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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

(Bad Debts鈥擜ging) Danica Patrick, Inc. includes the following account among its trade receivables.

Hopkins Company

1/1

Balance forward

700

1/28

Cash (#1710)

$1,100

1/20

Invoice #1710

1,100

4/2

Cash (#2116)

1,350

3/14

Invoice #2116

1,350

4/10

Cash (1/1 Balance)

155

4/12

Invoice #2412

1,710

4/30

Cash (#2412)

1,000

9/5

Invoice #3614

490

9/20

Cash (#3614 and part of #2412)

790

10/17

Invoice #4912

860

10/31

Cash (#4912)

860

11/18

Invoice #5681

2,000

12/1

Cash (#5681)

1,250

12/20

Invoice #6347

800

12/29

Cash (#6347)

800

Instructions

Age the balance and specify any items that apparently require particular attention at year-end

When is the financial components approach to recording the transfers of receivables used? When should a transfer of receivables be recorded as a sale?

Francis Equipment Co. closes its books regularly on December 31, but at the end of 2017 it held its cash book open so that a more favorable balance sheet could be prepared for credit purposes. Cash receipts and disbursements for the first 10 days of January were recorded as December transactions. The information is given below.

1. January cash receipts recorded in the December cash book totaled \(45,640, of which \)28,000 represents cash sales, and \(17,640 represents collections on account for which cash discounts of \)360 were given.

2. January cash disbursements recorded in the December check register liquidated accounts payable of \(22,450 on which discounts of \)250 were taken.

3. The ledger has not been closed for 2017.

4. The amount shown as inventory was determined by physical count on December 31, 2017.

The company uses the periodic method of inventory.

Instructions

(a) Prepare any entries you consider necessary to correct Francis鈥檚 accounts at December 31.

(b) To what extent was Francis Equipment Co. able to show a more favorable balance sheet at December 31 by holding its cash book open? (Compute working capital and the current ratio.) Assume that the balance sheet that was prepared by the company showed the following amounts:

Debit

Credit

Cash

\(39,000

Accounts receivables

42,000

Inventory

67,00

Accounts payable

\)45,000

Other Current liabilities

14,200

Kraft Enterprises owns the following assets at December 31, 2017.

Cash in bank 鈥� saving account

68,000

Checking account balance

17,000

Cash on hand

9,300

Post-dated Checks

750

Cash refunded due from IRS

31,400

Certificate of deposits (180-days)

90,000

What amount should be reported as cash?

(Bank Reconciliation and Adjusting Entries) The cash account of Aguilar Co. showed a ledger balance of \(3,969.85 on June 30, 2017. The bank statement as of that date showed a balance of \)4,150. Upon comparing the statement with the cash records, the following facts were determined.

1. There were bank service charges for June of \(25.

2. A bank memo stated that Bao Dai鈥檚 note for \)1,200 and interest of \(36 had been collected on June 29, and the bank had made a charge of \)5.50 on the collection. (No entry had been made on Aguilar鈥檚 books when Bao Dai鈥檚 note was sent to the bank for collection.)

3. Receipts for June 30 for \(3,390 were not deposited until July 2.

4. Checks outstanding on June 30 totaled \)2,136.05.

5. The bank had charged the Aguilar Co.鈥檚 account for a customer鈥檚 uncollectible check amounting to \(253.20 on June 29.

6. A customer鈥檚 check for \)90 (as payment on the customer鈥檚 Accounts Receivable) had been entered as \(60 in the cash receipts journal by Aguilar on June 15.

7. Check no. 742 in the amount of \)491 had been entered in the cash journal as \(419, and check no. 747 in the amount of \)58.20 had been entered as $582. Both checks had been issued to pay for purchases and were payments on Aguilar鈥檚 Accounts Payable.

Instructions

(a) Prepare a bank reconciliation dated June 30, 2017, proceeding to a correct cash balance.

(b) Prepare any entries necessary to make the books correct and complete.
See all solutions

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