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Chapter 7: Question 25 (page 363)

What are the general rules for measuring and recognizing gain or loss by both the debtor and the creditor in an impairment?

Short Answer

Expert verified

The creditor will report the impairment loss when it is probable that the debtor will not be able to make the payment. The debtor will record the journal entry on modification of terms or at the time of settlement.

Step by step solution

01

Definition of Debtor

The debtor can be defined as the individual or business to whom the business entity has given money as a loan or to whom merchandise is sold on credit.

02

General rule for measuring gains and losses from both debtor and creditor in impairment

When the loan is considered to be impaired, then the loss from such impairment is calculated as follow:

Particular

Amount $

Carrying value

$xx

Less: Discounted future cash flow @ effective interest rate

($xx)

Impairment Loss

$xx

The creditor would record the loss in the books of account. The debtor will record an entry when the settlement is made, or modifications of the terms are made.

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Most popular questions from this chapter

(Bank Reconciliation and Adjusting Entries) Presented below is information related to Haselhof Inc. Balance per books at October 31, \(41,847.85; receipts \)173,523.91; disbursements \(164,893.54. Balance per bank statement November 30, \)56,274.20.

The following checks were outstanding at November 30.

1224

\(1,635.29

1230

2,468.30

1232

2,125.15

1233

482.17

Included with the November bank statement and not recorded by the company were a bank debit memo for \)27.40 covering bank charges for the month, a debit memo for \(372.13 for a customer鈥檚 check returned and marked NSF, and a credit memo for \)1,400 representing bond interest collected by the bank in the name of Haselhof Inc. Cash on hand at November 30 recorded and awaiting deposit amounted to $1,915.40.

Instructions

(a) Prepare a bank reconciliation (to the correct balance) at November 30, for Haselhof Inc. from the information above.

(b) Prepare any journal entries required to adjust the cash account at November 30.

Because of calamitous earthquake losses, Bernstein Company, one of your client鈥檚 oldest and largest customers, suddenly and unexpectedly became bankrupt. Approximately 30% of your client鈥檚 total sales have been made to Bernstein Company during each of the past several years. The amount due from Bernstein Company鈥� none of which is collectible鈥攅quals 22% of total accounts receivable, an amount that is considerably in excess of what was determined to be an adequate provision for doubtful accounts at the close of the preceding year. How would your client record the write-off of the Bernstein Company receivable if it is using the allowance method of accounting for bad debts? Justify your suggested treatment.

(Transfer of Receivables) Use the information for Jones Company as presented in E7-20. Jones is planning to factor some accounts receivable at the end of the year. Accounts totaling \(25,000 will be transferred to Credit Factors, Inc. with recourse. Credit Factors will retain 5% of the balances for probable adjustments and assesses a finance charge of 4%. The fair value of the recourse obligation is \)1,200.

Instructions

(a) Prepare the journal entry to record the sale of the receivables.

(b) Compute Jones鈥檚 accounts receivable turnover for the year, assuming the receivables are sold, and discuss how factoring of receivables affects the turnover ratio.

(Journalize Various Accounts Receivable Transactions) The balance sheet of Starsky Company at December 31, 2016, includes the following.

Note receivable

\(36,000

Accounts receivable

182,100

Less: Allowance for doubtful accounts

17,300

\)200,800

Transactions in 2017 include the following.

1. Accounts receivable of \(138,000 were collected including accounts of \)60,000, on which 2% sales discounts were allowed.

2. \(5,300 was received in payment of an account which was written off the books as worthless in 2016.

3. Customer accounts of \)17,500 were written off during the year.

4. At year-end, Allowance for Doubtful Accounts was estimated to need a balance of $20,000. This estimate is based on an analysis of aged accounts receivable.

Instructions

Prepare all journal entries necessary to reflect the transactions above.

Horton Corporation is preparing a bank reconciliation and has identified the following potential reconciling items. For each item, indicate if it is (1) added to balance per bank statement, (2) deducted from balance per bank statement, (3) added to balance per books, or (4) deducted from balance per books.

(a) Deposit in transit \(5,500.

(d) Outstanding checks \)7,422.

(b) Bank service charges \(25.

(e) NSF check returned \)377.

(c) Interest credited to Horton鈥檚 account $31.
See all solutions

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