Accounts Receivables Paper 5

1

A financial manager for a jewelry distributor is analyzing the cost of offering a cash discount to its credit policy. Currently, the firm’s sales terms are net 60 and virtually all of its customers pay at the end of the 60 days. The manager estimates that if the firm offers a 2/10 net 60 discount, the average collection time on its $5,000,000 annual credit sales will drop to one month with 60% of its customers taking advantage of the discount. The distributor currently finances working capital with a revolving credit agreement at 12 . Calculate the firm’s net cost of adding the cash discount to its credit terms.






2

The cash manager for a large kitchen appliance retailer has been approached by a bank representative offering to set up a lock-box collection system. Analysis of the firm’s receipts shows that, on average, the system will reduce collection time by 2 days. The firm receives approximately 2,500 checks per day with an average value of $600 per check. The bank would charge $0.28 per check for operating the system. The firm currently invests short-term funds at an average rate of 7%. How much would the firm gain or lose annually by entering the lock-box agreement?






3

Frame Co. has an 8% note receivable dated June 30, year 1, in the original amount of $150,000. Payments of $50,000 in principal plus accrued interest are due annually on July 1, year 2, year 3, and year 4. In its June 30, year 2 balance sheet, what amount should Frame report as a current asset for interest on the note receivable?






4

Fenn Stores, Inc. had sales of $1,000,000 during December, year 2. Experience has shown that merchandise equaling 7% of sales will be returned within thirty days and an additional 3% will be returned within ninety days. Returned merchandise is readily resalable. In addition, merchandise equaling 15% of sales will be exchanged for merchandise of equal or greater value. What amount should Fenn report for net sales in its income statement for the month of December year 2?






5

A method of estimating uncollectible accounts that emphasizes asset valuation rather than income measurement is the allowance method based on






6

Which method of recording uncollectible accounts expense is consistent with accrual accounting? Allowance Direct write-off






7

When the allowance method of recognizing uncollectible accounts is used, the entry to record the write-off of a specific account






8

Which of the following is a method to generate cash from accounts receivables?
Assignment
Factoring






9

Gar Co. factored its receivables. Control was surrendered in the transaction which was on a without recourse basis with Ross Bank. Gar received cash as a result of this transaction, which is best described as a






10

Taylored Corp. factored $400,000 of accounts receivable to Rich Corp. on July 1, year 2. Control was surrendered by Taylored. Rich accepted the receivables subject to recourse for nonpayment. Rich assessed a fee of 2% and retains a holdback equal to 5% of the accounts receivable. In addition, Rich charged 15% interest computed on a weighted-average time to maturity of the receivables of forty-one days. The fair value of the recourse obligation is $12,000.
Taylored will receive and record cash of






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