solutions-ch07

Solutions-ch07 - EXERCISE 7-14(a Interest bearing note Option 1 Note Receivable Accounts Receivable Interest Receivable Interest Revenue($105,000 X

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EXERCISE 7-14 (a) Interest bearing note – Option 1: September 30, 2010 Note Receivable. ........................................ 105,000 Accounts Receivable. ...................... 105,000 December 31, 2010 Interest Receivable . .................................. 2,100 Interest Revenue. .............................. 2,100 ($105,000 X 8% X 3/12) September 30, 2011 Cash . .......................................................... 113,400 Interest Receivable. .......................... 2,100 Interest Revenue. .............................. 6,300 Note Receivable. ............................... 105,000 ($105,000 X 8% X 9/12 = $6,300) (b) Non-interest bearing note – Option 2: September 30, 2010 Note Receivable. ........................................ 105,000 Accounts Receivable. ...................... 105,000 December 31, 2010 Notes Receivable. ...................................... 2,100 Interest Revenue. .............................. 2,100 ($105,000 X 8% X 3/12) September 30, 2011 Notes Receivable. ...................................... 6,300 Interest Revenue. .............................. 6,300 ($105,000 X 8% X 9/12) Cash . .......................................................... 113,400 Note Receivable. ............................... 113,400 Page 1 of 13
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EXERCISE 7-14 (Continued) (a) There is no difference in the amounts because both options bear interest at 8%. The “non-interest bearing” note has the interest included in the face amount of the note and is journalized to account for this. The actual interest received is the same under both options. (b) The liquidity of Big Corp. at December 31, 2010 will remain unchanged whichever option is selected. Under option 1, the note balance remains at $105,000 but interest receivable of $2,100 results in a total of $107,100 under current assets. Under Option 2, the balance of the note, after the recording the accrual of interest income is also $107,100. The cash flows will also be the same under both options as the amount collected at the maturity of the note is $113,400. Page 2 of 13
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EXERCISE 7-19 (a) To be recorded as a sale, all of the following conditions would be met: 1. The transferred asset has been isolated from the transferor (put beyond reach of the transferor and its creditors even in bankruptcy or receivership). 2. The transferees have obtained the right to pledge or to exchange either the transferred assets or beneficial interests in the transferred assets. 3.
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This note was uploaded on 12/10/2010 for the course AFM 291 taught by Professor Clark during the Spring '10 term at Waterloo.

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Solutions-ch07 - EXERCISE 7-14(a Interest bearing note Option 1 Note Receivable Accounts Receivable Interest Receivable Interest Revenue($105,000 X

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