Okay, Have Another

IV.  Factoring of accounts receivable with recourse – whoo

H Company transferred $90,000 of accounts receivable to the P Bank. The transfer was made with recourse. P bank remits 88% of the factored amount to H Company and retains 12%. When the bank collects the receivables, it will remit to H Company the retained amount less a 4% fee (4% of the total factored amount). H Company anticipates a $4,500 recourse obligation.

Required:
Prepare the journal entry to record the transfer on the books of H Company assuming that the sale criteria are met.

Journal Entry	Debit	Credit
Cash	$79200	—–
Loss on sale of receivables	8100	—–
Receivable from factor	7200	—–
Recourse liability	—–	$4500
Accounts Receivable	—–	90000

Step 1 – So you see, Cash is found by multiplying the transferred amount ($90000) by the % that is remitted (88% in this case) to equal $79200. This is true for situations with or without recourse.

Step 2 – Then, loss on sale of receivables is determined by multiplying $90000 by the 4% fee, and then adding to that the recourse obligation of $4500.  Recourse insures that the buyer will still be paid even if the receivables end up being uncollectible.

In situations without recourse, the math simply takes that into account by NOT adding recourse.  Therefore, the loss on sale of receivables would be $3600 instead (’cause you don’t add in the $4500).

Step 3 – Receivable from factor is what happens if you multiply the $90000 by the 12% amount that the bank retained from the transfer, and then follow it up by subtracting that $3600 that I mentioned just above.  So this step is just seems to be all about the bank itself; taking the 4% fee and the 12% retained by the bank and putting it together.

Step 4 - Recourse liability only appears in journal entries for transactions WITH recourse.  The recourse liability is just another way of referring to the “recourse obligation” of $4500.

Step 5 – And now for the final step.  Accounts Receivable – an important account to be sure.  In this situation, you just put the transferred amount, or as my book says, the “balance sold,” that you used in almost all of your other equations. 

V.  Interest-bearing note receivable; solving for unknown rate

Hey, didn’t I just do one of these yesterday?  Maybe, but I wasn’t solving for an unknown rate then, now was I?

On January 1, 2009, the A Company exchanged some shares of common stock it had been holding as an investment for a note receivable. The note principal plus interest is due on January 1, 2010. The 2009 income statement reported $2,420 in interest revenue from this note and a $6,000 gain on sale of investment in stock. The stock’s book value was $16,000. The company’s fiscal year ends on December 31.
Required:

1. What is the note’s effective interest rate?
2. Reconstruct the journal entries to record the sale of the stock on January 1, 2009, and the adjusting entry to record interest revenue at the end of 2009. The company records adjusting entries only at year-end.

Round your answers to the nearest whole number. Enter your answer for effective interest rate without the % sign.

Step 1 – What’s the note’s effective interest rate?

Okay, I’ll admit that I had to work my way backwards on this one, only realize that the answer was staring me in the face!!!  I swear, I just gotta listen to my inner logical little voice . . .

You just take your $2420 in interest revenue and divide it by the total note receivable amount.  Okay, I admit it; I probably wouldn’t have seen it if I hadn’t worked backwards – so it’s all right, really.

So we’ll put step 1 on hold for a bit and come back to it.

Step 2 - Record the journal entries for stock in exchange of note receivable.

Journal Entry	Debit	Credit
Note Receivable	$22000	————-
Investment	————	$16000
Gain on sale of investments	————	$6000

Pretty self explanatory, right?

If you look back to Step 1, then all you do is take the $2420 in interest revenue and divide by $22000 to get 11%.

Step 3 – To accrue interest on a note receivable for 12 months

Journal Entry	Debit	Credit
Interest Receivable	$2420	————-
Interest Revenue	————	$2420

Ta da!

—-

I just submitted my homework online and got to figure out a few that I had no clue on, or only had part of a clue on. 

So it’d be best for me if I wrote those down as well, before doing anything else.

VI.  Lease Payments - On June 30, 2009, F Company Airlines leased a jumbo jet from Boeing Corporation. The terms of the lease require F Company to make 19 annual payments of $356,000 on each June 30. Accounting standards require this lease to be recorded as a liability for the present value of scheduled payments. Assume that a 5 % interest rate properly reflects the time value of money in this situation.
Required:

1. At what amount should F Company record the lease liability on June 30, 2009, assuming that the first payment will be made on June 30, 2010?
2. At what amount should F Company record the lease liability on June 30, 2009, before any payments are made, assuming that the first payment will be made on June 30, 2009?

Round all PV factors to 5 decimal places if you use the PV tables, and calculations to the nearest whole dollar.
1. Liability: $ 356000 × 12.08532 = $ 4302374
2. Liability: $ 356000 × 12.68959 = $ 4517493

Okay, so I totally go the first bit, but couldn’t seem to nail down the last 2 answers of the 2nd question. For that one, you just have to go to the PVAD (Present Value of an Annuity Due) Table, and find your coordinates for 5% and 19 periods.  Meanwhile, the first answer is remarkably similar in method, but the difference is in the table used.  With #1, you go to the Present Value of an Ordinary Annuity table.

Furthermore, the first problem asked for the present value at the end of the recording period, but the 2nd is referring the beginning.  See the difference?  Yeah, I don’t really either.  *grumps*

VII. Uncollectible accounts; allowance method; income statement and balance sheet approach

This one I was just mostly lost on.  As with before, the answers in red are the ones I was confused on.

Yeah, this one wasn’t long and complex at all. *rolls eyes and mutters darkly*

S Clothing Corporation grants its customers 30 days’ credit. The company uses the allowance method for its uncollectible accounts receivable. During the year, a monthly bad debt accrual is made by multiplying 3% times the amount of credit sales for the month. At the fiscal year-end of December 31, an aging of accounts receivable schedule is prepared and the allowance for uncollectible accounts is adjusted accordingly.

At the end of 2008, accounts receivable were $548,000 and the allowance account had a credit balance of $46,000. Accounts receivable activity for 2009 was as follows:
Beginning balance $548,000
Credit sales 2,540,000
Collections (2,376,000)
Write-offs (73,000)
——————————
Ending balance $639,000

The company’s controller prepared the following aging summary of year-end accounts receivable:
Summary

Age Group	Amount	% Uncollectible
0–60 days	$428,130	4%
61–90 days	95,850	15
91-120 days	70290	25
Over 120 days	44730	40

Total $639,000

Required:

1. Prepare a summary journal entry to record the monthly bad debt accrual and the write-offs during the year by completing the information where indicated below.
2. Prepare the necessary year-end adjusting entry for bad debt expense.
3. What is total bad debt expense for 2009? How would accounts receivable appear in the 2009 balance sheet?

Round your answers to the nearest dollar amount.

1. Monthly bad debt expense accrual summary.

Journal Entry	Debit	Credit
Bad Debt Expense	$76200	————-
Allowance for Uncollectible Accts	————	$76200

To record year 2009 accounts receivable write-offs.

Journal Entry	Debit	Credit
Allowance for uncollectible accounts	73,000	————-
Accounts receivable	————	73,000

2.

Journal Entry	Debit	Credit
Bad debt expense	17,768	————-
Allowance for uncollectible accounts	————	17,768

3. Bad debts expense $ 93,968

Balance sheet:
Current assets
Accounts receivable, net $ 572,032

Now I just gotta figure out where those numbers came from.  *sigh*  This is going to be a long day; I can tell already.

Alas, School Invades My Life Once More (Intermediate Accounting)

Think of this as my own online study guide.  I have been writing this stuff out by hand, but as of late, the steps involved have reached the ridiculous level in some cases, and I have decided to try a different approach.

I.  Present Value; single amount –

Given this info, determine the present value of single amounts.

Future Amount	Interest Rate	# of Periods
$20000	7	10
14000	8	12
25000	12	20
40000	10	8

PV = $________ * (_______) = $ _______

Do this for each line.

This is pretty simple, considering.

Step 1

You take your $ amount and multiply it by the corresponding amount on the present value table that every good accounting major has stuffed in an index somewhere.    So:

PV = $20000 * (.50835) = $10167

Woot!

The second number – “.50835” – is from that good ol’ PV (Present Value) table, using your % and # of periods to find said # (the table itself is pretty self-explanatory in my honest, but most humble opinion).  Oh yeah, and for this particular exercise, our teacher wanted us to round to the nearest whole number.

Then, for the rest of the lines, you just get to plug stuff in and then that’s it.

II.  Noninterest-bearing note; single payment -

So you get a problem that says something like:  Company A sold something to Company B on June 30, 2009. Payment was made in the form of a noninterest-bearing note requiring Company B to pay $85,000 on June 30, 2011. Assume that a 10% interest rate properly reflects the time value of money in this situation.

Calculate the amount at which Field should record the note receivable and corresponding sales revenue on June 30, 2009.

Fun, no?

Kinda terrifying at first, actually, for me–but anyways . . .

This is rather similar to the previous problem, you know?  Only this time, you have to figure out the # of periods, since it isn’t just laid out for you this time.  So, from what I understand, a period is a year unless otherwise stated.  I know that’s a rather simplistic definition, but it works for my purposes at this time, so meh.

With that in mind, you take the difference in time from the point that the note was issued to the time that it required to be paid by (i.e. – June 30, 2009 -> June 30, 20011).  So n (number of periods) = 2, ’cause that’s two years of time.  Then you plop back over to your PV table with your # of periods (2) and your % (10), match them up and get .82645 (ish – some tables figure it slightly differently; don’t ask me.  I’m just using the chart that my teacher told me to use).

Now just compute:

$85000 * .82645 = 70248.25 or 70248 if you round to the nearest whole number.

Like I said, welcome to my life.

III. Price of a Bond

On September 30, 2009, Corporation C issued 8% stated rate bonds with a face amount of $300 million. The bonds mature on September 30, 2029 (20 years). The market rate of interest for similar bonds was 10%. Interest is paid semiannually on March 31 and September 30.

First thing you gotta do is take the problem apart, bit by bit.  Since one of the components you know you’ll need first is your # of periods, then it’s best to find that first, if possible.

On September 30, 2009, Corporation C issued 8% stated rate bonds with a face amount of $300 million. The bonds mature on September 30, 2029 (20 years). The market rate of interest for similar bonds was 10%. Interest is paid semiannually on March 31 and September 30.

Step 1: Since there are TWO pay periods per year – due to the semiannual interest payments, and it will take TWENTY years for the bonds to mature, we just get to multiply the two together to equal FORTY.  2 * 20 = 40

Step 2 (this step has a tendency to really screw me up when I don’t read the problem closely enough): Look at the second half of the first statement: Corporation C issued 8% stated rate bonds with a face amount of $300 million.

This is where you get your $ amount from, believe it or not.  The 8% stated rate is the yearly interest rate for the bonds; however, since the interest is paid SEMIANNUALLY, that’s twice a year btw, the 8% has to be divided by 2 in order to the right answer:  8%/2 = .04 (4%).

See, ’cause if you paid 8% on March 31st, then you’d be paying more interest than what is due – which probably is okay in real life . . . hmm, but that’s not what the problem wants you to do.

So then you multiply the FACE AMOUNT of 300 million (that’s a 3 followed by 8 zeros, btw) by the semiannual stated rate of 8%, or better known as 8%/2 = .04 (4%).  Or put in purely worded equation form:

Face Amount
Stated Rate/2

Numerically stated then:

300,000,000 = 12000000 (which my book refers to as the “annuity amount”)
.04

Step 3!!! – Whoo!

That was fun. *snorts*  Well, kinda anyways. 

The first part of step 3 we actually completed in step 1.  The number of periods is 40; so n = 40.  Yay.

We need the interest % now.  This time we look to the statement reading: The market rate of interest for similar bonds was 10%. So is it 10%?  NOPE.  Remember that semiannual thing???  Yup.  10%/2 = 5%

We know that n = 40 and i (interest) = .05 (5%).  According to the Present Value Table of an Ordinary Annuity (remember, 300 million was the annuity amount), 17.15909.

Let’s restate what we have so far:

PV = $12000000 * 17.15909 + 300,000,000 (lump sum) * ________ = $ ________

Is it any wonder that it takes me a while to get my homework done?

BTW, the 300,000,000 was given to me in the equation set-up I have.  It’s just a plug-in number though, really.  From what I can tell, what you do is figure out the interest for the annuity amount, and then do the same thing for the lump sum amount, before finally adding the two together.  Meh.

Step 4

Okay, remember the number of periods that we had?  40, right?  Remember what i was?  5%, yah?  You just plug those two into the regular ol’ Present Value Table now.

= .14205

Our problem now looks like this:  PV = $12000000 * 17.15909 + 300,000,000 (lump sum) * .14205 =

Step 5 (Bringing it Together)

$12000000 * 17.15909 = 205909080
$300000000 * .14205 = 42615000

205909080 + 42615000 = $248,524,080

And that’s the answer.

*slumps over*

I’ll continue this on another page . . .