of Difficulty: 1 Easy Topic Area: Financing with receivables-with recourse 16. Securitization of receivables is a type of secured borrowing. FALSE AACSB: Reflective thinking AICPA: BB Resource management AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Gradable: automatic Learning Objective: 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale. Level of Difficulty: 1 Easy Topic Area: Financing with receivables 14-9 17. Under IFRS, transfer of risks and rewards of ownership, rather than transfer of control, is the primary factor determining whether a factored receivable can be treated as sold rather than as part of a secured borrowing. TRUE AACSB: Diversity AACSB: Reflective thinking AICPA: BB Global AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Gradable: automatic Learning Objective: 07-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to cash and receivables. Level of Difficulty: 1 Easy Topic Area: IFRS-Transfers of receivables 18. The receivables turnover ratio provides a way for an analyst to assess the effectiveness of a company in managing its investment in receivables. TRUE AACSB: Reflective thinking AICPA: FN Measurement AICPA: FN Risk analysis Accessibility: Keyboard Navigation Blooms: Remember Gradable: automatic Learning Objective: 07-09 Describe the variables that influence a company's investment in receivables and calculate the key ratios used by analysts to monitor that investment. Level of Difficulty: 1 Easy Topic Area: Receivables management 14-10 19. In a bank reconciliation, adjustments to the bank balance could include adding deposits in transit and deducting bank service charges. FALSE AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Gradable: automatic Learning Objective: Appendix 7A Cash Controls Level of Difficulty: 1 Easy Topic Area: Bank reconciliation 20. In a bank reconciliation, adjustments to the book balance could include adding or subtracting company errors. TRUE AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Gradable: automatic Learning Objective: Appendix 7A Cash Controls Level of Difficulty: 1 Easy Topic Area: Bank reconciliation 14-11 21. The journal entry to record the replenishment of a petty cash fund includes a credit to the petty cash fund. FALSE AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Gradable: automatic Learning Objective: Appendix 7A Cash Controls Level of Difficulty: 1 Easy Topic Area: Petty cash 22. When a creditor's receivable becomes impaired, the receivable is revalued based on the discounted present value of currently expected cash flows at the loan's original effective rate. TRUE AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Gradable: automatic Learning Objective: Appendix 7B Accounting for Impairment of a Receivable and a Troubled Debt Restructuring Level of Difficulty: 1 Easy Topic Area: Impairment of a receivable 14-12 23. Under IFRS, accounts receivable impairments are not recognized. FALSE AACSB: Diversity AACSB: Reflective thinking AICPA: BB Global AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Gradable: automatic Learning Objective: 07-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to cash and receivables. Learning Objective: Appendix 7B Accounting for Impairment of a Receivable and a Troubled Debt Restructuring Level of Difficulty: 1 Easy Topic Area: IFRS-Impairment of receivables Multiple Choice Questions 14-13 24. Important elements of an internal control system for cash disbursements include each of the following except: A. Only authorized personnel should sign checks. B. All expenditures should be authorized before a check is prepared. C. All disbursements, other than very small disbursements, should be made by check. D. The same person that prepares the check should also record it in the proper journal. AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Risk analysis Accessibility: Keyboard Navigation Blooms: Remember Gradable: automatic Learning Objective: 07-01 Define what is meant by internal control and describe some key elements of an internal control system for cash receipts and disbursements. Level of Difficulty: 1 Easy Topic Area: Internal control 14-14 25. COSO defines internal control as a process, affected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in: A. Effectiveness and efficiency of operations. B. Reliability of financial advice. C. Compliance with local ordinances. D. All of these answer choices are correct. AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Risk analysis Accessibility: Keyboard Navigation Blooms: Remember Gradable: automatic Learning Objective: 07-01 Define what is meant by internal control and describe some key elements of an internal control system for cash receipts and disbursements. Level of Difficulty: 1 Easy Topic Area: Internal control 14-15 26. Cashmere Soap Corporation had the following items listed in its trial balance at 12/31/2016: Currency and coins $ 650 Balance in checking account 2,600 Customer checks waiting to be deposited 1,200 Treasury bills, purchased on 11/1/2016, mature on 4/30/2017 3,000 Marketable equity securities 10,200 Commercial paper, purchased on 11/1/2016, mature on 1/30/2017 5,000 What amount will Cashmere Soap include in its year-end balance sheet as cash and cash equivalents? A. $9,450. B. $12,450. C. $7,450. D. $19,650. $650 + 2,600 + 1,200 + 5,000 = $9,450 AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Gradable: automatic Learning Objective: 07-01 Define what is meant by internal control and describe some key elements of an internal control system for cash receipts and disbursements. Level of Difficulty: 3 Hard Topic Area: Cash and cash equivalents 14-16 27. Cash equivalents do not include: A. Money market funds. B. High grade marketable equity securities. C. U.S. treasury bills. D. Commercial paper. AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Gradable: automatic Learning Objective: 07-01 Define what is meant by internal control and describe some key elements of an internal control system for cash receipts and disbursements. Level of Difficulty: 1 Easy Topic Area: Cash and cash equivalents 14-17 28. Cash may not include: A. Foreign currency. B. Money orders. C. Restricted cash. D. Undeposited customer checks. AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Gradable: automatic Learning Objective: 07-01 Define what is meant by internal control and describe some key elements of an internal control system for cash receipts and disbursements. Learning Objective: 07-02 Explain the possible restrictions on cash and their implications for classification in the balance sheet. Level of Difficulty: 1 Easy Topic Area: Cash and cash equivalents Topic Area: Restricted cash and compensating balances 14-18 29. Compensating balances represent: A. Funds in a bank account that can't be spent. B. Balances in a payroll checking account. C. Accounts that are subject to bank service charges. D. Accounts on which banks pay interest, e.g., NOW accounts. AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Gradable: automatic Learning Objective: 07-02 Explain the possible restrictions on cash and their implications for classification in the balance sheet. Level of Difficulty: 1 Easy Topic Area: Restricted cash and compensating balances 14-19 30. Cash that is restricted and not available for current operations is reported in the balance sheet as: A. Equity. B. Investments. C. Liabilities. D. A separate section between liabilities and equity. AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Gradable: automatic Learning Objective: 07-02 Explain the possible restrictions on cash and their implications for classification in the balance sheet. Level of Difficulty: 1 Easy Topic Area: Restricted cash and compensating balances Missing part for sample version, for completed please visit link from first page. Short Answer Questions 14-20 125. Costa Co. has the following cash balances at local banks as of 12/31/2016: National Bank: $100,000 K&P Bank: 25,000 Insolvent Trust 25,000 Required: 1. Prepare the Current Assets and Current Liabilities section of Costa's 2016 balance sheet, assuming Parker reports under U.S. GAAP. 2. Prepare the Current Assets and Current Liabilities section of Costa's 2016 balance sheet, assuming Parker reports under IFRS. 1. U.S. GAAP Current Assets: Cash $125,000 Current Liabilities: Bank Overdrafts $ 5,000 2. IFRS Current Assets: Cash $120,000 14-21 AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Blooms: Apply Gradable: manual Learning Objective: 07-01 Define what is meant by internal control and describe some key elements of an internal control system for cash receipts and disbursements. Learning Objective: 07-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to cash and receivables. Level of Difficulty: 2 Medium Topic Area: Cash and cash equivalents Topic Area: IFRS-Cash and cash equivalents 14-22 126. On May 12, 2016, Falwell Computing sold five computers to Computing Plus for $10,000, subject to terms 3/10, n/30. Falwell uses the net method of accounting for sales discounts. Required: 1. Prepare the journal entry to record the sale. 2. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on May 20, 2016. 3. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on June 5, 2016. 1. Accounts receivable 9,700 Sales revenue 9,700 2. Cash 9,700 Accounts 9,700 receivable 3. Cash 10,000 Accounts 9,700 receivable Interest revenue 300 14-23 AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Gradable: manual Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts. Level of Difficulty: 2 Medium Topic Area: Cash discounts 14-24 127. On July 18, 2016, Philly Furniture Factory sold 20 reclining rockers to Dave's Discount Furniture for $8,000, subject to terms 2/10, n/30. Philly uses the net method of accounting for sales discounts. Required: 1. Prepare the journal entry to record the sale. 2. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on July 26, 2016. 3. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on August 15, 2016. 1. Accounts receivable 7,840 Sales revenue 7,840 2. Cash 7,840 Accounts receivable 7,840 3. Cash 8,000 Accounts receivable 7,840 Interest revenue 160 AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Gradable: manual Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts. Level of Difficulty: 2 Medium Topic Area: Cash discounts 14-25 128. On March 12, 2016, Admiral Electronics sold 20 fax machines to Cool Stuff Co. for $10,000, subject to terms 2/10, n/30. Admiral uses the gross method of accounting for sales discounts. Required: 1. Prepare the journal entry to record the sale. 2. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on March 20, 2016. 3. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on April 5, 2016. 1. Accounts receivable 10,000 Sales revenue 10,000 2. Cash 9,800 Sales discounts 200 Accounts 10,000 receivable 3. Cash 10,000 Accounts 10,000 receivable 14-26 AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Gradable: manual Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts. Level of Difficulty: 2 Medium Topic Area: Cash discounts 14-27 129. On October 18, 2016, Flying Chicken sold 2,000 pounds of chicken to Healthier Grocery for $3,400, subject to terms 2/10, n/30. Flying Chicken uses the gross method of accounting for sales discounts. Required: 1. Prepare the journal entry to record the sale. 2. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on October 26, 2016. 3. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on November 15, 2016. 1. Accounts receivable 3,400 Sales revenue 3,400 2. Cash 3,332 Sales discounts 68 Accounts 3,400 receivable 3. Cash 3,400 Accounts 3,400 receivable 14-28 AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Gradable: manual Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts. Level of Difficulty: 2 Medium Topic Area: Cash discounts 14-29 130. On June 14, 2016, Rumsfeld Company sold 100 air-conditioning units to Powell Heating and Cooling. The units list for $600 each, but Powell was granted a 25% trade discount. All of Rumfeld's sales are subject to terms 2/10, n/30. Rumsfeld uses the gross method of accounting for sales discounts. Required: 1. Prepare the journal entry to record the sale. 2. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on June 22, 2016. 3. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on July 10, 2016. 1. Accounts receivable 45,000 Sales revenue 45,000 2. Cash 44,100 Sales discounts 900 Accounts 45,000 receivable 3. Cash 45,000 Accounts 45,000 receivable 14-30 AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Gradable: manual Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts. Level of Difficulty: 3 Hard Topic Area: Cash discounts 14-31 131. On February 14, 2016, Prime Company sold 50 air-conditioning units to L&P Heating and Cooling. The units list for $700 each, but L&P was granted a 30% trade discount. All of Prime's sales are subject to terms 2/10, n/30. Prime uses the net method of accounting for sales discounts. Required: 1. Prepare the journal entry to record the sale. 2. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on February 22, 2016. 3. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on March 10, 2016. 1. Accounts receivable 24,010 Sales revenue 24,010 2. Cash 24,010 Accounts 24,010 receivable 3. Cash 24,500 Accounts 24,010 receivable Interest revenue 490 14-32 AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Gradable: manual Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts. Level of Difficulty: 3 Hard Topic Area: Cash discounts 14-33 14-34 132. Beethoven Music Company started business in March 2016. Sales for its first year were $400,000. Beethoven priced its merchandise to yield a 45% gross profit based on sales dollars. Industry statistics suggest that 10% of the merchandise sold to customers will be returned. Beethoven estimated its sales returns based on the industry average. During the year, customers returned $30,000 in sales. Beethoven uses a perpetual inventory system. Required: Prepare summary journal entries to record (1) sales, (2) sales returns, and (3) the year-end adjusting entry for estimated sales returns. Assume that cash has not yet been collected for merchandise that could yet be returned. (1) Accounts 400,000 receivable Sales revenue 400,000 Cost of goods 220,000 sold Inventory 220,000 (2) Sales returns 30,000 Accounts 30,000 receivable Inventory 16,500 Cost of goods 16,500 sold (3) Sales returns 10,000 ([$400,000 x 10%] - $30,000 14-35 Allowance for 10,000 sales returns Inventory- 5,500 estimated returns Cost of goods 5,500 sold AACSB: Knowledge Application AICPA: FN Measurement Blooms: Apply Gradable: manual Learning Objective: 07-04 Describe the accounting treatment for merchandise returns. Level of Difficulty: 3 Hard Topic Area: Sales returns Missing part for sample version, for completed please visit link from first page. Essay Questions 14-36 163. Define what it is meant by internal control. Internal control is part of the overall control structure of an organization. It refers to a firm's plan to (a) encourage adherence to its policies and procedures, (b) promote operational efficiency, (c) minimize errors and theft, and (d) enhance the reliability and accuracy of accounting data. Although every unit of an organization should be concerned with overall internal control, the focus of financial accounting is on controls intended to improve the accuracy and reliability of accounting information and to safeguard the company's assets. AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Risk analysis Blooms: Remember Gradable: manual Learning Objective: 07-01 Define what is meant by internal control and describe some key elements of an internal control system for cash receipts and disbursements. Level of Difficulty: 2 Medium Topic Area: Internal control 14-37 164. Describe some key elements of an internal control system for cash. Separation of duties is essential to good internal control, especially in cash management. The text examples cover handling of mailed receipts and controls for cash disbursements. The bank reconciliation is very important in the control of cash. It is also common to use a lockbox to store petty cash. AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Risk analysis Blooms: Understand Gradable: manual Learning Objective: 07-01 Define what is meant by internal control and describe some key elements of an internal control system for cash receipts and disbursements. Level of Difficulty: 2 Medium Topic Area: Internal control 165. Cash is the most liquid of all assets but is not always reported under current assets. Explain this statement. Depending on the circumstances, restricted cash may sometimes be reported as either investments or other assets. Note disclosure is appropriate for material restrictions on cash regardless of balance sheet classification. AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Understand Gradable: manual Learning Objective: 07-02 Explain the possible restrictions on cash and their implications for classification in the balance sheet. Level of Difficulty: 2 Medium Topic Area: Restricted cash and compensating balances 14-38 166. Although the net method is theoretically more sound, most companies use the gross method of accounting for cash discounts related to sales on account. Explain this statement. The net method is superior, in theory, since it neither overstates receivables nor overstates net sales. Both of these problems occur with the gross method. However, the gross method is more practical from a cost versus benefit view, and the difference between the two methods is usually immaterial. AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Understand Gradable: manual Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts. Level of Difficulty: 2 Medium Topic Area: Cash discounts 14-39 167. Briefly explain the accounting treatment for estimated sales returns at the end of an accounting period for which accounts receivable remain outstanding. If sales returns are material, an allowance should be established for the estimated amount of returns, debiting "sales returns" (a contra-revenue account) and crediting an "allowance for sales returns" (a contra-receivables account). AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Remember Gradable: manual Learning Objective: 07-04 Describe the accounting treatment for merchandise returns. Level of Difficulty: 2 Medium Topic Area: Sales returns 168. Briefly explain the accounting treatment for estimated sales returns at the end of an accounting period for which cash has already been collected from customers. If sales returns are material, a refund liability should be established, debiting "sales returns" (a contra-revenue account) and crediting the refund liability. AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Remember Gradable: manual Learning Objective: 07-04 Describe the accounting treatment for merchandise returns. Level of Difficulty: 2 Medium Topic Area: Sales returns 14-40 169. Briefly explain why the direct write-off of uncollectible accounts is not permitted by GAAP if bad debts are material. The direct write-off method is not permitted by GAAP if bad debts are material because it violates the matching principle and overstates total assets, retained earnings, and net income. The direct write-off method may be used if bad debts are immaterial. AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Understand Gradable: manual Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable. Level of Difficulty: 2 Medium Topic Area: Uncollectible accounts receivable 14-41 170. Last year, Simpson Company had a receivables turnover ratio of 12. Homer, Simpson's president, was delighted when the ratio went to 18 for this year. This year, Simpson's long-standing credit terms of net 30 were changed to net 10. Should Homer be happy? Explain. Homer needs to compare the average collection periods and credit policies between last year and the current year. In Simpson's case that information is as follows: Prior Current year year Average 30 20 collection period (365/12) (365/18) Credit terms net 30 net 10 There may be a dark cloud in Homer's silver lining. His customers are not complying with his new credit policy. Although his receivables turnover ratio has improved dramatically, he should examine other data carefully before concluding that the change in credit terms has been beneficial to the company. AACSB: Analytical Thinking AICPA: FN Risk analysis Blooms: Evaluate Gradable: manual Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable. Level of Difficulty: 2 Medium Topic Area: Uncollectible accounts receivable 14-42 14-43 171. You have recently been hired as the assistant controller for Clayton Inc., a large, publicly held manufacturing company. Your immediate superior is the controller who, in turn, is responsible to the chief financial officer. The controller has assigned the task of preparing the year-end adjusting entry for bad debts to you. The allowance for uncollectibles accounts has a credit balance of $86,000 before the year-end adjustment. Your analysis indicates that an appropriate balance for the allowance account is $210,000. After showing your analysis to the controller, she tells you to adjust the allowance account to $310,000. Tactfully, you ask the controller for an explanation for the amount and she tells you, "We are having a really good year. Let's bump up the allowance." Required: Discuss the ethical dilemma you face. Consider your options and responsibilities along with the possible consequences of any action you might take. Ethical Dilemma: You, as the assistant controller, have a responsibility to follow GAAP and make a reasonably accurate estimate of the net realizable value of receivables. Is your responsibility to fairly present Clayton Inc.'s financial statements to external users greater than your obligation to manage the earnings of your employer? Alternative actions and consequences include: 1. Refuse to comply with the controller's request to increase the allowance. Positive consequences: a. Preservation of your honesty and integrity. b. Fair presentation of the net realizable value of receivables. Negative consequences: a. Possible loss of your job. b. Higher market expectations for next year's earnings caused by inflated 14-44 income this year could lead to lower stock price in the future. 2. Comply with the controller's suggestion to report the allowance for uncollectible accounts at $310,000. Positive consequences: a. Retention of your job. b. A more favorable net income in future years and perhaps higher stock price as great growth in earnings will be reported. Negative consequences: a. Endure guilt feelings. b. A lack of trust in you by other managers and employees. c. Possible litigation from investors and creditors. 3. Report the controller's suggestion to a higher level of management, the audit committee, or the auditors. If one of these parties corrects the controller and compels fair reporting of the allowance account, the consequences would be the same as in alternative 1 when you refuse to make the adjustment. Your job may still be in jeopardy due to the fact that management may consider whistle- blowing as indicative of employee disloyalty. If the reportee parties agree with the controller and report the incorrect amount of $310,000, the consequences will be similar to those for alternative 2, except that you run an even greater risk of losing your job. 4. Refuse to comply with the controller's request and resign as assistant controller. If you report the controller's suggestion to higher management, the audit committee, or the auditor, the positive and negative considerations are the same as for alternative 3. If you do not report the controller's request, then the consequences are the same as for alternative 2. In either case your job is not an issue since you have already resigned. 14-45 AACSB: Communication AACSB: Ethics AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Risk analysis Blooms: Create Gradable: manual Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable. Level of Difficulty: 3 Hard Topic Area: Uncollectible accounts receivable 172. Briefly compare and contrast the two approaches to estimating bad debt expense. In your answer, indicate which approach, if either, is superior. The two ways to estimate bad debt expense are the income statement approach and balance sheet approach. Both are acceptable, but the primary objective of the allowance method is to determine the net realizable value of receivables. In this sense, the balance sheet approach is theoretically superior. This approach often uses an accounts receivable aging schedule to determine estimated bad debt expense. The income statement approach typically calculates bad debt expense as a percentage of credit sales. AACSB: Communication AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Evaluate Gradable: manual Learning Objective: 07-06 Describe the two approaches to estimating bad debts. Level of Difficulty: 2 Medium Topic Area: Uncollectible accounts-Balance sheet approach Topic Area: Uncollectible accounts-Income statement approach 14-46 173. Companies can have accounts receivable from ordinary trade customers and from related parties (e.g., directors, employees or large shareholders). How does U.S. GAAP differ from IFRS in its requirements regarding separate disclosure of trade receivables and related-party receivables? Why might separate disclosure of related party receivables be useful? U.S. GAAP requires that accounts receivable from related parties be disclosed separately from accounts receivable from ordinary trade customers. IFRS does not require that separate disclosure. Separate disclosure is useful because a receivable from a related party might not have the same collection pattern as a receivable from a trade customer. The related party could potentially get more extended terms, such that those receivables are collected slower. Alternatively, to make the company appear more effective in its collections, a related party might pay more quickly than necessary. AACSB: Diversity AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Understand Gradable: manual Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable. Learning Objective: 07-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to cash and receivables. Level of Difficulty: 3 Hard Topic Area: IFRS-Accounts receivable Topic Area: Uncollectible accounts receivable 14-47 174. The following note disclosure appeared in a recent annual report of Halliburton: Our receivables are generally not collateralized. Included in notes and accounts receivable are notes with varying interest rates totaling $12 million at December 31. At December 31, 39% of our consolidated receivables related to our United States government contracts, primarily for projects in the Middle East. Explain the reason that Halliburton indicates that its receivables include notes with varying interest rates totaling $12 million at December 31. What significance does this have to the reader? Halliburton is conveying to the reader the portion of the total receivables that are interest-bearing. AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Gradable: manual Learning Objective: 07-07 Describe the accounting treatment of short-term notes receivable. Level of Difficulty: 2 Medium Topic Area: Notes receivable-interest-bearing 14-48 175. The following note disclosure appeared in a recent annual report of Halliburton: Our receivables are generally not collateralized. Included in notes and accounts receivable are notes with varying interest rates totaling $12 million at December 31. At December 31, 39% of our consolidated receivables related to our United States government contracts, primarily for projects in the Middle East. Explain the reason that Halliburton indicates that its receivables are generally not collateralized. What significance does this have to the reader? Receivables that are collateralized are pledged against the company's loans and will not be available for use in the company's operations when they are collected. Halliburton's disclosure is telling the reader that, generally, its receivables are highly liquid and available for use or sale. AACSB: Analytical Thinking AICPA: BB Resource management AICPA: FN Measurement Blooms: Analyze Gradable: manual Learning Objective: 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale. Level of Difficulty: 2 Medium Topic Area: Financing with receivables 14-49 176. Explain the transactions that typically would affect the discount on notes receivable account. The discount on notes receivable would be initially credited for the "discount" when a noninterest-bearing note is issued. The "discount" really represents the total interest on the note over its term. The "discount" should be recognized as interest earned over the term of the loan in a series of adjusting entries: Discount on note $XXX receivable Interest revenue $XXX These entries bring the discount account to zero on the maturity date. Prior to maturity, the unamortized balance in the discount account is reported in the balance sheet as a contra account to the related note receivable. AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Understand Gradable: manual Learning Objective: 07-07 Describe the accounting treatment of short-term notes receivable. Level of Difficulty: 3 Hard Topic Area: Notes receivable-noninterest-bearing 14-50 177. A company's investment in receivables is affected by several related variables. Give an example of this interrelationship. There are many such examples. For instance, a change in credit policies could affect sales. In fact, more liberal credit policies—allowing customers a longer time to pay or offering cash discounts for early payment—often are initiated with the specific objective of increasing sales volume. Also, management's choice of credit and collection policies often involves trade-offs. For example, offering cash discounts may increase sales volume, accelerate customer payment, and reduce bad debts. AACSB: Reflective thinking AICPA: BB Resource management AICPA: FN Risk analysis Blooms: Create Gradable: manual Learning Objective: 07-09 Describe the variables that influence a company's investment in receivables and calculate the key ratios used by analysts to monitor that investment. Level of Difficulty: 2 Medium Topic Area: Receivables management 14-51 178. Explain how a company could manipulate cash flow from operations by changing the extent to which it factors accounts receivable and treats those factoring arrangements as sales of receivables. Assume all else equal, and that the company treats cash collected from the factor as an operating cash flow. In the period in which a company increases the proportion of receivables that it factors, it will increase cash flow from operations (because cash flow from operations contains not only ordinary cash collections from prior receivables but also the cash collections associated with the factored receivables). The reverse is also true; in the period in which a company decreases the proportion of receivables that it factors, it will decrease cash flow from operations (because fewer receivables are being factored). AACSB: Communication AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: BB Resource management AICPA: FN Risk analysis Blooms: Understand Gradable: manual Learning Objective: 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale. Level of Difficulty: 3 Hard Topic Area: Financing with receivables 14-52 179. Explain briefly how IFRS and U.S. GAAP differ in determining whether a transfer of an accounts receivable qualifies as a sale. U.S. GAAP focuses on whether control of assets has shifted from the transferor to the transferee. There are three primary sales criteria: 1. The transferred assets have been isolated from the transferor—beyond the reach of the transferor and its creditors. 2. Each transferee has the right to pledge or exchange the assets it received. 3. The transferor does not maintain effective control over the transferred assets. Effective control would exist, for example, if the transfer is structured such that the assets are likely to end up returned to the transferor. In contrast, IFRS requires a more complex decision process. The company has to have transferred the rights to receive the cash flows from the receivable, and then considers whether the company has transferred "substantially all of the risks and rewards of ownership," as well as whether the company has transferred control. Under IFRS: 1. If the company transfers substantially all of the risks and rewards of ownership, the transfer is treated as a sale. 2. If the company retains substantially all of the risks and rewards of ownership, the transfer is treated as a secured borrowing. 3. If neither conditions 1 nor 2 hold, the company treats the transaction as a sale if it has transferred control, and as a secured borrowing if it has retained control. 14-53 AACSB: Diversity AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Remember Gradable: manual Learning Objective: 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale. Learning Objective: 07-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to cash and receivables. 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However, at present the convergence process appears to have stalled with respect to new standards, and it is not clear when, if ever, IFRS will be fully incorporated into U.S. GAAP. So, while there is considerable overlap between U.S. GAAP and IFRS, important differences between U.S. GAAP and IFRS will remain for the foreseeable future. 14-56