According to ASC Topic 860, which of the following statements
is true regarding servicing assets and servicing liabilities?
I. Either the amortization method or the fair value method can
II. Once the fair value method is elected, the election cannot be
III. Changes in fair value are reported in other comprehensive
income for the period.
(b) Answer (b) is correct. Either the amortization
method or the fair value method can be used for servicing assets
and servicing liabilities. However, if the fair value method is
elected, the election cannot be reversed. Changes in fair value are
reported in earnings in the period in which the change occurs.
Binsar Corporation transfers a financial asset but continues
to hold an interest in the servicing asset. How should the interest
in the servicing asset that continues to be held be measured at the
date of the transfer?
(c) When a company transfers a financial asset but continues
to hold an interest in the servicing asset, the transferor
should report the interest that continues to be held as the difference
between the previous carrying amount and the amount
derecognized. Answers (a), (b), and (d) are incorrect because
they represent incorrect values.
Which of the following is true?
(c) The arrangement of having collateral transferred to
a secured party is known as a pledge. Answer (a) is incorrect
because a debtor may grant a security interest in certain assets to
a lender to serve as collateral with recourse. Answer (b) is incorrect
because a debtor may grant a security interest in certain assets
to a lender to serve as collateral without recourse. Answer
(d) is incorrect because secured parties are sometimes permitted
to sell collateral held under a pledge.
(c) Financial assets subject to prepayment should be
measured like investments in debt securities classified as
available-for-sale or trading.
In accordance with accounting for transfers and servicing, all
of the following would be disclosed except
(d) Answers (a), (b), and (c) are required disclosures.
Answer (d) is the correct answer as disclosure is only required of
assets and liabilities with nonestimable fair values.
Taft Inc. borrowed $1,000,000 from Wilson Company on
July 2, year 8. As part of the loan agreement, Taft granted Wilson
a security interest in land that originally cost $750,000 when it
was acquired by Taft in year 1. The land had a fair value of
$900,000 on July 2, year 8. In June year 9, Taft defaulted on its
loan to Wilson, and the land was transferred to Wilson in full
settlement of the debt on June 30. The land had a fair value of
$950,000 on June 30, year 9. What amount should Wilson record
for land on June 30, year 9?
(d) If the debtor defaults under the terms of the secured
contract and is no longer entitled to redeem the pledged asset, it
(Taft) shall derecognize the pledged asset, and the secured party
(Wilson) shall recognize the collateral as its asset initially measured
at fair value.
If a firm is offered credit terms of 2/10, net 30 on its purchases.
Sound cash management practices would mean that the
firm would pay the account on which of the following days?
(c) The requirement is to evaluate credit terms to made
sound cash management decisions. Answer (c) is correct because
a firm should take advantage of the cash discount and pay
on the last day of the discount period, which is day 10. Answers
(a) and (b) are incorrect because “2” is the amount of the
percentage discount; not the discount period. Answer (d) is
incorrect because if a firm pays bills on the final due date, it will
not have taken advantage of cash discounts which are very lucrative.
The following forms of short-term borrowings are available
to a firm:
• Floating lien
• Revolving credit
• Chattel mortgages
• Bankers’ acceptances
• Lines of credit
• Commercial paper
The forms of short-term borrowing that are unsecured credit are
(d) The requirement is to identify the forms of borrowing
that are unsecured. Answer (d) is correct because revolving
credit agreements, bankers’ acceptances, lines of credit, and
commercial paper all represent unsecured obligations. Answer
(a) is incorrect because floating liens and chattel mortgages
are secured. Answer (b) is incorrect because factoring agreements
and chattel mortgages are secured. Answer (c) is incorrect
because floating liens and chattel mortgages are secured.
A company obtaining short-term financing with trade credit
will pay a higher percentage financing cost, everything else being
(d) The requirement is to evaluate the cost of trade
credit. Answer (d) is correct because if the discount period is
longer, the days of extra credit obtained by foregoing the discount
are fewer. This makes the trade credit more costly. Answer
(a) is incorrect because the lower the discount percentage,
the lower the opportunity cost of foregoing the discount and
using the trade credit financing. Answers (b) and (c) are incorrect
because percentage financing cost is unaffected by the purchase
price of the items.
Which of the following is not related to loans involving
(a) The requirement is to identify the term that is not
related to loans involving inventory. Answer (a) is correct because
factoring involves the sale of accounts receivable. Answer
(b) is incorrect because a blanket inventory lien involves a
legal document that establishes inventory as collateral for a loan.
Answer (c) is incorrect because a trust receipt is an instrument
that acknowledges that the borrower holds the inventory and the
proceeds from sale will be put in trust for the lender. Answer (d)
is incorrect because warehousing involves storing inventory in a
public warehouse under the control of the lender.
The London Interbank Offered Rate (LIBOR) represents
an example of a
(b) The requirement is to identify the nature of LIBOR.
Answer (b) is correct because LIBOR, like the prime rate, is an
example of a nominal rate. It is adjusted for inflation risk, but not
credit risk. Answer (a) is incorrect because the risk-free rate is a
theoretical rate that is not quoted. Answer (c) is incorrect because
LIBOR is not credit risk adjusted. Answer (d) is incorrect
because LIBOR is a short-term rate.