Question

Which of the following situations does not lead to default of a loan contract?

Multiple Choice

• Failure to pay other debts when due

• Impairment of capital

• Paying interest and principal when due

• Failure to abide by a covenant

Research evidence suggests that:

Multiple Choice

• companies increase their provision for doubtful accounts when earnings are otherwise low and then decrease the provision when earnings are high.

• companies reduce their provision for doubtful accounts when earnings are otherwise low and then increase the provision when earnings are high.

• companies increase their provision for doubtful accounts when earnings are otherwise high and then decrease the provision when earnings are low.

• companies reduce their provision for doubtful accounts when earnings are otherwise high and then increase the provision when earnings are low.

Management must periodically assess the reasonableness of the allowance for uncollectibles if it uses the:

Multiple Choice

• direct write-off method.

• percent of gross receivables method only.

• percent of sales method only.

• percent of sales or the percent of gross receivables method.

Per authoritative accounting literature, the determination of whether a transfer of receivables is a sale or collateralized borrowing hinges on whether the:

Multiple Choice

• transfer was with or without recourse.

• transferor surrenders control over the receivable.

• customer ultimately defaults.

• transferor collects payments directly from the customer.

Answer 1

1) Which of the following situations does not lead to default of a loan contract?

Answer) Paying interest and principal when due.

Reason: If we pay interest and principal when due then there is compliance of the loan contract and not default of a loan contract.

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2) Research evidence suggests that:

Answer) companies increase their provision for doubtful accounts when earnings are otherwise high and then decrease the provision when earnings are low.

Reason:. Companies increase their provision for doubtful accounts when earnings are otherwise high and then decrease the provision when earnings are low so that they can declare fewer profits when earnings are high and hence pay low tax.

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3) Management must periodically assess the reasonableness of the allowance for uncollectibles if it uses the:

Answer) percent of sales or the percent of gross receivables method.

Reason: Under both the methods the estimate of uncollectibles accounts is based on a historically determined percentage. So this percentage must be periodically be assessed to periodically assess the reasonableness of the allowance for uncollectibles.

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4) Per authoritative accounting literature, the determination of whether a transfer of receivables is a sale or collateralized borrowing hinges on whether the:

Answer) transferor surrenders control over the receivable.

Reason: If transferor surrenders control over the receivable it is a sale of receivables