Zeta wrote off uncollectible accounts totaling $20,000 during 20X1. Under the cash basis of accounting, Zeta would have reported 20X1 sales of

Accounts receivable would be increased by sales and decreased by accounts written off. The beginning balance in accounts receivable as of January 1, 20X1 was $1,000,000 (closing balance of 20X0). This would be increased by sales of $4,600,000 and decreased by accounts written off of $20,000. The balance after this increase and decrease would be $5,580,000. However, the closing balance was $1,300,000, which implies the difference of $4,280,000 must be due to cash collections. These cash collections would be the amount reported as sales under the cash basis of accounting. The allowance for uncollectible accounts would not affect this calculation.

A transaction is accounted for as a collateralized borrowing if the transfer does not satisfy the conditions for de-recognition. The entity recognizes a financial liability for the consideration received for the transferred asset. If the transferee has the right to sell or re-pledge the asset, it is presented separately in the balance sheet either as a loaned asset, pledged security or repurchased receivable. In subsequent periods, the entity recognizes income relating to the transferred assets and any expense incurred on the financial liability.

3. True.
   
   

In case of ‘factor with recourse’ the transferor assumes the risk of uncollectible. Thus, he makes a provision for allowance for bad debts under the account of ‘Recourse Liability’. The ‘Recourse liability’ is always equal to the allowance for bad debts.

5. False.
   
   

Factor’s holdback contains proceeds retained by the factor as a margin to cover against risks of uncollectable, sales discounts, sales returns and allowances and disputed accounts. Thus, it is reported as a current asset on the balance sheet and it is not an expense on the income statement.

6. True.
   
   

In factoring of accounts receivable, both in case of ‘sale with recourse’ or ‘sale without recourse’ the factor’s holdback includes margin to cover against sales returns and sales discounts as these would lead to a decrease in the amount receivable from the financial assets.

When exchange price is not given, sale of the equipment is to be recorded at the present value of the payments to be received as per the terms of the note. Since this is a non-interest bearing note, the market rate of 10% would be applied to calculate the present value for the three year note. Thus, present value of note = $600,000 x 0.75 = $450,000. Interest for the first year = $450,000 x 10% = $45,000.

The total proceeds received from the customer at the end of the one-year of the note = $500,000 + 8% = $540,000. After Roth discounts the note, the bank would receive $540,000 at the maturity of the note. Roth discounts the note after holding it for six months. The bank will give to Roth, after discounting for the 6 months at 10% of the proceeds of $540,000. Discount = $540,000 x 10% x 6/12 = $27,000. Thus, Roth will receive $540,000 - $27,000 = $513,000.

• At December 31, 1992, Lyle has a $50,000 debit balance in its accounts payable to Ross, a supplier, resulting from a $50,000 advance payment for goods to be manufactured to Lyle’s specifications.

• Checks in the amount of $100,000 were written to vendors and recorded on December 29, 1992. The checks were mailed on January 5, 1993.

What amount should Lyle report as accounts payable in its December 31, 1992, balance sheet?

The unadjusted accounts payable was $360,000. An advance payment for goods to be manufactured is to be recorded as an asset- "Advance to suppliers" and should not be a debit balance to accounts payable. This $50,000 should therefore be added back to accounts payable. Even though the checks to vendors were written on December 29, 1992, they were mailed only in the next year. These should be deducted from accounts payable only in the next year. Since they were incorrectly recorded in the current year, they should also be added back to accounts payable. The adjusted accounts payable balance for December 31, 1992 balance sheet = $360,000 + $50,000 + $100,000 = $510,000.

As per US GAAP, short term obligations may be classified as non-current debt if there is an intent and ability to refinance on a long-term basis. Largo completed a bond offering and wants to use the offering to repay the note payable, this shows intent and ability. Thus, the portion of note payable that is refinanced by the bond offering can be classified as long-term liability. Largo repays part of the note of $250,000 with excess cash, this amount is not refinanced with a long term debt. As of December 31, 1992 balance sheet, $250,000 to be repaid by cash in the following year is a current liability and the remaining $500,000 to be refinanced by a long-term debt and paid at maturity is a long-term liability.

Notes receivable / payable are to be reported at the present value. However, if the notes receivable or payable is incurred in the normal course of business that has a maturity date of one year or less, it can be recorded at face value. In the given question, the note is made at usual trade terms (in the ordinary course of business) and is due in nine months (less than one year), it will be recorded at its face value of $10,000.

The number of days in the operating cycle is the number of days a company takes to realize its inventory to cash. This is equal to the number of days' sales in inventory or inventory conversion period + the number of days' sales in trade accounts receivable or receivable conversion period. Thus, number of days in Clay's 20X1 operating cycle = 61 + 33 = 94.

The bonus is payable in the year 3 and 4 of employment, contingent on employment through the year ended December 31, year 2. Based on the matching principle, we match the expenses incurred to the period in which they relate to. The bonus expense would be allocated in year 1 at $100,000 and in year 2 for the balance of $100,000 for the combined 2 years vesting period. For year 3 and 4 bonus expense will be nil.

Secured creditors have a claim over the collateralized asset. During liquidation, sale proceeds of the asset are first used to settle the secured claim. If sale proceeds are insufficient to settle the claim, the shortfall would be treated as an unsecured claim and paid as part of the liquidation proceeds for unsecured creditors.

Hale holds a $30,000 non-interest bearing note, secured by an asset having a book value of $35,000. However, liquidation value is only $5,000, which would be applied to settle the claim. The balance shortfall of $25,000 would be considered an unsecured claim. Given in the problem that unsecured claims are settled at 40 cents to a dollar (i.e. only 40% of the claim is settled on liquidation). Thus, against the unsecured claim of $25,000 Hale would additionally receive $10,000 (i.e. 40% x $25,000). In all, Hale would realize $15,000 from the liquidation proceeds, sale proceeds of collateralized asset $5,000 and $10,000 on settlement of the balance unsecured portion of the claim.

Using financial components approach, as per US GAAP, transfers are accounted for as a sale (control is surrendered) or borrowing (secured loan with control not surrendered).

Sale or surrender of control is when all the following conditions are met:
Transferred financial assets are isolated i.e. beyond the reach of the transferor and its creditors, even in cases such as bankruptcy.
Transferor does not maintain effective control over the financial assets; no obligation to repurchase / redeem before maturity or right to repurchase at favorable terms.
Transferee can pledge or exchange the financial assets with no unreasonable constraints or conditions.
Sale or surrender of control may be without recourse (i.e. factor is liable for bad debts) or with recourse (i.e. factor is not liable for bad debts).
In all of the above transactions the conditions for maintaining effective control for a sale or surrender of control by the transferor are not met. Thus, all would be recorded as secured borrowing.

Short term debts to be refinanced are excluded from current liabilities only if both of the following conditions are met:

a. Company intends to refinance the obligation on a long-term basis.

b. Company has the ability to refinance and the ability to refinance is demonstrated if the agreement does not expire within one year or normal operating cycle from the date of the balance sheet.

As Makers has decided to replace the notes payable with a revolving credit agreement which is valid for less than a year from the date of the balance sheet, notes payable will continue to be classified as a current liability without a separate disclosure requirement.

The right to service financial assets may be sold to a third party. In such case the agreements to sell mortgage servicing rights may contain certain protection provisions that could affect the amount ultimately paid to the seller. These protection provisions for which the sale price may be adjusted include loan prepayments, defaults or foreclosures that occur within a specified period of time.