AC 210 Lecture Notes - Lecture 39: Annual Percentage Rate, Contingent Liability, Financial Institution

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silvercicada472

5 Jun 2018

School

University of Alabama

Department

Accountancy

Course

AC 210

Professor

Lisa Mc Kinney

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Discounting Notes Receivable

Just as accounts receivable can be factored, notes can be converted into cash by

selling them to a financial institution at a discount. Notes are usually sold (discounted)

with recourse, which means the company discounting the note agrees to pay the

financial institution if the maker dishonors the note. When notes receivable are sold with

recourse, the company has a contingent liability that must be disclosed ni the notes

accompanying the financial statements. A contingent liability is an obligation to pay an

amount in the future, if and when an uncertain event occurs.

The discount rate is the annual percentage rate that the financial institution charges for

buying a note and collecting the debt. The discount period is the length of time

between a note's sale and its due date. The discount, which is the fee that the financial

institution charges, is found by multiplying the note's maturity value by the discount rate

and the discount period.

Suppose a company accepts a 90‐day, 9%, $5,000 note, which has a maturity value

(principal + interest) of $5,110.96. In this example, precise calculations are made by

using a 365‐day year and by rounding results to the nearest penny.

If the company immediately discounts with recourse the note to a bank that offers a

15% discount rate, the bank's discount is $189.04

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Document Summary

Just as accounts receivable can be factored, notes can be converted into cash by selling them to a financial institution at a discount. Notes are usually sold (discounted) with recourse, which means the company discounting the note agrees to pay the financial institution if the maker dishonors the note. When notes receivable are sold with recourse, the company has a contingent liability that must be disclosed ni the notes accompanying the financial statements. A contingent liability is an obligation to pay an amount in the future, if and when an uncertain event occurs. The discount rate is the annual percentage rate that the financial institution charges for buying a note and collecting the debt. The discount period is the length of time between a note"s sale and its due date. The discount, which is the fee that the financial institution charges, is found by multiplying the note"s maturity value by the discount rate and the discount period.

Related Questions

Indicate whether the sentence or statement is true or false.

____ 5. The "list" sales price less any trade discount is the amount at which the receivable and the corresponding revenue should be recorded.

____ 6. When factoring accounts receivable without recourse, the buyer (factor) normally assumes the burden of billing and collecting accounts.

____ 7. Transferring receivables without recourse means that the bank or finance company advances cash in return for accounts receivable, but it retains the right to collect from the transferor if debtors fail to make payments when due.

____ 8. The transfer of accounts receivable with recourse should never be accounted for as a sale.

____ 9. Notes arising from loans to customers, officers, employees, and affiliated companies should be reported with the other regular trade notes receivable.

____ 10. An interest-bearing note is written as a promise to pay a face amount plus interest at a specified rate.

beigebat309

Select the term that best fits each of the following definitions and descriptions.

a.	Notes receivable
b.	Nontrade receivables
c.	Net realizable value
d.	Direct write-off method
e.	Interest-bearing note
f.	Maturity date
g.	Promissory note
h.	Factoring receivables
i.	Trade discount
j.	Present value
k.	Allowance method
l.	Sales discount
m.	Negotiable note
n.	Non-interest-bearing note
o.	Assignment of receivables
p.	Valuation date

____ 21. Receivables that are evidenced by a formal written promise to pay a certain sum of money at a specified date.

____ 22. The date the principal amount of a note is due to be paid.

____ 23. The sum of future receipts or payments discounted to the present date at an appropriate rate of interest.

____ 24. A method of recognizing the estimated losses from uncollectible accounts as expenses during the period in which the sales occur.

____ 25. A note that is legally transferable by endorsement and delivery.

____ 26. Any receivable arising from transactions that are not directly associated with the normal operating activities of a business.

____ 27. A note written in the form where the face amount includes the interest charges.

____ 28. The borrowing of money with receivables pledged as security on the loan.

____ 29. A note written in the form where the maker promises to pay the face amount plus interest at a specified rate.

____ 30. An unconditional written promise to pay a certain sum of money at a specified time.

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1.The useful life of a plant asset is:

The length of time it is used productively in a company'soperations

Never related to its physical life

Its productive life, but not to exceed one year

Determined by the FASB

Determined by law

2. Depreciation:

Measures the decline in market value of an asset

Measures physical deterioration of an asset

Is the process of allocating to expense the cost of a plantasset

Is an outflow of cash from the use of a plant asset

Is applied to land

3. Plant assets are

Tangible assets used in the operation of a business that have auseful life of more than one accounting period

Current assets

Held for sale

Intangible assets used in the operations of a business that havea useful life of more than one accounting period

Tangible assets used in the operation of business that have auseful life of less than one accounting period

4. A company has net sales of $870,000 and average accountsreceivable of $174,000. What is its accounts receivable turnoverfor the period?

0.20

5.00

20.0

73.0

1,825

5. FICA taxes include:

Social Security taxes

Charitable giving

Employee income taxes

Unemployment taxes

6. Times interest earned is calculated by:

Multiplying interest expense times income

Dividing interest expense by income before interest expense

Dividing income before interest expense and any income tax byinterest expense

Dividing interest and income tax expense by income beforeinterest and income tax expense

7. Amortization:

Is the systematic allocation of the cost of an intangible assetto expense over its estimated useful life

Is the process of allocating to expense the cost of a plantasset to the accounting periods benefiting from its use

Is the process of allocating the cost of natural resources toperiods when they are consumed

Is an accelerated form of expensing an asset's cost

Is the same as depletion

8. A method of estimating bad debts expense that involves adetailed examination of outstanding accounts and their length oftime past due is the:

Direct write-off method

Aging of accounts receivable method

Percentage of sales method

Aging of investments method

Percent of accounts receivable method

9. A company purchased a tract of land for its natural resourcesat a cost of $1,500,000. It expects to mine 2,000,000 tons of orefrom this land. The salvage value of the land is expected to be$250,000. The depletion expense per ton of ore is:

$0.75

$0.625

$0.875

$6.00

$8.00

10. The matching principle requires:

That expenses be ignored if their effect on the financialstatements are less important than revenues to the financialstatement user

The use of the direct write-off method for bad debts

The use of the allowance method of accounting for bad debts

That bad debts be disclosed in the financial statements

That bad debts not be written off

11. Liabilities:

Must be certain

Must sometimes be estimated

Must be for a specific amount

Must always have a definite date for payment

Must involve an outflow of cash

12. In the accounting records of a defendant, lawsuits:

Are estimated liabilities

Should always be recorded

Should always be disclosed

Should be recorded if payment for damages is probable and theamount can be reasonably estimated

13. A contingent liability:

Is always of a specific amount

Is a potential obligation that depends on a future event arisingout of a past transaction or event

Is an obligation not requiring future payment

Is an obligation arising from the purchase of goods or serviceson credit

Is an obligation arising from a future event

14. Total asset turnover is calculated by dividing:

Gross profit by average total assets

Average total assets by gross profit

Net sales by average total assets

Average total assets by net sales

Net assets by total assets

15. If the times interest ratio:

Increases, then risk increases

Increases, then risk decreases

Is greater than 1.5, then the company is in default

Is less than 1.5, the company is carrying too little debt

16. Promissory notes that require the issuer to make a series ofpayments consisting of both interest and principal are:

Debentures

Discounted notes

Installment notes

Indentures

Investment notes

17. A company borrowed $300,000 cash from the bank by signing a5-year, 8% installment note. The present value factor for anannuity at 8% for 5 years is 3.9927. Each annuity payment equals$75,137. The present value of the note is:

$75,137

$94,013

$300,000

$375,685

18. A bond traded at 102

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AC 210 Lecture Notes - Lecture 39: Annual Percentage Rate, Contingent Liability, Financial Institution

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