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A company estimates that its bad debt expense each year will be 2% of credit sales. In the current period, one customer balance of $6,000 is determined to be uncollectible. Which of the following is true?
When bad debt expense is based off of an estimate each year, actual accounts written off will reduce the customer balance while also reducing the allowance for doubtful accounts. Actual written off accounts have no impact on bad debt expense and therefore no impact on net income.
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The Wells Corporation ends Year 4 with accounts receivable of $540,000 and credit sales for the year of $1.3 million. The ending balance in allowance for doubtful accounts is a $5,000 debit balance as a result of accounts being written off during the year. The company has a choice between estimating bad debts as 4% of outstanding receivables or 3% of current sales. Which of the following statements is true?
If the company uses the percent of sales method, bad debt expense will be $39K ($1.3M x 3%). If it uses the ending receivables method, bad debt expense will be $26,600 ($540K x 4% + $5K debit balance). Thus under the percent of sales method, bad debt expense will be $12,400 higher and net income will be lower by that amount.
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At the beginning of Year 4, Omar Company had a credit balance of $150,000 in its allowance for doubtful accounts. Based on past experience, Omar expects 2% of its credit sales to become uncollectible. During Year 4, Omar wrote off $75,000 in uncollectible accounts and made credit sales of $2 million. What amount should Omar report in its allowance for doubtful accounts at the end of Year 4?
The ending balance in allowance for doubtful accounts is calculated by taking the beginning balance of $150K + $40K for current year bad debt ($2M in credit sales x 2%) - $75K for accounts written off.
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Which of the following statements correctly describes the proper accounting treatment for nonmonetary exchanges that are deemed to have commercial substance?
For nonmonetary exchanges with commercial substance, gains and losses are recognized immediately.
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There was a nonmonetary exchange of assets reported. Under which following circumstances should the exchange be measured based on the reported amount of the nonmonetary asset surrendered? When:
When a transaction involving a nonmonetary exchange lacks commercial substance, the reported amount of the nonmonetary asset surrendered is used to record the newly acquired asset. If there is commercial substance, the fair value approach is used.
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A collection of a previously written off A/R would increase the ______ account.
The allowance for doubtful accounts account is an account essentially used for a budget of funds expected to not be received.
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On January 2, Year 1, a company buys a piece of equipment for $50,000 with a 10 year life and a residual value of $8,000. It is depreciated using the straight line method. On July 1, Year 4, the equipment is worth $44,000 and is traded for a van worth $46,000. What amount of gain is recognized on this exchange?
Depreciation is recorded at $4,200 per year ($50K purchase price - $8K residual value over 10 years) for 3.5 years. The total book value at the time of the exchange is $35,300 ($50K purchase price - $14,700 depreciation). This book value is compared to the old asset's fair value to determine how much gain is realized ($44K FV - $35,300 BV). Because this transaction has commercial substance the gain is recognized.
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The Scott Company owns an asset with a cost of $320,000, a book value of $305,000, and a fair value of $345,000. The asset is traded for another asset and the exchange is viewed as having no commercial substance. Which of the following is true regarding the exchange?
When an exchange has no commercial substance, and no cash changes hands, the new asset is booked at the book value of the old asset.
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ABC factored receivables without recourse with DEF bank. ABC received cash as a result of the transaction , which is best described as a:
Factoring A/R without recourse is a sales transaction. Factoring without recourse transfers risk of collectability to the buyer.
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One method of estimating uncollectible accounts emphasizes the asset valuation over income measurement. This is the allowance method based on:
Estimating bad debt on aging of receivables is a good matching of revenue and expense. It focuses on the balance sheet and emphasizes the valuation of assets.
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Under IFRS rules, the ___________ is required for recognizing revenue from construction contracts.
The percentage of completion method for revenue recognition is required under IFRS unless the final outcome of the construction project cannot be reasonably estimated.
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The Martino Corporation, in attempt to raise revenues, begins selling goods with an automatic right to return within six months if not completely satisfied. On November 1, $35,000 worth of goods with a cost of $22,000 are sold. Company officials expect that 15% of the goods sold will be returned before the expiration date in the following year. How much gross profit should be recognized on this sale in the current year?
Because the company can reasonably estimate that 15% of goods will be returned, it should record an allowance and therefore only record 85% of its gross profit on these sales (100% - 15%). Final GP should thus be $13K ($35K sales - $22K expenses) x 85%.
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A company sends 14,000 units of its product to a customer on December 27, Year 3. The buyer has the right to return any merchandise within 90 days for a full refund. Which of the following would require the company to recognize the sale of goods in Year 4 rather than Year 3?
None of these scenarios would require the company to postpone recognition of the sale to Year 4.
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Bloom’s Gift Shop, a retail store, sold gift certificates that are redeemable in merchandise. On October 1, Year 2, a customer buys $1,000 of gift certificates from Bloom’s Gift Shop. The gift certificates expire 1 year after the date of purchase. Which of the following is correct?
When gift cards are purchased, the company will credit deferred revenue. When gift cards are redeemed, the company will debit deferred revenue for the amount redeemed and credit revenue.
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Which expression best describes accrual basis revenue recognition?
Revenue is recognized when earned under accrual basis. Under cash basis, revenue is recognized when cash is received.
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When the total consideration for a contract with multiple embedded obligations reflects a discount, the best way to assign that discount is to:
Any discount that exists in a contract should be allocated proportionally across all obligations within the contract.
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Equipment is bought by ABC Company for $550,000 on January 1, Year 1. After 3 years, $270,000 worth of depreciation has been recorded. At that time the asset has a fair market value of $310,000 and it is exchanged for a similar asset with a fair market value of $300,000. ABC also receives $10,000 in the exchange. What amount of gain should ABC realize as a result of this transaction?
The company will recognize a gain in the amount of the difference between the book value of the asset given up ($550K purchase price - $270K accumulated depreciation = $280K) and the fair value of the asset given up of $310K. $310K - $280K = $30K gain. Note that only 3.2% of this gain would actually be recognized ($10K cash received / total consideration of $310K).
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Under the completed contract revenue recognition method per US GAAP, a company would recognize recorded progress billings:
When a company uses the US GAAP completed contract method, revenue is recognized when the job is completed.
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