6.9: Exercises

6.1 Below is a list of various items. For each item, determine the amount that should be reported as cash or cash equivalent. For all other items, identify the proper disclosure.

1. Chequing account balance $600,000
2. Short-term (60-day) treasury bills $22,000
3. Cash advance received from a customer $2,670
4. Cash advance of $5,000 to company executive, payable on demand
5. Refundable deposit of $13,000 paid to developer to guarantee performance on a construction contract
6. Cash restricted for future plant expansion $545,000
7. Certificate of deposit $575,000, maturing in nine months
8. Utility deposit paid to utility company $500
9. Cash advance to subsidiary $100,000
10. Post-dated cheque from customer $30,000
11. Cash restricted to maintain compensating balance requirement $115,000, considered to be significant
12. Certified cheque from customer $13,000
13. Postage stamps on hand $1,115
14. Savings account balance $545,000 and overdraft in special chequing account at same bank as normal chequing account $25,000
15. Cash held in non-current bond sinking fund $150,000
16. Petty cash fund $1,200
17. Cash on hand $13,000
18. Money-market balance at mutual fund with chequing privileges $75,400
19. NSF cheque received from the bank for a customer $8,000

6.2 Below is financial information for Overachiever Ltd. The company's year-end is December 31.

1. A commercial savings account with $575,000 and a commercial chequing account with $450,000 are held at First Royal Bank. There is also a bank overdraft of $150,000 in a chequing account at the Lemon Bank. It is the only account held at the Lemon Bank.
2. The company must maintain a minimum cash balance of $175,000 with First Royal Bank in order to retain its overdraft privileges.
3. A separate cash fund for $2 million is restricted for the retirement of long-term debt.
4. There are five cash floats for retail operation cash registers for $250 each.
5. Currency and coin on hand amount to $15,000.
6. The petty cash fund has $1,500.
7. The company has received a cheque dated January 18, 2021, in the amount of $12,500 from a customer for an amount owing as at December 31.
8. The company has received a cheque dated January 12, 2021, in the amount of $1,800 from a customer as payment in advance for an order placed on December 27. Goods will be delivered FOB destination on January 20, 2021.
9. There are cash advances for $15,000 paid for executive travel to occur in the first quarter of next year. These travel advances will be recovered from the travel expense reports after they travel.
10. An employee owes $2,300 that was borrowed from the company and will be withheld from his salary in January 2021.
11. The company has invested $2.5 million in money market funds (with chequing privileges) maturing in 2 months at the Commercial Bank of British Columbia.
12. The company has a 180-day treasury bill for $50,000. It was purchased on November 22.
13. The company has a 60-day treasury bill for $18,000. It was purchased on December 15.
14. The company holds commercial paper for $1.56 million from Ace Furniture Co., which is due in 145 days.
15. The company acquired 1,000 shares of Highland Ltd. for $3 per share on July 31 and is holding them for trading. The shares are still on hand as at December 31 have a fair value of $4.06 per share on December 31, 2020.

Required:

1. Prepare a partial statement of financial position (balance sheet) as at December 31, 2020, reporting any cash balances.
2. For any items not reported in (a) above, indicate the proper way to disclose them.

6.3 Amy Glitters Ltd. provides you with the following information about its accounts receivable at December 31, 2020:

 

Due from customers, of which $30,000 has been pledged as security for a bank loan		$	275,000
Instalment accounts due after December 31, 2021			50,000
Advances to employees			2,500
Advances to a related party (originated in 2015)			30,000
Overpayments made to a supplier			6,000

Required: Prepare a partial classified balance sheet at December 31, which is their year-end. Make the required disclosures in parentheses after the line item account.

6.4 From July 1 to August 30, 2020, Busy Beaver Ltd. completed the following transactions:

On July 1, Busy Beaver sold 40 computers at a unit price of $3,000 to Heintoch Corp., terms 1/15, n/30. Average cost for these computers was $1,500. Busy Beaver also paid the freight costs of $3,200 cash. On July 5, Heintoch Corp. returned for full credit three damaged computers from the July 1 shipment. These were not returned to inventory. Heintoch agreed to pay the $240 freight cost to return the computers to Busy Beaver. On July 10, Busy Beaver received payment from Heintoch for the full amount owed from the July transactions. On July 14, Busy Beaver purchased 50 computers on account from Correl Computers Ltd. for $1,500 per unit plus freight for $4,000. On July 17, Busy Beaver sold $224,000 in computers and peripherals to Perkins Store, terms 1.5/10, n/30. Cost for these computers was $112,000. On July 26, Perkins Store paid Busy Beaver for half of its July purchases. On August 30, Perkins Store paid Busy Beaver for the remaining half of its July purchases. Busy Beaver uses the perpetual inventory system.

Required:

1. Prepare the entries for Busy Beaver Computers Ltd., assuming the gross method is used to record sales and sales discounts.
2. Assume that Heintoch has access to a bank line of credit facility at a rate of 8%. Is it a good idea to pay within the discount period? Explain your answer using data from the question.
3. Prepare the entries for July and August, assuming Busy Beaver is an IFRS company that uses the net method to record sales and sales discounts. Also assume that on August 30 year-end, Busy Beaver estimates sales returns and allowances to be $44,000 for the year just ended, which it considers to be significant. The unadjusted balance of its refund liability account prior to the July and August transactions was $23,000 credit.

6.5 The following information is available for Inverness Ltd.'s second year in business:

• Opening merchandise inventory is $35,000.
• Goods are marked to sell at 35% above cost.
• Merchandise purchased totalled $600,000.
• Collections from customers are $420,000.
• Ending merchandise inventory is $225,000.
• Opening accounts receivable balance is $0.
• Ending accounts receivable balance is $85,000.

Required:

1. Estimate the ending accounts receivable that should appear in the ledger. Calculate any shortages, if any. Assume that all sales are made on account.
2. What controls can be put in place to prevent theft?

6.6 The trial balance before adjustment of Cyncrewd Inc. shows the following balances:

 

		Dr.			Cr.
Accounts receivable		$	225,000
Allowance for doubtful accounts (AFDA)			2,340
Credit sales						375,000
Sales returns			35,000

Required:

1. Give the entry for bad debt expense for the current year assuming:
   • The allowance should be 4% of gross accounts receivable.
   • Historical records indicate that based on accounts receivable aging the following statistics apply:

     	Balance	Percentage Estimated
     		to be Uncollectible
     0–30 days outstanding	$141,000	1%
     31–60 days outstanding	53,500	3%
     61–90 days outstanding	10,500	8%
     Over 90 days outstanding	20,000	14%

   • Allowance for doubtful accounts is $2,340, but it is a credit balance, and the allowance should be 2% of gross accounts receivable.
2. What could account for the unadjusted debit balance in the AFDA account for $2,340?

6.7 At January 1, 2020, the credit balance of Reimer Corp.'s allowance for doubtful accounts was $575,000. During 2020, the bad debt expense entry was based on a percentage of net credit sales. Net sales for 2020 were $16 million, of which 75% were on account. Based on the information available at the time, the 2020 bad debt expense was estimated to be 1% of net credit sales. During 2020, uncollectible receivables amounting to $40,000 were written off against the allowance for doubtful accounts. The company has estimated that at December 31, 2020, based on a review of the aged accounts receivable, the allowance for doubtful accounts would be properly measured at $500,000.

Required:

1. Prepare a schedule calculating the balance in Reimer Corp.'s allowance for doubtful accounts at December 31, 2020. Prepare any necessary journal entry at year-end to adjust the allowance for doubtful accounts to the required balance.
2. If accounts receivable balance at December 31 was $50,950,000, prepare a partial classified balance sheet at December 31, 2020 for Reimer. What is the net accounts receivable balance intended to measure?
3. Under what conditions is using the direct write-off method justified?

6.8 On May 1, 2020, Effix Ltd. provided services to Harper Inc. in exchange for Harper's $336,000, five-year, zero-interest-bearing note. The implied interest is 8%. Effix's year-end is December 31.

Required:

1. Prepare Effix's entries for the note, the interest entries over the five years and the collection of the note at maturity.
2. Using present value calculations prove that the note yields 8%.
3. Prepare a partial classified balance sheet as at December 31, 2021. What would be the unamortized discount/premium, if any? How would the classification of the note receivable differ on the partial classified balance sheet as at December 31, 2024?
4. If an appropriate market rate of interest for the note receivable is not known, how should the transaction be valued and recorded on December 31, 2020?

6.9 Below are three unrelated scenarios:

1. On July 1, a one-year note for $120,000 was accepted in exchange for an unpaid accounts receivable for $120,000. Interest for 5% would be payable at maturity.
2. On July 1, a one-year non-interest-bearing note for $110,250 was accepted in exchange for an unpaid accounts receivable for $105,000. The market rate of interest at that time was 5%.
3. On July 1, a one-year 10% note for $115,000 was accepted in exchange for unpaid accounts receivable $104,545 from a higher-risk customer. The customer's borrowing interest rate at that time was 10%.

Required:

1. Prepare the entries to recognize the notes payable and accrued interest, if any. The year-end is December 31.
2. Assume that for item (iii) above, the borrower faces financial difficulties and can only pay 75% of the note's maturity amount. After a thorough analysis, the creditor determines that the 25% remaining is uncollectible. Prepare the entry for the note at maturity.

6.10 On January 1, Harrison Corp. sold used vehicles with a cost of $78,000 and a carrying amount of $12,600 to Aberdeen Ltd. in exchange for a $18,000, four-year non-interest-bearing note receivable. The market rate of interest for a note of similar risk is 7.5%. Harrison follows IFRS and has a year-end of December 31.

Required:

1. Prepare the entries to record the sale of equipment in exchange for the note, the interest for the first year, and the collection of the note at maturity.
2. Prepare the interest entry for the first year assuming that Harrison follows ASPE and uses the straight-line method for interest.

6.11 On July 1, 2020, Helim Ltd. assigns $800,000 of its accounts receivable to Central Bank of Tasmania as collateral for a $500,000 loan that is due October 1, 2020. The assignment agreement calls for Helim to continue to collect the receivables. Central Bank assesses a finance fee of 3.5% of the accounts receivable, and interest on the loan is 7.5%, a realistic rate for a note of this type and risk.

Required:

1. Assuming the transaction does not qualify as a sale, prepare the July 1, 2020 journal entry for Helim Ltd.
2. Prepare the journal entry for Helim's collection of $750,000 of the accounts receivable during the period July 1 to September 30, 2020.
3. On October 1, 2020, Helim paid Central Bank the entire amount that was due on the loan.
4. Explain the differences between IFRS and ASPE regarding the sale of receivables compared to a secured borrowing.
5. Explain if management would prefer the transaction to be reported as a sale of receivables or a secured borrowing and why.

6.12 Browing Sales Ltd. sells $1,450,000 of receivables with a fair value of $1,500,000 to Finnish Trust in a securitization transaction that meets the criteria for a sale. Browing receives the full fair value of the receivables and agrees to continue to service them. The fair value of the service liability component is estimated as $250,000.

Required: Prepare the journal entry for Browing to record the sale.

6.13 Jertain Corporation factors $800,000 of accounts receivable with Holistic Financing Inc. on a with recourse basis. Holistic Financing will collect the receivables. The receivable records are transferred to Holistic Financing on February 1, 2020. Holistic Financing assesses a finance charge of 2.5% of the amount of accounts receivable and also reserves an amount equal to 4% of accounts receivable to cover probable adjustments. Jertain prepares financial statements under ASPE and has a year-end of December 31.

Required:

1. Assuming that the conditions for a sale are met, prepare the journal entry on February 1, 2020, for Jertain to record the sale of receivables, assuming the recourse obligation has a fair value of $10,000.
2. What effect will the factoring of receivables have on calculating the accounts receivable turnover for Jertain?

6.14 On July 1, 2020, Brew It Again Ale Co. sold excess land in exchange for a three-year, non-interest-bearing promissory note in the face amount of $530,000. The land's carrying value is $250,000.

On September 1, Brew It Again Ale rendered services in exchange for a six-year promissory note having a face value of $500,000. Interest at a rate of 3% is payable annually.

For both transactions, the customers are able to borrow money at 11% interest. Brew It Again Ale's cost of capital is 7.4%.

On October 1, 2020, Brew It Again Ale agreed to accept an instalment note from one if its customers, in partial settlement of accounts receivable that were overdue. The note calls for five equal payments of $12,000, including the principal and interest due, on the anniversary of the note. The implied interest rate on this note is 12%.

Required:

1. Prepare the journal entries to record the three notes receivable for Brew It Again Ale Co. for 2020 fiscal year.
2. Prepare an effective-interest amortization table for the instalment note obtained in partial collection of accounts receivable. Brew It Again Ale's year-end is December 31. Prepare the year-end journal entry and the first cash payment entries for the first year.
3. From Brew It Again Ale's perspective, what are the advantages of an instalment note compared with a non-interest-bearing note?

6.15 The following information below relates to Corvid Company for 2020:

• The beginning of the year net Accounts Receivable balance was $123,000.
• Net sales for the year were $1,865,000. Credit sales were 54.8% of the total sales and no cash discounts are offered.
• Collections on accounts receivable during the year were $863,260, and uncollectible accounts written off in 2020 were $12,500. The AFDA account ending balance for 2020 needed no further adjustment for estimated uncollectible accounts at year-end.

Required:

1. Calculate Corvid Company's accounts receivable turnover ratio for the year. How old is the average receivable?
2. Use the turnover ratio calculated in part (a) to analyze Corvid Company's liquidity. The turnover ratio last year was 5.85.

6.16 Jersey Shores Ltd. sold $1,250,000 of accounts receivable to Fast Factors Inc. on a without recourse basis. The transaction meets the criteria for a sale, and no asset or liability components of the receivables are retained by Jersey Shores. Fast Factors charges a 3.5% finance fee and retains another 5% of the total accounts receivable for estimated returns and allowances.

Required:

1. Prepare the journal entries for both companies.
2. Assume instead, that Jersey Shores follows ASPE and sells the accounts receivable with recourse. The recourse obligation has a fair value of $7,400. Prepare the journal entries for the sale by Jersey Shores.

6.17 Opal Co. Ltd. transfers $400,000 of its accounts receivable to an independent trust in a securitization transaction on July 11, 2020, receiving 95% of the receivables balance as proceeds. Opal will continue to manage the customer accounts, including their collection. Opal estimates this obligation has a fair value of $14,000. In addition, the agreement includes a recourse provision with an estimated value of $12,000. The transaction is to be recorded as a sale.

Required: Prepare the journal entry on July 11, 2020, for Opal Co. Ltd. to record the securitization of the receivables, assuming it follows ASPE.

1. Source: http://www.iasplus.com/en/standards/ifrs/ifrs13 IFRS 13 Fair Value Measurement applies to IFRSes that require or permit fair value measurements or disclosures and provides a single IFRS framework for measuring fair value and requires disclosures about fair value measurement. The Standard defines fair value on the basis of an "exit price" notion and uses a "fair value hierarchy," which results in a market-based, rather than entity-specific, measurement. IFRS 13 was originally issued in May 2011 and applies to annual periods beginning on or after 1 January 2013 and is beyond the scope of this course. For simplicity, the fair value of the property, goods or services given up as explained in the chapter material assumes that IFRS 13 assumptions and hierarchy to determine fair values have been appropriately considered.
2. "Cash is king" is a catch phrase for "cash is most important." While a firm can generate a profit, if it cannot be converted to cash fast enough to pay the liabilities as they are due, then the company runs the risk of failing.
3. An expense is debited instead of Office Supplies, an asset, because the need to purchase supplies through petty cash assumes the immediate use of the items.