Chapt 8 and 9 HW Questions ACCT370
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Apr 3, 2024
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1.
Limits on new borrowing and ensuring that cash from ongoing operations will not be diverted away from servicing debt are known as
Multiple choice question.
conflicts of interest.
protection against credit-damaging events.
incorrect
preservation of repayment capacity.
signals and triggers.
Correct Answer
preservation of repayment capacity.
2.
Affirmative covenants are actions that the borrower must make and generally include
Multiple select question.
allowing the lender to inspect business assets.
incorrect
paying a dividend.
paying down other debt to reduce their overall debt even though they may not have borrowed for this purpose.
providing audited financial statements.
correct
limiting capital expenditures.
incorrect
Correct Answer
allowing the lender to inspect business assets.
providing audited financial statements.
3.
Assume that XYZ Company has a loan agreement that states that it must maintain a fixed-charge coverage ratio greater than or equal to 1.0 They have net income of $75, noncash charges of $25, current loan
maturities of $60, stock repurchases of $10, and replacement capital expenditures of $20. Which of the following statements is true?
Multiple choice question.
They have violated their affirmative covenant since their fixed-coverage charge is less than 1.0.
They can pay a dividend of no more than $20 to remain within the covenant.
Their fixed-coverage ratio is 2.0.
incorrect
Their fixed-coverage ratio is 1.1.
Correct Answer
They can pay a dividend of no more than $20 to remain within the covenant.
4.
Restrictions on total indebtedness
Multiple choice question.
limit the payment of cash dividends and share repurchases.
incorrect
assure the creditor that cash will be available to make interest and principal payments when due.
limit the amount of additional debt the company may incur over the loan term.
limit the company from entering into a merger.
Correct Answer
limit the amount of additional debt the company may incur over the loan term.
5.
Many loan agreements have financial covenants that rely on ______
Multiple choice question.
regulatory GAAP.
floating GAAP.
incorrect
flexible GAAP.
fixed GAAP.
Correct Answer
fixed GAAP.
6.
Covenant-lite loans
Multiple select question.
provide the lender with more protection.
incorrect
provide the borrower with more freedom.
correct
provide the borrower with less freedom.
contain minimal covenants.
correct
provide the lender with less protection.
incorrect
Correct Answer
provide the borrower with more freedom.
contain minimal covenants.
provide the lender with less protection.
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7.
A compensation discussion and analysis (CD&A)
Multiple select question.
is provided in the proxy statement.
correct
is provided in 10-K and 10-Q filings.
is similar in nature to management's discussion and analysis (MD&A).
correct
must describe specific items of corporate performance that are considered in
making compensation decisions.
incorrect
Correct Answer
is provided in the proxy statement.
is similar in nature to management's discussion and analysis (MD&A).
must describe specific items of corporate performance that are considered in making compensation decisions.
8.
Incentives that require a manager to achieve certain multi-year financial achievement goals are called
Multiple choice question.
financial incentives.
incorrect
achievement-based pay plans.
short-term incentives.
performance-based pay plans.
Correct Answer
performance-based pay plans.
9.
Which of the following statements is not
true regarding regulatory accounting principles (RAP)?
Multiple choice question.
They closely follow GAAP.
They can be an early warning signal for monitoring a company's financial health.
They serve as a basis for supervisory action.
They are used to set the prices that customers may be charged.
incorrect
Correct Answer
They closely follow GAAP.
10.
Loan charge-offs for banks
Multiple choice question.
have no impact on invested capital.
increase invested capital.
decrease net income.
incorrect
decrease invested capital.
Correct Answer
decrease invested capital.
11.
Items included in the compensation discussion and analysis would not
include
Multiple choice question.
how specific forms of compensation are structured.
incorrect
the impact of accounting and tax treatments on the particular form of compensation.
specific items of corporate performance that are considered in making compensation decisions.
compensation of the CEO, CFO and the three mostly highly paid executives if
their compensation is less than $100,000.
Correct Answer
compensation of the CEO, CFO and the three mostly highly paid executives if
their compensation is less than $100,000.
12.
Sizable losses for financial institutions that had invested heavily in mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) resulted in which of the following?
Multiple select question.
The U.S. government took control of Fannie Mae and Freddie Mac.
incorrect
Bank of America entered into the largest bankruptcy in U.S. history.
The Federal Deposit Insurance Corporation seized Washington Mutual, the nation's largest savings and loan.
correct
The U.S, government took control of the investment banking firm Merill Lynch.
incorrect
Correct Answer
The U.S. government took control of Fannie Mae and Freddie Mac.
The Federal Deposit Insurance Corporation seized Washington Mutual, the nation's largest savings and loan.
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13.
The collapse of a global housing bubble in 2008 triggered
Multiple select question.
decreased regulation.
an increase in the use of fair value accounting.
the bailout of banks by national governments.
incorrect
the failure of large financial institutions.
correct
downturns in stock markets around the world.
correct
Correct Answer
the bailout of banks by national governments.
the failure of large financial institutions.
downturns in stock markets around the world.
14.
In 2008, financial services firms in the U.S. reported mortgage-
related fair value accounting losses and loan write-downs totaling roughly
Multiple choice question.
$515 million.
$81 million.
$2 billion.
incorrect
$175 billion.
Correct Answer
$175 billion.
15.
The net realizable value of a company's accounts receivable
Multiple choice question.
is adjusted for expected uncollectibles but not returns and allowances.
Reason:
It is adjusted for both uncollectibles and returns and allowances.
is the amount that the company expects to collect.
is adjusted for returns and allowances but not uncollectibles.
incorrect
Reason:
It is adjusted for both uncollectibles and returns and allowances.
is reported on the income statement.
Reason:
It is on the balance sheet.
Correct Answer
is the amount that the company expects to collect.
16.
The beginning of the month balance of Allowance for credit losses is $45,000. There were no account write-offs during the month. The gross receivables at the end of the month was $2,000,000 and credit sales were $3,000,000. The company would use a 5% assumption with the Gross accounts receivable approach and a 2% assumption with the Sales revenue approach. In recording the Credit loss expense under the Sales revenue approach,
Multiple choice question.
the Allowance for credit losses should be credited for $15,000.
Reason:
The sales approach would not consider the beginning balance.
the Allowance for credit losses should be credited for $100,000.
Reason:
This amount is based on receivables but does not consider the beginning balance.
the Allowance for credit losses should be credited for $60,000.
the Allowance for credit losses should be credited for $45,000.
incorrect
Reason:
This is the answer for the Gross accounts receivable approach.
Correct Answer
the Allowance for credit losses should be credited for $60,000.
17.
Which of the following is
not
true of the journal entry to write off credit losses?
Multiple choice question.
Credit loss expense is recorded.
An allowance contra-account is reduced.
incorrect
A specific accounts receivable is eliminated.
18.
A individual account is written off only when the seller knows that the specific receivable is uncollectible.
Correct Answer
Credit loss expense is recorded.
As an economy comes out of a recession, the Allowance for credit losses as a
percentage of gross accounts receivable would be expected to
Multiple choice question.
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remain stable.
decrease.
increase.
incorrect
Correct Answer
decrease.
19.
Under the final revenue recognition standards, the expected credit losses are shown as a (an)
Multiple choice question.
increase to cost of sales and disclosed if material.
incorrect
reduction of accounts receivable.
reduction of revenue because the revenue should not have been recognized originally.
expense and included with other impairment losses.
Correct Answer
expense and included with other impairment losses.
20.
To record the effects of a return, a company would
Multiple choice question.
debit Allowance for sales returns and allowances.
incorrect
debit Account receivable.
debit Allowance for credit losses
debit Sales returns and allowances
Correct Answer
debit Sales returns and allowances
21.
Which of the following are reasons for receivables growth exceeding sales growth?
Multiple select question.
Selling more inventory for cash than on credit.
incorrect
Decreasing the payment period for receivables from 90 days to 30 days.
Extending the payment period for receivables from 30 days to 90 days.
correct
Deteriorating creditworthiness among existing customers.
incorrect
Correct Answer
Extending the payment period for receivables from 30 days to 90 days.
Deteriorating creditworthiness among existing customers.
22.
In collateralized borrowing, a company
Multiple choice question.
no longer continues to collect cash related to the receivable.
Reason:
The company would still be responsible for collecting the receivable.
receives proceeds that exceed the face value of the receivable.
Reason:
The proceeds would be less than the face value.
sells its receivables.
incorrect
Reason:
This is a factoring.
uses its receivables as collateral for a loan.
Correct Answer
uses its receivables as collateral for a loan.
23.
A recourse obligation is
Multiple choice question.
the fair value of the sold receivables that may go bad.
the same thing as the Allowance for doubtful accounts.
Reason:
It is not the same thing. It represents the fair value of the sold receivables that may go bad.
the amount that the factor retains for potential noncollections.
Reason:
This is the Due from factor amount.
the difference between the book value of the accounts receivable and the cash received.
incorrect
Reason:
The difference represents part of the loss.
Correct Answer
the fair value of the sold receivables that may go bad.
24.
At the time a company receives the proceeds of a loan collateralized by its receivables, the company
Multiple choice question.
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decreases its shareholders' equity.
incorrect
Reason:
This would be true in a sale of receivables recourse.
increases its liabilities and assets.
increases its assets and decreases its liabilities.
Reason:
Liabilities would increase.
decreases its assets by the difference between the cash received and book value of the receivables.
Reason:
This would be true for a sale.
Correct Answer
increases its liabilities and assets.
25.
Patrick, Inc. has a 10%, $20,000 face, note receivable. When there is one year left on the note, Patrick discounts the note with First National Bank, which charges Patrick a 15% discount rate. Patrick will receive
Multiple choice question.
$17,000.
incorrect
Reason:
The bank charge will be $3,300 ($20,000 x 1.10 x 0.15).
$18,700.
$16,700.
Reason:
This answer subtracts the bank charge of $3,300 from the face value of $20,000 rather than from the maturity value of $22,000.
$18,000.
Reason:
This answer subtracts the 10% stated rate from the face. The proceeds are computed by multiplying the 15% by $22,000, which is the maturity value of the original note. The resulting charge of $3,300 is subtracted from the $22,000 maturity value.
Correct Answer
$18,700.
26.
A receivable is considered sold when
Multiple choice question.
cash changes hands.
incorrect
the owner transfers control.
another party collects the receivable payments.
the owner gives up most of the risk related to the receivable.
Correct Answer
the owner transfers control.
27.
In a securitization,
Multiple choice question.
the owner of a receivable obtains a loan secured by the receivables.
incorrect
Reason:
The receivables are bundled and transferred, and investors buy debt instruments that are secured by the receivables.
investors buy debt instruments secured by receivables.
investors buy receivables directly from the owner.
Reason:
The receivables are bundled and transferred, and investors buy debt instruments that are secured by the receivables.
an investor buys a security from another firm.
Reason:
The receivables are bundled and transferred, and investors buy debt instruments that are secured by the receivables.
Correct Answer
investors buy debt instruments secured by receivables.
28.
When a company uses its receivables as collateral for a loan, the company
Multiple choice question.
recognizes a loss for the difference between between the book value of the receivables and the amount received from the bank.
incorrect
Reason:
This would be true in a sale of receivables without recourse.
removes the receivables from its books.
Reason:
This would be true for a sale.
recognizes interest expense when the cash is received.
Reason:
Interest expense is recognized with the passage of time.
recognizes a liability for the cash received from the bank.
Correct Answer
recognizes a liability for the cash received from the bank.
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29.
The securitization entity
Multiple choice question.
pays fees to the guarantor.
receives cash from the credit rating agencies.
Reason:
It pays them.
pays investors if the debtors default.
Reason:
The guarantor does this.
pays proceeds from the sale of securities to the investors.
incorrect
Reason:
It pays the proceeds to the transferor.
Correct Answer
pays fees to the guarantor.
30.
An investor is willing to accept less than the face amount of interest of loans included in a securitization because
Multiple choice question.
the portfolio of loans has less liquidity than would individual loans.
Reason:
Securitizations increase liquidity.
the portfolio of loans provide less diversification than do the individual loans.
incorrect
Reason:
Securitizations increase diversification.
the portfolio of loans is less risky than are the individual loans.
the investors could easily identify loans of similar investment quality.
Reason:
Banks have this expertise, and the investors are willing to accept lower rates
as payment for the expertise.
Correct Answer
the portfolio of loans is less risky than are the individual loans.
31.
At the time a company receives the proceeds of a loan collateralized by its receivables, the company
Multiple choice question.
increases its assets and decreases its liabilities.
incorrect
Reason:
Liabilities would increase.
increases its liabilities and assets.
decreases its shareholders' equity.
Reason:
This would be true in a sale of receivables recourse.
decreases its assets by the difference between the cash received and book value of the receivables.
Reason:
This would be true for a sale.
Correct Answer
increases its liabilities and assets.
32.
A bank recognizes a gain upon securitizing receivables because
Multiple choice question.
it treats the securitization as a collateralized borrowing.
Reason:
No gain would be recognized in a collateralized borrowing.
the present value of the securities sold to the investors is calculated at a higher interest rate.
incorrect
Reason:
The present value is calculated at a lower rate.
it receives proceeds in excess of the book value of the receivables.
the present value of the securities sold to the investors is less than the book value of the receivables.
Reason:
The present value would be higher.
Correct Answer
it receives proceeds in excess of the book value of the receivables.
33.
A securitization entity
Multiple choice question.
transfers receivables to investors.
Reason:
It pays investors as cash payments are received from the receivables.
pays investors if the debtors default.
Reason:
The guarantor does this.
holds the underlying receivables.
correct
rates the credit quality of the receivables.
Reason:
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Credit-rating agencies do this.
Correct Answer
holds the underlying receivables.
34.
Improperly accounting for a securitization as a sale instead of a collateralized borrowing
Multiple choice question.
understates assets.
overstates the debt-to-equity ratio.
incorrect
Reason:
It would understate the ratio.
understates the return-on-assets ratio.
Reason:
It would overstate the ratio.
overstates debt.
Reason:
It would understate debt.
Correct Answer
understates assets.
35.
A servicing asset
Multiple choice question.
is received by the investors at the time of a securitization.
incorrect
Reason:
The transferor might receive one.
arises when a transferor receives more than adequate compensation for handling cash collections.
appears on the guarantor's balance sheet.
Reason:
It appears on the transferor's balance sheet.
arises when a securitization entity collects cash from debtors and makes payments to investors.
Reason:
The transferor would have to receive more than adequate compensation for doing the servicing.
Correct Answer
arises when a transferor receives more than adequate compensation for handling cash collections.
36.
Improperly accounting for a securitization as a sale instead of a collateralized borrowing
Multiple choice question.
overstates assets.
incorrect
Reason:
It would understate assets.
overstates the debt-to-equity ratio.
Reason:
It would understate the ratio.
overstates debt.
Reason:
It would understate debt.
overstates the return-on-assets ratio.
Correct Answer
overstates the return-on-assets ratio.
37.
All of the following led to the 2008 financial crisis, except
Multiple choice question.
default rates were higher than expected.
fewer subprime loans were made prior to the crisis.
companies shopped for better security ratings.
guarantors had more risk than expected.
incorrect
Correct Answer
fewer subprime loans were made prior to the crisis.
38.
Which of the following is an indicator of financial difficulties of a debtor?
Multiple choice question.
The debtor has defaulted on some of its debt.
The debtor can obtain financing at the prime rate.
Reason:
The debtor would have to pay much more than the prime rate if it were troubled.
The creditor expects to collect the full amount of debt and interest.
Reason:
The creditor would expect to receive less.
The creditor believes that the debtor has adequate cash flows to pay the debt.
incorrect
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Reason:
The creditor would believe that the cash flows are inadequate for it to be troubled.
Correct Answer
The debtor has defaulted on some of its debt.
39.
Bond Company renegotiates its debt with Bahamas Bank in a troubled debt restructuring. The present value of the new cash flows is less than the book value of the debt, but the undiscounted cash flows exceed the book value of the debt.
Multiple choice question.
Bahamas Bank would continue to use the original interest rate to record interest income.
Bond Company would continue to use the original interest rate to record interest expense.
incorrect
Reason:
It imputes a new rate.
Bond Company would use a new interest rate based on its current financial health to record interest expense.
Reason:
It imputes a new rate.
Bahamas Bank imputes a new interest rate to record interest income.
Reason:
It uses the original rate.
Correct Answer
Bahamas Bank would continue to use the original interest rate to record interest income.
40.
Condor Company modifies a note payable with New York Bank as
part of a troubled debt restructuring. Both the present value of cash
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flows and the undiscounted cash flows under the terms of the new note are less than the book value of the note payable.
Multiple choice question.
New York Bank will recognize a gain.
Reason:
It will recognize a loss.
Condor Company will not recognize a gain or loss.
Reason:
It will recognize a gain.
Condor Company will recognize a gain.
New York Bank will not recognize a gain or a loss.
incorrect
Reason:
It will recognize a loss.
Correct Answer
Condor Company will recognize a gain.
41.
Current U.S. GAAP for troubled debt restructuring can be criticized because
Multiple choice question.
the accounting is consistent between the lender and the borrower.
incorrect
Reason:
It is inconsistent.
the gain recognized by a borrower equals the loss recognized by the lender.
Reason:
The gain recognized by the borrower is generally less than the loss recognized by the lender.
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the lender computes its loss using the original rate.
the recognized gains and losses generally occur in the same years as the actual economic gains and losses.
Reason:
The economic gains and losses generally precede the accounting recognition.
Correct Answer
the lender computes its loss using the original rate.
42.
Condor Company modifies a note payable with New York Bank as
part of a troubled debt restructuring. Both the present value of cash flows and the undiscounted cash flows under the terms of the new note are less than the book value of the note payable.
Multiple choice question.
Condor Company will not recognize a gain or loss.
incorrect
Reason:
It will recognize a gain.
New York Bank will not recognize a gain or a loss.
Reason:
It will recognize a loss.
Condor Company will recognize a loss.
Reason:
It will recognize a gain.
New York Bank will recognize a loss.
Correct Answer
New York Bank will recognize a loss.
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B. The lender defers solely to the customer's judgment.
C. The borrower uses the funds for purposes other than loan repayment.
D. The lender has much control over how funds are used by the borrower.
Mark for follow up
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a.
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b.
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c.
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d.
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- Loan covenants are used for which of the following reasons?a. To protect the lender from the borrower’s substantially weakening of the latter’s financial position.b. To protect the borrower from the lender’s calling the loan early.c. To protect the auditors from false information by the borrower.d. To protect shareholders from management taking on too much debt.arrow_forwardManagers wishing to avoid loan covenant violations may resort to making accounting changes that increase reported earnings. True or False?arrow_forwardPlease explain in detail. . Unsecured creditors: have rights to be paid amounts owed, but the rights may have to be enforced through the courts face significant risk, and accordingly unsecured credit is very unusual have no rights in the event that the debtor defaults only have the recourse of severing business ties with the defaulting debtorarrow_forward
- Choose the right onearrow_forward8) The Allowance Method for bad debts:A) Should be used if uncollectible accounts have a material effect on the company's financial statements used by investors and creditorsB) Complies with GAAPC) Estimates bad debt expense and establishes an allowance or reserve for uncollectibleD) All of the choices are correct Group of answer choices A B C Darrow_forwardWhich of the following is NOT a reason for sales discounts to be offered to the debtors(customers)? A. Increase the amount paid by the debtors B. Improve the liquidity by turning the accounts receivable into cash C. Encourage earlier settlement of debts by debtors D. Reduce the level of bad debtsarrow_forward
- Which of the following statements is false? Group of answer choices A)The journal entry to record bad debt expense decreases current assets. b)The journal entry to record bad debt expense decreases retained earnings. C)The journal entry to write-off an uncollectible account receivable decreases operating income. D)The journal entry to write-off an uncollectible account receivable does not affect current assets. e)All the above statements are correct.arrow_forwardeceivables arise due to a deferred sale, and companies are often unable to collect all their debts, which means that part of those debts may become non-existent or there is doubt about the possibility of collection. 1- What is the difference between bad debts and doubtful debts? 2- Draft an example (supported by numbers) to explain the method of doubtful debts in dealing with bad debts, provided that the explanation includes accounting restrictions and the impact on the financial statements? 3- Explain why the use of the direct method (bad debt method) conflicts with generally accepted accounting principles? 4- One of the methods for estimating doubtful debts is the deferred sales method, the receivables balance method, and the receivables aging method. Required: Formulate an example (enhanced by numbers) to explain the method of aging receivables in estimating doubtful debts, taking into account the following: (1) the number of clients should be 10 clients, (2) the percentages…arrow_forwardeceivables arise due to a deferred sale, and companies are often unable to collect all their debts, which means that part of those debts may become non-existent or there is doubt about the possibility of collection. 1- What is the difference between bad debts and doubtful debts? 2- Draft an example (supported by numbers) to explain the method of doubtful debts in dealing with bad debts, provided that the explanation includes accounting restrictions and the impact on the financial statements? 3- Explain why the use of the direct method (bad debt method) conflicts with generally accepted accounting principles? 4- One of the methods for estimating doubtful debts is the deferred sales method, the receivables balance method, and the receivables aging method. Required: Formulate an example (enhanced by numbers) to explain the method of aging receivables in estimating doubtful debts, taking into account the following: (1) the number of clients should be 10 clients, (2) the percentages…arrow_forward
- Question 46 of 50. Which situation is generally a consequence of overly lenient loan repayment terms? A. The borrower does not have the needed cash flow for operations. B. The lender defers solely to the customer's judgment. C. The borrower uses the funds for purposes other than loan repayment. D. The lender has much control over how funds are used by the borrower. Mark for follow uparrow_forwardAn allowance for doubtful debts is created: a. When debtors become bankrupt b. When debtors cease to be in business c. To provide for possible bad debts d. To write off bad debtsarrow_forwardWhich accounting concept supports recording bad debt expense before accounts are actually uncollectible? a) Full disclosure principle b) Materiality concept c) Going concern concept d) Matching principlearrow_forward
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