Learning Materials
Features
Discover
Chapter 7: Question 26 (page 363)
Describe the estimation of the allowance, based on expected cash flows.
Allowance is calculated by deducting the expected discounted cash flow from the actual account or note receivable amount. Discounted cash flow is calculated using the market or effective interest rate.
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
(Expected Cash Flows) On January 1, 2017, Botosan Company issued a \(1,200,000, 5-year, zero-interest bearing note to National Organization Bank. The note was issued to yield 8% annual interest. Unfortunately, during 2018 Botosan fell into financial trouble due to increased competition. After reviewing all available evidence on December 31, 2018, National Organization Bank decided that the loan was impaired. Botosan will probably pay back only \)800,000 of the principal at maturity.
Instructions
(a) Prepare journal entries for both Botosan Company and National Organization Bank to record the issuance of the note on January 1, 2017. (Round to the nearest $10.)
(b) Assuming that both Botosan Company and National Organization Bank use the effective-interest method to amortize the discount, prepare the amortization schedule for the note.
(c) Under what circumstances can National Organization Bank consider Botosan’s note to be impaired?
(d) Compute the loss National Organization Bank will suffer from Botosan’s financial distress on December 31, 2018. What journal entries should be made to record this loss?
(Bad Debts—Aging) Danica Patrick, Inc. includes the following account among its trade receivables.
Hopkins Company | |||||
1/1 | Balance forward | 700 | 1/28 | Cash (#1710) | $1,100 |
1/20 | Invoice #1710 | 1,100 | 4/2 | Cash (#2116) | 1,350 |
3/14 | Invoice #2116 | 1,350 | 4/10 | Cash (1/1 Balance) | 155 |
4/12 | Invoice #2412 | 1,710 | 4/30 | Cash (#2412) | 1,000 |
9/5 | Invoice #3614 | 490 | 9/20 | Cash (#3614 and part of #2412) | 790 |
10/17 | Invoice #4912 | 860 | 10/31 | Cash (#4912) | 860 |
11/18 | Invoice #5681 | 2,000 | 12/1 | Cash (#5681) | 1,250 |
12/20 | Invoice #6347 | 800 | 12/29 | Cash (#6347) | 800 |
Instructions
Age the balance and specify any items that apparently require particular attention at year-end
(Assigned Accounts Receivable—Journal Entries) Salen Company finances some of its current operations by assigning accounts receivable to a finance company. On July 1, 2017, it assigned, under guarantee, specific accounts amounting to \(150,000. The finance company advanced to Salen 80% of the accounts assigned (20% of the total to be withheld until the finance company has made its full recovery), less a finance charge of ½% of the total accounts assigned.
On July 31, Salen Company received a statement that the finance company had collected \)80,000 of these accounts and had made an additional charge of ½% of the total accounts outstanding as of July 31. This charge is to be deducted at the time of the first remittance due Salen Company from the finance company. (Hint: Make entries at this time.) On August 31, 2017, Salen Company received a second statement from the finance company, together with a check for the amount due. The statement indicated that the finance company had collected an additional $50,000 and had made a further charge of ½% of the balance outstanding as of August 31.
Instructions
Make all entries on the books of Salen Company that are involved in the transactions above.
(Note Transactions at Unrealistic Interest Rates) On July 1, 2017, Agincourt Inc. made two sales.
1. It sold land having a fair value of \(700,000 in exchange for a 4-year zero-interest-bearing promissory note in the face amount of \)1,101,460. The land is carried on Agincourt’s books at a cost of \(590,000.
2. It rendered services in exchange for a 3%, 8-year promissory note having a face value of \)400,000 (interest payable annually).
Agincourt Inc. recently had to pay 8% interest for money that it borrowed from British National Bank. The customers in these two transactions have credit ratings that require them to borrow money at 12% interest.
Instructions
Record the two journal entries that should be recorded by Agincourt Inc. for the sales transactions above that took place on July 1, 2017.
When is the financial components approach to recording the transfers of receivables used? When should a transfer of receivables be recorded as a sale?
What do you think about this solution?
We value your feedback to improve our textbook solutions.
Explanations 
Textbooks 
Exams 
GCSE 
IGCSE 
AS 
A Level 
International A Level 
University Admissions Tests 
Flashcards 
Vaia AI 
Notes 
Study Plans 
Study Sets 
Find a job 
Find a degree 
Student Deals 
Magazine 
Mobile App