This process of approximation is called imputation, and the resulting rate is called an. Where should a discount or premium appear in the financial statements? A 1, 2, and 4 but not 3 B 1, 2, 3, and 4 C 1, 3, and 4 but not 2 D 1 and 4 but not 2 or 3 Unitex sold its accounts receivable outright to Hyperion Enterprises which is a financing company that normally buys accounts receivable of other companies without recourse. Examples are Treasury bills, commercial paper, and money market funds purchased with cash that is in excess of immediate needs. Accounting Study Guide by AccountingInfo. What is the resulting interest rate called? What is the resulting interest rate often called? A At face amount less implicit interest. Sawyer returned from a week in Florida, Ben hastened to tell her the good news that both sideboards had sold. The transferor is obligated to make a genuine effort to identify those receivables that are uncollectible.
The interest rate chosen is very important, as this would affect the accounting for long-term liabilities and your assets. Here, the asset value is not known. See below as to how to determine one. There is not a reliable fair value measure for the equipment, the exchange price is indeterminable, and there is question as to how to account for the interest expense over the life of the note, let alone what the rate of interest should even be. They have asked you to conduct some accounting research on this topic. Thomas is planning to start his own business in 10 years, at which time he will buy all the equipment and land needed.
A reliable fair value measure for the equipment is not available, given the age and specialty nature of the equipment. Imputed interest applies to all financial transactions that have favorable interest terms that may cause unrealistic tax implications. What Does Non-Interest Bearing Note Mean? To calculated the second year, third year, and so on, you would need to include the previous interest and add it to the discount value, which would be multiplied by the imputed interest rate. A 2, 3, and 4 but not 1 B 1, 3, and 4 but not 2 C 1, 2, 3, and 4 D 2 and 4 but not 1 or 3 Which phrases fill in the following blanks? B They have been pledged. The allowance method is based on the assumption that the percentage of receivables that will not be collected can be predicted from past experiences, present market conditions, and an analysis of outstanding balances. D as assets but separately from other receivables.
Portion of the codification are cut and pasted into the document for you so you know the theory and then I answer the specific questions asked. A Northern Pine can determine the implicit interest rate from amortizing the difference between the future value and the present value over the life of the note. D They have been assigned. Generally, only investments with original maturities of three months or less qualify under this definition. Cora's company sold equipment to a competitor on June 1, 2014, where they both agreed to an installment sales contract with a rate of 8%. As each month or year goes by, record this information on the ledger in clearly delineated columns.
If an annuity due and an ordinary annuity have the same number of equal payments and the same interest rates, then the A future value of the annuity due is less than the future value of the ordinary annuity. Each year, in a ledger format, record the beginning value of the loan and the market interest rate. That presumption, however, must not permit the form of the transaction to prevail over its economic substance and thus would not apply if interest is not stated, the stated interest rate is unreasonable, or the stated face amount of the note is materially different from the current cash sales price for the same or similar items or from the fair value of the note at the date of the transaction. Non interest bearing note payable — discount amortized Account Debit Credit Interest expense 61 Discount on notes payable 61 Total 61 61 At the end of the term, all the discount has been amortized as an expense to the income statement, the balance on the discount on notes payable account is zero, and the balance on the non interest bearing notes payable account is reduced to zero when payment of the face value is made to the lender. Accounts receivable from officers, employees, or affiliated companies should be presented on the balance sheet A as trade notes and accounts receivable if they otherwise qualify as current assets.
The discount is amortized over the lifetime of the notes. B The allowance method reflects the real facts. C the higher the discount rate is, the higher the present value will be. You will then want to record the transaction where repayment of the debt varies considerably from the market interest rate. The direct write-off method will provide for a proper matching of costs with revenues of the period when the average monthly accounts receivable balance is consistent throughout the year. Disclose any loss contingencies that exist on the receivables. Identify the authoritative literature that provides guidance on the zero-interest-bearing note.
You will then have a written record of your imputed interest. . In order for the lender to get a return on their zero interest notes payable, the notes are issued at a lower price than their face value. What has happened to the accounts receivable? They have asked you to conduct some accounting research on this topic. This is supposed to prevent exploitation of taxable income.
An uncollectible account receivable is a loss of revenue that requires, through proper entry in the accounts, a decrease in the asset accounts receivable and a related decrease in income and stockholders' equity. Nonrecognition of an apparently small difference between the stated rate of interest and the applicable current rate may have a material effect on the financial statements if the face amount of the note is large and its term is relatively long. Let us use 5% for this scenario. They have asked you to conduct some account research on this topic. Short-term, highly liquid investments that are both a readily convertible to known amounts of cash, and b so near their maturity that they present insignificant risk of changes in value due to changes in interest rates. Example The Internal Revenue Service provides an example of the calculation.