True/False:
1. iGAAP and U.S. GAAP are very similar in accounting for cash and receivables.
2. iGAAP does not permit the reversal of impairment losses, as does U.S. GAAP.
3. Under iGAAP, there is a specific standard that mandates segregation of receivables with different characteristics.
4. Under iGAAP, there is no specific standard related to pledging receivables.
5. Both the FASB and IASB have indicated that they believe all financial instruments should be recorded and reported at fair value.
Answers to True/False:
1. True 2. False 3. False 4. True 5. True
Multiple Choice
Use the following information to answer Question 1 and 2.
Harrison Company has a loan receivable with a carrying value of $15,000 at December 31, 2010.
On January 3, 2011, the borrower, Thomas Clark Imports, declares bankruptcy, and Harrison estimates that it will collect only 60% of the loan balance.
1. Which of the following entries would Harrison make to record the impairment under iGAAP?
a. Loan Receivable 9,000
Impairment Loss 9,000
b. Loan Recovery Expense 6,000
Loan Receivable 6,000
c. Impairment Loss 9,000
Loan Receivable 9,000
d. Impairment Loss 6,000
Loan Receivable 6,000
2. Assume that on January 5, 2012, Harrison learns that Thomas Clark Imports has emerged from bankruptcy. As a result, Harrison now estimates that all but $1,500 will be repaid on the loan. Under iGAAP, which of the following entries would be made on January 5, 2012?
a. Loan Receivable 4,500
Recovery of Impairment Loss 4,500
b. Loan Receivable 1,500
Recovery of Impairment Loss 1,500
c. Bad Debt Expense 1,500
Impairment Loss 1,500
d. No journal entry is allowed under iGAAP.
3. The iGAAP approach for derecognizing a receivable focuses on which of the following?
a. Risks b. Rewards c. Loss of control d. All of these
4. When comparing U.S. GAAP with iGAAP, which of the following is true regarding the reporting of securitizations?
a. Both U.S. GAAP and iGAAP show these as off-balance-sheet treatments.
b. Only iGAAP requires full or partial balance sheet recognition of securitizations.
c. Only U.S. GAAP requires full or partial balance sheet recognition of securitizations.
d. Both U.S. GAAP and iGAAP requires full or partial balance sheet recognition of securitizations.
5. Which of the following authoritative iGAAP guidance specifically addresses issues related to cash?
a. AIS No.1 (Presentation of Financial Statements) b. IRFS No. 7 (Financial Instruments: Disclosures)
c. IAS No. 39 (Financial Instruments: Recognition and Measurement) d. None of these standards specifically addresses cash issues.
6. Key similarities between U.S. GAAP and iGAAP include all of the following except a. the definition used for cash equivalents.
b. accounting and reporting issues related to recognition and measurement of receivables, such as the use of allowance accounts.
c. working toward implementing fair value measurement for all financial instruments.
d. the same criteria is used to derecognize a receivable.
7. Genesis Company has seven loans receivable. The loans vary in size and have been extended to companies with different credit ratings. Given a downturn in the economy, it is expected that at least two of these loans will be impaired. Which of the following statements best describes the accounting for these loans under iGAAP?
a. iGAAP implies that the loans should be reported as an aggregated portfolio.
b. iGAAP uses an incurred loss model rather than an expected loss model, so no impairment on each of the two loans is recognized until an identifiable event occurs and is measurable.
c. Under iGAAP, when impairment is permitted, the balance on each of the impaired loans becomes the new basis for the loan.
d. iGAAP uses an expected loss model, so the entire diverse portfolio should be written down based on the anticipated impairment.
8. iGAAP requires an impairment loss for a loan receivable be recognized when a. its carrying amount is less than its recoverable amount.
b. its recoverable amount is less than its carrying amount.
c. its present value of expected future cash flows is greater than its carrying amount.
d. its principal amount is less than its interest amount.
Use the following information to answer Questions 9 and 10.
Johnstone Company has a loan receivable with a carrying value of $125,000 at December 31, 2010.
On January 1, 2011, the borrower, Ralph Young Industries, declares bankruptcy, and Johnstone estimates that it will collect only 45% of the loan balance.
9. Which of the following entries would Johnstone make to record the impairment under iGAAP?
a. Loan Receivable 56,250
Impairment Loss 56,250
b. Loan Recovery Expense 68,750
Loan Receivable 68,750
c. Impairment Loss 56,250
Loan Receivable 56,250
d. Impairment Loss 68,750
Loan Receivable 68,750
10. Assume that on January 4, 2012, Johnstone learns that Ralph Young Industries has emerged from bankruptcy. As a result, Johnstone now estimates that all but $11,500 will be paid on the loan. Under iGAAP, which of the following entries would be made on January 4, 2012?
a. Loan Receivable 57,250
Recovery of impairment Loss 57,250
b. Loan Receivable 11,500
Recovery of impairment Loss 11,500
c. Bad Debt Expense 11,500
Impairment Loss 11,500
d. No journal entry is allowed under iGAAP.
11. Under iGAAP, the characteristics that would imply segregation of receivables would include a. past-due status.
b. industry.
c. collateral type.
d. All of these could be used to determine whether segregation of receivables is implied.
Answers to Multiple Choice
Short Answer:
1. Briefly describe some of the similarities and differences between U.S. GAAP and iGAAP with respect to the accounting for cash and receivables.
1. Key similarities relate to (1) the definition used for cash equivalents, (2) accounting and reporting issues related to recognition and measurement of receivables, such as the use of allowance accounts, how to record trade and sales discounts, use of percentage of sales and receivables methods, pledging, and factoring and (3) both Boards are working to implement fair value measurement for all financial instruments but both Boards have faced bitter opposition from various factions.
Key differences relate to (1) iGAAP has no guidance for segregation of receivables with different characteristics, (2) iGAAP and U.S. GAAP standards on the fair value option are similar but not identical. The international standard related to the fair value option is subject to certain qualifying criteria not in the U.S. standard. In addition, there is some difference in the financial instruments covered, (3) iGAAP and U.S. GAAP differ in the criteria used to
derecognize a receivable. iGAAP is a combination of a risks and rewards and a loss of control approach. U.S. GAAP uses loss of control as the primary criterion. In addition, iGAAP permits partial derecognition—U.S. GAAP does not.
2. Walton Company, which uses iGAAP, has a note receivable with a carrying value of $30,000 at December 31, 2010. On January 2, 2011, the borrower declares bankruptcy, and Walton estimates that only $25,000 of the note will be collected. Briefly describe the accounting for the loan subsequent to the bankruptcy, assuming Walton estimates that more than $25,000 can be repaid.
2. Under iGAAP, Walton may record recovery of losses on prior impairments. Under U.S.
GAAP, reversal of impairment is not permitted. Rather the balance on the loan after the impairment becomes the new basis for the loan.