If you have a set of present value tables, an annual interest rate, the dollar amount of equal payments made, and the number of semiannual payments, what other information do you need to calculate the present value of the series of payments?

a.The timing of the payments (whether they are at the beginning or end of the period)

b.The future value of the annuity

c.No other information is needed

d.The rate of inflation

A

Justin Investor wants to calculate how much money he needs to deposit today into a savings account that earns 4% in order to be able to withdraw $6,000 at the end of each of the next five years. He should use which present value concept?

a.Present value of $1 for five periods

b.Present value of an annuity due of $1 for five periods

c.Present value of an ordinary annuity of $1 for five periods

d.Future value of $1 for five periods

C

The Knotworth Gedding Consulting Company purchased a machine for $15,000 down and $500 a month payable at the end of each of the next 36 months. How would the company calculate the cash price of the machine, assuming the annual interest rate is known?

a.$15,000 plus the present value of $18,000 ($500 × 36)

b.$15,000 plus the present value of an annuity due of $500 for 36 periods

c.$33,000

d.$15,000 plus the present value of an ordinary annuity of $500 for 36 periods

D

The Stinch Fertilizer Corporation wants to accumulate $8,000,000 for plant expansion. The funds are needed on January 1, 2026. Stinch intends to make five equal annual deposits in a fund that will earn interest at 7% compounded annually. The first deposit is to be made on January 1, 2021. PV & FV facts below:

Future value of an ordinary annuity of $1 at 7% for five periods

5.75

Future value of an annuity due of $1 at 7% for five periods

6.15

Present value of $1 at 7% for five periods

.713

Present value of an ordinary annuity of $1 at 7% for five periods

4.10

What is the amount of the required annual deposit?

a.$1,300,813

b.$1,391,304

c.$1,951,220

d.$1,704,000

A

I.R. Wright plans to make quarterly deposits of $200 for five years into a savings account. The first deposit will be made immediately. The savings account pays interest at an annual rate of 8%, compounded quarterly. How much will Wright have accumulated in the savings account at the end of the five-year period? Round to the nearest dollar.

Future value of an ordinary annuity of $1 at 8% for five periods 6.3359

Future value of an annuity due of $1 at 8% for five periods 5.8666

Future value of an ordinary annuity of $1 at 2% for 20 periods 24.2974

Future value of an annuity due of $1 at 2% for 20 periods 24.7833

a.$2,672

b.$4,000

c.$4,957

d. $5,237

C

U.B. Wong plans to make quarterly deposits of $200 for five years into a savings account. The deposits will be made at the end of each quarter. The savings account pays interest at an annual rate of 8%, compounded quarterly. How much will Wong have accumulated in the savings account at the end of the five-year period? Round to the nearest dollar.

Future value of an ordinary annuity of $1 at 8% for five periods 6.3359

Future value of an annuity due of $1 at 8% for five periods 5.8666

Future value of an ordinary annuity of $1 at 2% for 20 periods 24.2974

Future value of an annuity due of $1 at 2.5% for 20 periods 24.7833

a.$2,672

b.$4,000

c.$5,237

d.$4,859

D

Harry Byrd’s Chicken Shack agrees to pay an employee $50,000 a year for six years beginning two years from today and decides to fund the payments by depositing one lump sum in a savings account today. The company should use which present value concept to determine the required deposit?

a.Future value of $1

b.Future value of a deferred annuity

c.Present value of a deferred annuity

d.None of the above

C

The Omagosh Company purchased office furniture for $25,800 and agreed to pay for the purchase by making five annual installment payments beginning one year from today. The installment payments include interest at 8%. The present value of an ordinary annuity for five periods at 8% is 3.99271. The present value of an annuity due for five periods at 8% is 4.31213. What is the required annual installment payment?

a.$5,160

b.$6,462

c.$5,983

d.$4,398

B

On May 31, 2021, the Gusto Beer Company leased a machine from B. A. Lush, Inc. The lease agreement requires Gusto to pay six annual payments of $16,000 on each May 31, with the first payment due on May 31, 2021. Assuming an interest rate of 6% and that this lease is treated as an installment sale (capital lease), Gusto will initially value the machine by multiplying $16,000 by which of the following?

a.Present value of $1 at 6% for six periods

b.Present value of an ordinary annuity of $1 at 6% for six periods

c.Present value of an annuity due of $1 at 6% for six periods

d.Future value of an annuity due of $1 at 6% for six periods

C

Which of the following is not an element of a good internal control system for cash receipts and disbursements?

a.Maintaining a separation of duties

b.Ensuring all checks are signed by authorized individuals

c.Having the most senior employee handle cash disbursements and bank reconciliations

d.Making disbursements with checks rather than cash

C

Jenks borrowed $13,000,000 from a bank at a 10% rate of interest. The bank requires Jenks to maintain a $3,000,000 compensating balance. What is Jenks’ effective interest rate?

a.7.7%

b.10%

c.13%

d.23%

C

Which of the following is not true about recording sales discounts?

a.The gross method records sales discounts taken when payment occurs during the discount period

b.The net method records sales discounts not taken as sales discounts forfeited

c.Net sales revenue is higher under the gross method than under the net method

d.Net sales revenue is the same under both methods

C

Five Dollar Stores (FDS) sells merchandise for cash. It began 2021 with a refund liability of $0, made sales of $1,000,000 during 2021 which cost FDS $600,000 (or 60%), estimates that 1% of all sales will be returned, and experiences $8,000 of returns during 2021. When accruing its estimate of remaining returns at the end of 2021, FDS would debit sales returns and credit the refund liability for:

a.$18,000

b.$10,000

c.$8,000

d.$2,000

D

Five Dollar Stores (FDS) sells merchandise for cash. It began 2021 with a refund liability of $0, made sales of $1,000,000 during 2021 which cost FDS $600,000 (or 60%), estimates that 1% of all sales will be returned, and experiences $8,000 of returns during 2021. When accruing its estimate of remaining returns at the end of 2021, FDS would debit Inventory—estimated returns and credit COGS for:

a.$6,000

b.$4,800

c.$1,200

d.$0

C

Green Valley Steel had sales of $1,000,000 and collections of $760,000, leaving a balance of $240,000 in accounts receivable as of December 31, 2021. Analysis indicates it expects to collect $200,000 of its accounts receivable. How would it set up an allowance for uncollectible accounts?

a.Debit accounts receivable for $40,000 and credit bad debts for $40,000

b.Debit bad debt expense for $40,000 and credit allowance for uncollectible accounts for $40,000

c.Debit allowance for uncollectible accounts for $40,000 and credit accounts receivable for $40,000

d.Debit allowance for uncollectible accounts for $40,000 and credit bad debts for $40,000

B

Berkley Associates uses the balance sheet approach to estimate bad debts expense. It started 2021 with a credit balance of $10,000 in its allowance for uncollectible accounts. Berkley wrote off $200,000 of bad debts during 2021, and its aging of accounts receivable at 12/31/21 indicates it should have a credit balance of $5,000 in the allowance for uncollectible accounts. No other journal entries to the allowance have been made. Berkley’s journal entry to record bad debts expense should include a:

a.Debit to B.D. expense of $195,000

b.Debit to the allowance for $5,000

c.Credit to B.D. expense for $200,000

d.Credit to the allowance for $200,000

A

Finkel sold merchandise to a customer in exchange for a four-year, noninterest-bearing note for $10,000. An equivalent loan would have a 10% interest rate. Finkel would record sales revenue on the date of sale equal to:

a.$0

b.$10,000

c.The present value of $10,000, discounted at a 10% discount rate for four years

d.$9,000, equal to $10,000 − (10% × $10,000)

C

Jada Co. borrows $100,000 on January 1 from NorthEast Bank at a 12% interest rate. Jada assigned $140,000 of its accounts receivable as collateral, and agreed to pay a financing fee of 2% of accounts receivable assigned. On January 1, Jada’s accounting for this transaction will include:

a.Debit to cash for $100,000

b.Debit to cash for $97,200

c.Debit to finance expense of $2,000

d.Debit to finance expense of $1,000

B

Which of the following is not true about factoring receivables?

a.Cash received upon transfer is less than the amount of receivables transferred

b.A transfer without recourse means that the transferor bears the risk of the receivables not being collected

c.A larger loss is recorded by the transferor when receivables are transferred with recourse

d.The transferor removes the factored accounts receivable from its balance sheet

B

On June 1, 2021, Detert accepted a six-month note paying $100,000 plus 8% interest in exchange for services rendered. Detert immediately discounted the note at SouthBank, paying a 10% discount rate. On June 1, Detert will receive how much cash from SouthBank?

a.$98,800

b.$97,200

c.$100,000

d.$108,000

A

Which of the following is not true regarding IFRS and U.S. GAAP reporting standards?

a.IFRS allows overdrafts to be offset against other cash accounts

b.When accounting for receivables, U.S. GAAP allows “available for sale” accounting for investments, but IFRS does not

c.IFRS requires a complex decision process for the transfer of receivables

d.IFRS, like U.S. GAAP, allows a “fair value option” for accounting for receivables in all circumstances

D

Cambridge Associates’ financial statements list the following:

Accounts receivable as of 1/1/21: $200,000

Accounts receivable as of 12/31/21: $600,000

Net sales for 2021: $8,000,000

Net sales for 2020: $10,000,000

Cambridge’s 2021 average collection period is:

a.9.125

b.16.22

c.18.25

d.27.375

C

What is time value of money?

money invested today to earn interest and grow to a larger dollar amount in the future.

What's the formula for simple interest?

initial investment times annual rate times period of time

What is compound interest?

interest adding onto all accumulated interest from previous periods.

What is the effective rate?

actual rate which money grows per year.

If something is compounded semiannually the interest rate will be divided by

2

When compounding you do not add up

previous balances.

PV formula

FV/(1+i)ⁿ

FV formula

PV*(1+i)ⁿ

The (1+i)ⁿ is what?

the table factor

You should remember than n is ______, not years

periods

What does TVM ignore?

inflation. So the longer you wait to receive your money, the less valuable it is.

FV requires ______ of compound interest

addition

PV requires ______ of compound interest

removal

How do you find i or n?

Divide PV/FV which will equal a table factor on the PV table, follow i/n to find i/n

Explicit interest means

agreement actually says interest rate, note receivable and revenue is actual face value where you calculate FV.

Nonexplicit interest means

agreement doesn't say interest rate, note receivable and revenue are face value where you calculate PV.

What are annuities?

series of cash flows of same amount received or paid each period.

What is an ordinary annuity?

cash flow occur at end of each period.

What is an annuity due?

cash flow occur at beginning (day of) of each period.

What is a deferred annuity?

first cash flow occurs more than 1 period after agreement date.

What are the steps for a deferred annuity?

1) Calculate PV of annuity at beginning of period

2) Reduce single amount calculated in 1 increase to its PV of today

How do you find an ordinary annuity amount?

PV/PV table annuity #

How do you find amount of years in annuities?

PV/annuity amount

How do you find rate in annuities?

PV/annuity amount

How do you find interest expense?

price * rate

How do you find price of bond issue?

x+y where X is PVA (annuity amount*PV#) and Y is PV (lump sum*PV#).

What is PVAD?

annuity amount * PV#

this is for the journal entry Right Use of Asset and Lease Payable

How do you find valuation of installment notes?

loan amount/PV#

How do you find valuation of pensions?

Use deferred annuity where x+y

What are some cash issues?

internal control and classification on balance sheet.

What are some receivables issues?

valuation and income statement effects involving AR and NR.

Cash doesn't have a restriction, but cash equivalents do, what are they?

maturity date no loner than 3 months from date of purchase.

Cash is like coins and balances in checking accounts, what are cash equivalents?

T Bills, money market funds, and commercial paper.

What are some things internal control helps with?

Encouraging adherence to company policies and procedures, promotes operational efficiency, minimizes errors and thefts, and enhances the reliability accuracy of accounting data.

What are two real world examples of internal control?

Sarbanes-Oxley Act and Committee of Sponsoring Organizations (COSO)

How does the Sarbanes-Oxley Act require internal control?

1) requires company to document internal controls and asses their adequacy

2) requires auditors to express opinion on management

How does the Committee of Sponsoring Organizations (COSO) require internal control?

Achievement of these means internal control is effective:

1) Effectiveness and efficiency of operations

2) Reliability of financial reporting

3) Compliance with applicable laws and regulations

How do we minimize errors and theft?

Separate duties.

An example of separating duties with cash receipts is

employees who handle cash should not be the ones with access to the accounting records.

A would open mail

B would takes mail to C

C would input data into books

What are 3 ways you can minimize error and theft with cash dispurements?

1) Make disbursements by check

2) All expenditures should be authorized

3) Checks should be signed only by authorized individuals

How is restricted cash reported?

As noncurrent assets such as investments and funds.

Why might a company restrict cash?

To build a new plant, saving up.

If debt is noncurrent, then restricted cash is

noncurrent.

If debt is current, then restricted cash is

current.

What is a compensating balance?

The amount that compensates the bank for loaning out $.

What are some rules with compensating balances?

1) borrower must keep a certain amount of $ in bank

2) this balance would be equal to some % of committed amount

3) borrower pays effective interest rate higher than the stated rate on the debt

Give an example of finding the effective interest rate for a compensating balance.

Borrow 10. Keep 2. Actually borrowing 8 then. "12% interest rate"

So it would be amount of interest: (10*.12)/8=15%

How is overdraft treated for GAAP? IFRS?

like a liability, offsets against other cash accounts.

How is liabilities stated on balance sheet for GAAP? IFRS?

Separate from assets, offsets against other cash accounts.

When is AR performance obligation satisified?

at point of delivery, revenue will also be recognized at this time.

AR is a ______ asset

current because collection normally falls within 1 year, or operating cycle, whichever is longer.

Because AR and revenue recognition are so closely related, what two issues arise with AR?

1) TVM

2) Variable consideration (trade and sales discounts)

What are trade discounts? Are they variable?

They are not variable. They are a % of reduction from list price. This is normally offered to large groups of people like senior citizens.

What are sales discounts? Are they variable?

They are variable. They are reductions in amount if paid within a certain period of time.

2/10, n/30 is a 2% discount in 10 days. Full amount in 30 days.

Has gross and net method.

What is the gross method of sales discounts?

Recording revenue at full price, then debiting sales discount (contra to sales revenue) (which will be deducted from sales revenue to get net sales revenue).

What is the net method of sales discounts?

Recording revenue at discount price, then credit sales discount forfeited (which will be added to sales revenue to calculate net sales revenue).

Is gross or net method of sales discounts more effective?

Net because it will actually show the seller what they actually saved.

What is an allowance?

a special price reduction if customer keeps merchandise rather than returns it.

When do you accrue sales returns and allowances?

At time of sale, otherwise recognizing them when they occur will result in overstated income in period of sale.

Give an example of a company initially/predicting accounting for a return.

Sales Return

Cash

To account for the COGS (% * amount returned)

Inventory

COGS

Give an example of a company accounting for a return that actually happened.

Sales Return

Refund Liability

To account for the COGS (% * additional amount returned)

Inventory

COGS

Sometimes people don't always pay their AP, this is called a ___ ____ aka _____ ______ in AR.

credit loss, bad debt

What are two approaches for the subsequent valuation of AR?

1) Direct write off method (not GAAP)
2) Allowance method (GAAP)

Describe the direct write off method

this is waiting until a particular amount is deemed uncollectible then writing it off at that time.

What are two problems with the direct write off method?

1) overstates AR balance in periods prior to write off

2) Distorts net income by waiting until actual period they don't pay

Describe allowance method

This is where bad debt expenses are recognized early as an estimated amount.

The allowance method uses the contra asset account

allowance for uncollectible accounts

On the balance sheet how would the allowance method look?

AR minus Allowance equals Net AR

How does a journal entry for allowance method look?

Bad debt debited

Allowance credited

A debit to the allowance account will

reduce it.

Sometimes you overstate how much you won't be able to collect so you have to reverse the journal entry. What does this look like?

AR Debit

Allowance Credit

To eliminate allowance, what is the balance sheet approach?

Has "plugs" where it estimates what the allowance's ending balance would be, then finds "x" aka the bad debt expense (based on carrying value of AR).

Required started 2020, what is CECL supposed to do?

Base allowance amount on relevant information like: historical experience, current conditions, and reasonable forecasts.

How does CECL estimate allowance amount?

Applies percentages of estimation of bad debts to AR. Depending on the length, different percentages are applied. Example, it will have a high percentage if it has been outstanding for a while. (most likely won't collect)

What is the income statement approach to estimate allowance amount?

Taking a percentage of AR and calling that the bad debt expense amount.

What is the combined approach to estimate allowance amount?

Estimates bad debts quarterly using income statement approach then refining it by using balance sheet approach at year end.

What are some issues with AR?

Recognition, initial valuation, subsequent valuation, and classification.

Why is recognition an issue with AR?

it depends on revenue recognition.

Why is initial valuation an issue with AR?

Cash discounts and variable considerations.

Why is subsequent valuation an issue with AR?

this is reduced by allowance

Why is classification an issue with AR?

always a current asset.

What's the formula to use for interest bearing accounts?

face amount * annual rate * fraction of annual period.

Does a noninterest bearing note actually have interest?

Yes

How do you determine cash proceeds the borrower has with a noninterest bearing note?

discount interest from face amount

What does the discount for the noninterest bearing note represent?

a future interest revenue being recognized over time.

The noninterest bearing note is a contra account to

note receivable

How do you find effective interest rate?

divide amount of interest by sales price then multiply that amount by the semi/quarter/annual rate.

How is the cash paid to the issuer considered the note's present value?

If the note received is solely for cash.

Does note receivable also have an allowance?

yes

What model does solely for cash or note receivable use?

CECL.

Who allows fair value for receivables?

GAAP

Who allows "available for sale" on investments?

GAAP

Who requires separate disclosures?

GAAP

What model does IFRS use?

ECL

What model does GAAP use?

CECL

What are the two ways to finance recievables?

Secured borrowing and sale of receivables.

What happens in secured borrowing?

Entire AR is pledged as collateral for a loan.

What happens in sale of a recievable?

Its sold as a gain or loss like other assets.

During secured borrowing, whos responsibility is it to collect AR?

the company

Is secured borrowing disclosed?

Yes

On the balance sheet, how is secured borrowing recognized?

Borrower would keep AR on there as collateral and lender would create a notes receivable

On the balance sheet, how is sale of receivables recognized?

Seller would "derecognize" get rid of AR completely and buyer would add it to their assets at fair value.

Why finance AR?

to get cash quicker and avoids the buying/collecting process because financial institutions handle it but they are still in charge of IR.

Who assigns secured borrowing?

companies, for collateral

With assigning secured borrowing, why would a lender lend out money less than the amount of the receivables assigned by the borrower?

To provide protection from uncollectible accounts.

With assigning secured borrowing, lender charges what in addition to interest?

an up front fee.

With assigning secured borrowing, who can receivables be collect by?

lender or borrower

What's the gist of sale of receivables?

Remove AR then Recognize fair value then Record the difference (gain/loss)

What are the two arrangements for sale of receivables?

factoring and securitization.

In sale of receivables, what is factoring?

sells to a financial institution (ex. VISA)

In sale of receivables, what is securitization?

a "special purpose entity" that buys then sells things that are backed (collateralized)

In sale of receivables, what is the process of factoring?

sell AR, financial institution buys it and charges fee (the factor that is responsible for billing/collection) to company

In sale of receivables, what is the process of securitization?

Company will create SPE that will buy trade receivables, credit card receivables, and loans or sell related securities like: bonds and commercial paper.

When a factoring arrangement is made without recourse,

the buyer cant ask seller for more money if receivables prove to be uncollectible. Buyer assumes risk of debt

When a factoring arrangmenet involves a company selling AR with recourse,

the seller claims all risks of bad debs. To compensate, buyers charge lower factoring fees.

How are transfers of note receivables discounted?

Same as AR with secured borrowing or selling it for cash. The discount is the "financing fee"

When is a transferor allowed to treat a transfer as a sale?

When a company has surrendered control over assets transferred.

How do you know when assets are surrendered?

a. the transferred assets have been isolated from transferor-beyond reach of transferor and its creditors.

b. each transferee has right to pledge or exchange assets

c. transferor does not maintain effective control over transferred assets

If all conditions of a surrender are met,

transferor accounts for sale.

If some conditions of a surrender are met,

transferor treats it as a secured borrowing.

What's disclosed?

-the transfer

-any continuing involvement with transferred assets

-ongoing basis of continuing involvement

-any ongoing risks to transferor

-how fair values were estimated

-any cash flows occurring

When it comes to transfer of receivables, who needs more complex decision making?

IFRS

How do you monitor receiavbles?

Receivables turnover ratio and average collection period.

How will receivables turnover decline?

If increase in receivables is greater than increase in sales

How does the difference between cash, book, and bank balance occur?

timing and errors.

What are the steps to correcting a bank reconciliation balance?

1. Adjust bank balance

add deposits

deduct checks

and plus/minus bank errors

2. Adjust book balance

add collections

deduct service and charges

deduct NSF checks

and plus/minus company errors

these balances must match!

What is petty cash used for?

little services like delivery and entertainment. companies will just make out a check on a monthly basis.

Examples of a creditor changing terms are:

a. reducing or delaying interest payments

b. reducing or delaying maturity amount

c. combination of above

If receivable is settled at time of restructing,

the creditor records loss for difference between carrying amount of receivable and fair value of asset.