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Chapter 7

Receivables (Part 3)

PROBLEM 7-1: THEORY


1. B 6. A 11. D 16. D
2. A 7. C 12. C 17. D
3. B 8. D 13. A 18. A
4. B 9. D 14. B 19. B
5. B 10. C 15. B 20. C

PROBLEM 7-2: THEORY


1. B 6. C
2. B 7. B
3. B 8. B
4. B 9. D
5. B 10. D

PROBLEM 7-3: MULTIPLE CHOICE: COMPUTATIONAL


1. C (200,000 x 12% x 1/12) = 2,000

2. B
Solution:
Principal amount 150,000
Direct loan origination costs 4,000
Origination fee (150K x 4%) (6,000)
Carrying amount 148,000

3. A
Solution:
Principal amount 150,000
Origination fee (150K x 4%) (6,000)
Carrying amount 144,000

4. C (194,000 x 12.4% x 1/12) = 2,005

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5. A Bigco, Inc. has not surrendered control over any amount of
transferred receivables because it is obligated to repurchase
the receivables.

6. D Since the transfer of the bond is used only as security for the
loan, and not as a sale of the bond, Dayco would not recognize
the bond on its books at the time of the transfer. The bond would
be recognized on Dayco's books on the date Rayco defaulted and
at its fair value at that time.

7. C
Solution:
Year Expected fees Fractions
1 40,000 40/80
2 30,000 30/80
3 10,000 10/80
80,000

60,000 servicing asset x 40/80 fraction in Year 1 = 30,000


amortization

8. D equal to the face amount

9. C Maturity value = 500,000 + (500,000 x 8%) = 540,000


Discount = 540,000 x 10% x 6/12 = 27,000
Net proceeds = 540,000 – 27,000 = 513,000

10. A
Solution:
NP = MV - D
MV = 10,000 + (10,000 x 60/360 x 6%) = 10,100
D = 10,100 x 9% x 30/360 = 75.75
NP = 10,100 – 75.75 = 10,024.25

PROBLEM 7-4: MULTIPLE CHOICE: COMPUTATIONAL


1. C ₱840,000 – ₱16,800 = ₱823,200.

2. C

3. B ₱500,000 × .03 = ₱15,000.

4. B (₱500,000 × .03) + ₱2,500 = ₱17,500.

5. A [625,000 – (750,000 x 2%)] = 610,000

2
6. B (260,000 – 3,500) + (625,000 x 12% x 1/12) = 262,750

7. A
MV = 6,000 + (6,000 x 15% x 3/12) = 6,225
D = 6,225 x 10% x 1/12 = 51.88
NP = 6,225 – 51.88 = 6,173.12
Net interest = 6,173.12 net proceeds less 6,000 face amount = 173.12

8. D
MV = 10,000 + (10,000 x 0% x 3/12) = 10,000
D = 10,000 x 10% x 3/12 = 250
NP = 10,000 – 250 = 9,750

9. C
MV = 5,000 + (5,000 x 6% x 2/12) = 5,050
D = 5,050 x 8% x 1/12 = 33.67
NP = 5,050 – 33.67 = 5,016.33

10. C
MV = 10,000 + (10,000 x 9% x 3/12) = 10,225
D = 10,225 x 12% x 2/12 = 204.50
NP = 10,225 – 204.50 = 10,020.50

11. B
MV = 3,000 + (3,000 x 10% x 3/12) = 3,075
D = 3,075 x 12% x 2/12 = 61.50
NP = 3,075 – 61.50 = 3,013.50

12. C
MV = 400,000 + (400,000 x 10% x 6/12) = 420,000
D = 420,000 x 12% x 6/12 = 25,200
NP = 420,000 – 25,200 = 394,800

13. C
MV = 180,000 + (180,000 x 10% x 6/12) = 189,000
D = 189,000 x 12% x 4/12 = 7,560
NP = 189,000 – 7,560 = 181,440

14. C
Using trial and error:
Cash flows PV of 1 @3.5%, n=1 Present value
900,000.00 0.96618357 869,565.22
135,000.00 0.96618357 130,434.78
1,000,000.00

15. D
MV = 70,000 + (70,000 x 0% x 3/12) = 70,000
D = 70,000 x 12% x 1/12 = 700

3
NP = 70,000 – 700 = 69,300

PROBLEM 7-5: EXERCISES: COMPUTATIONAL


1. Solution:
5,000,000 + 100,000 – (5,000,000 x 6%) = 4,800,000

2. Solutions:
Requirement (a):
The PV of the remaining cash flows is computed as follows:
Date Cash flows PV of 1 @11% PV factors Present value
1/1/x3 1,000,000 n=0 1 1,000,000
1/1/x4 1,500,000 n=1 0.900900901 1,351,351
1/1/x5 1,500,000 n=2 0.811622433 1,217,434
3,568,785

The carrying amount of the loan is computed as follows:


Initial measurement:
Face amount 4,000,000
Direct origination costs 364,098
Origination fees (240,000)
Initial carrying amount 4,124,098

Subsequent measurement:
Date Collections Interest income Amortization Present value
1/1/x1 4,124,098
12/31/x1 480,000 453,651 26,349 4,097,749
12/31/x2 480,000 450,752 29,248 4,068,501
.
The impairment loss is computed as follows:
PV of remaining cash flows 3,568,785
Less: Carrying amount (4,068,501)
Impairment loss (499,716)

Requirement (b):
(3,568,785 – 1,000,000) x 11% = 282,566

3. Solutions:
Table #1: Original amortization table:
Date Interest income Unearned interest Present value
1/1/x1 437,378 762,622

4
12/31/x1 91,515 345,864 854,136
12/31/x2 102,496.36 243,367 956,633
12/31/x3 114,795.92 128,571 1,071,429
12/31/x4 128,571.43 0 1,200,000

Table #2: Amortization table after the impairment:


Date Interest income Unearned interest Present value
12/31/x1 218,689 381,311
12/31/x2 45,757 172,932 427,068
12/31/x3 51,248.18 121,684 478,316
12/31/x4 57,397.96 64,286 535,714
12/31/x5 64,285.71 0 600,000

Requirement (1): Impairment loss


PV of remaining cash flows (Table #2) 381,311
Less: Carrying amount (Table #1) (854,136)
Impairment loss (472,825)

Requirement (2.a): Reversal of impairment loss

Recoverable amount
d 1,120,000
- Dec. 31, 20x3

c
CA had no IL been recognized
1,071,429 previously - Dec. 31, 20x3 (Table #1)

b
478,316 Carrying amount - Dec. 31, 20x3 (Table #2)

Gain on reversal = (1,071,429 – 478,316) = 593,112

Requirement (2.b): Reversal of impairment loss

CA had no IL been recognized


c 1,071,429
previously - Dec. 31, 20x3 (Table #1)

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d 900,000
Recoverable amount - Dec. 31, 20x3

b
478,316 Carrying amount - Dec. 31, 20x3 (Table #2)

Gain on reversal = (900,000 – 478,316) = 421,684

4. Solution:
Requirement (a):
Date Cash on hand 180,000
Loss on transfer 20,000
Loans receivable 200,000

Requirement (b):
Date Cash on hand 180,000
Liability on repurchase agreement 180,000

Requirement (c):
Date Cash on hand 180,000
Loss on transfer 20,000
Loans receivable (200K – 20K) 180,000
Liability on repurchase agreement 20,000

5. Solution: ₱200,000 – the gross amount. Offsetting is not applicable


because ABC Co. does not intend to settle the accounts receivable and
accounts payable simultaneously.

6. Solution:
(a) Cash 723,000
Finance Charge 27,000
Notes Payable 750,000

(b) Accounts receivable – assigned 900,00


Accounts receivable 900,000
Cash 350,000
Sales Discounts 560
Allowance for Doubtful Accounts 530
Accounts Receivable 351,090

(c) Notes Payable 350,000


Interest Expense 7,500
Cash 357,500

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7. Solutions:
(a) Cash 368,000
Due from Factor (2% × ₱400,000) 8,000
Loss on Sale of Receivables (6% × ₱400,000) 24,000
Accounts Receivable 400,000

(b) Accounts Receivable 400,000


Due to Dexter 8,000
Financing Revenue 24,000
Cash 368,000

(c) Cash 368,000


Due from Factor 8,000
Loss on Sale of Receivables 31,000
Accounts Receivable 400,000
Recourse Liability 7,000

8. Solution:
September 1, 2002
Notes Receivable 400,000
Accounts Receivable 400,000

October 1, 2002
Cash 405,066
Interest income 3,945
Notes Receivable 400,000
Gain 1,121

MV = 400,000 + (400,000 x 12% x 90/365) = 411,836


D = 411,836 x 10% x 60/365 = 6,770
NP = 411,836 – 6,770 = 405,066
Interest income = 400,000 x 12% x 30/365 = 3,945