HW Chap 7 Day 2
ANSWERS TO QUESTIONS
16. The fair value option gives companies the option of using fair value as the measurement
basis for financial instruments. The Board believes that fair value measurement for financial
instruments provides more relevant and understandable information than historical cost. If
companies choose the fair value option, the receivables are recorded at fair value, with
unrealized gains or losses reported as part of net income.
17. A company might sell receivables because money is tight and access to normal credit is
not available or prohibitively expensive. Also, a company may have to sell its receivables,
instead of borrowing, to avoid violating existing lending arrangements. In addition, billing
and collection of receivables are often time-consuming and costly.
21. The accounts receivable turnover ratio is computed by dividing net sales by average net
receivables outstanding during the year. This ratio is used to assess the liquidity of the
receivables. It measures the number of times, on average, receivables are collected during
the period. It provides some indication of the quality of the receivables and how successful
the company is in collecting its outstanding receivables.
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 7-6
11/1/10
Notes Receivable ............................................................
30,000
Sales .......................................................................
30,000
12/31/10 Interest Receivable .........................................................
300
Interest Revenue
($30,000 X 6% X 2/12) ..........................................
300
5/1/11
Cash .................................................................................
30,900
Notes Receivable ...................................................
Interest Receivable ................................................
Interest Revenue
($30,000 X 6% X 4/12) ............................................
30,000
300
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600
HW Chap 7 Day 2
BRIEF EXERCISE 7-8
Chung, Inc.
Cash .................................................................................730,000
Interest Expense ($1,000,000 X 2%) ............................... 20,000
Notes Payable .........................................................
750,000
Seneca National Bank
Notes Receivable .............................................................750,000
Cash ........................................................................
Interest Revenue ($1,000,000 X 2%) ......................
730,000
20,000
BRIEF EXERCISE 7-11
Cash $250,000 – [$250,000 X (.05 + .04)] ........................227,500
Due from Factor ($250,000 X .04) ................................... 10,000
Loss on Sale of Receivables .......................................... 20,500*
Accounts Receivable .............................................
Recourse Liability ..................................................
250,000
8,000
*($250,000 X .05) + $8,000
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HW Chap 7 Day 2
SOLUTIONS TO EXERCISES
EXERCISE 7-16 (15–20 minutes)
(a) To be recorded as a sale, all of the following conditions would be met:
1.
The transferred asset has been isolated from the transferor (put
beyond reach of the transferor and its creditors).
2.
The transferees have obtained the right to pledge or to exchange
either the transferred assets or beneficial interests in the
transferred assets.
3.
The transferor does not maintain effective control over the
transferred assets through an agreement to repurchase or
redeem them before their maturity.
(b) Computation of net proceeds:
Cash received ($250,000 X 94%) .................
Due from factor ($250,000 X 4%) .................
Less: Recourse obligation..........................
Net proceeds ................................................
$235,000
10,000
Computation of gain or loss:
Carrying value ............................................
Net proceeds ..............................................
Loss on sale of receivables ......................
The following journal entry would be made:
Cash ........................................................................
$235,000
Due from Factor .....................................................
10,000
Loss on Sale of Receivables .................................8,000
Recourse Liability ..........................................
Accounts Receivable .....................................
$245,000
3,000
$242,000
$250,000
242,000
$ 8,000
3,000
250,000
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HW Chap 7 Day 2
EXERCISE 7-19 (20–25 minutes)
(a)
Notes Receivable ............................................................
300,000
Discount on Notes Receivable ..............................
Service Revenue ....................................................
52,065
247,935*
*Computation of present value of note:
PV of $300,000 due in 2 years at 10%
$300,000 X .82645 = $247,935
(b)
Discount on Notes Receivable........................................
24,794
Interest Revenue ....................................................
24,794*
*$247,935 X 10% = $24,794
(c)
Discount on Notes Receivable........................................
27,271*
Interest Revenue .....................................................
27,271
*$52,065 – $24,794
Cash..................................................................................
300,000
Notes Receivable ...................................................
(d)
Notes Receivable .............................................................
22,271
Unrealized Holding Gain or
Loss—Income .....................................................
300,000
22,271*
*Note Receivable, net ......................................
Amortization, 12/31/12 ................................
Book Value, 12/31/12 ......................................
$247,935
24,794
272,729
Fair Value ........................................................
Carrying Value ................................................
Unrealized Gain ..............................................
$295,000
(272,729)
$ 22,271
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