Concept explainers
Researching GAAP
Situation
Hamilton Company operates in an industry with numerous competitors. It is experiencing a shortage of cash and decides to obtain money from a large bank by using some of its receivables as collateral. Hamilton pledges 5100,000 of its receivables, is charged a 12% fee on this amount, and notifies these credit customers to make their payments directly to the bank. Hamilton transfers the receivables to the bank, and the bank assumes the servicing activities, but Hamilton is responsible for all
Directions
Research the related generally accepted accounting principles and prepare a short memo to the president that answers his question. Cite your reference and applicable paragraph numbers.
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Intermediate Accounting: Reporting And Analysis
- Which of the following statements about the company's financial operations and financial decisions is FALSE? If your company overdraws its checking account, the Global Community Bank will automatically issue your company a 1-year loan in an amount sufficient to bring your ending cash balance up to zero. The interest rate charged on overdraft loans is always 2% above whatever interest rate your company would otherwise pay on a 1-year loan from the GCB (for example, if your company's B credit rating entitled your company to a 1-year loan carrying a 6.5% interest rate, then the interest rate on a 1-year overdraft loan would be 8.5%). If the company needs to secure additional capital, it can take out loans with 1-year, 5-year. and/or 10-year terms from the Global Community Bank and/or it can issue new shares of common stock. The company's banking arrangement with the Global Community Bank calls for the company to be paid interest on any positive cash balance in the company checking…arrow_forwardWhich statement is incorrect? Information and transaction costs related to financial market transactions would be higher if there is no participation of financial intermediaries. The common trait of savings banks, commercial banks, credit unions and savings and loan associations is that all of them accept deposits from SSUs and provide credit to DSUs through loans and purchases of securities. Finance companies act as a factor by purchasing a firm's receivables at a discount and subsequently processing and collecting the balances of these accounts. A lending company operating in the Philippines cannot charge more than 12% annual interest on the loans it grants to borrowers. none of the abovearrow_forwardSuppose that, as a result of increased use of electronic payments, banks no longer need to hold as much vault cash. Banks decide to reduce their vault cash holdings by $250million. a) Show the effects this would have on the balance sheets of commercial banks and the central bank. b) If, at the same time, depositors decide to reduce their cash holdings by $50million by depositing that amount with their banks, show the combined effect of these decisions on the balance sheets of commercial banks.arrow_forward
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- DO IT ABC Co. is preparing its November 30, 2020 bank reconciliation. The following information was determined. a. The cash balance per books is P500,000 while cash balance per bank statement is P530,000. b. The bank collected P640,000 from a customer, representing P600,000 principal of note receivable and P40,000 interest. c. NSF check of P150,000 returned by the bank to ABC. ABC Co. not yet recorded the return of the check. d. Collections amounting to P310,000 were deposited by month end but were not yet reflected on the bank statement. e. Checks issued totaling P60,000 are not yet presented to the bank for payment. f. A book error caused the debits to be overstated by P120,000. g. The bank error caused the debits to be overstated by P90,000. Requirements. 1. Prepare bank reconciliation. Bank Reconciliation Statement Balance per books, end Add: Credit memos Less: Debit memos (NSF) Add/Less: Book errors Bal. per bank statement, end Add: Deposits in transit (DIT) Less: Outstanding…arrow_forwardSuppose ABC Bank has the following balance sheet items: checkable deposit received of $525 million, bank capital of $100 million, mortgage loans made of $500 million, and securities purchased of $50 million. Does ABC Bank still meet its reserve requirement? Why or why not? If not, what options are available to the bank to keep it from failing?arrow_forwardConsider the simple Financial Intermediary (FI) balance sheet as shown below (in millions of dollars). Before the withdrawal Cash Assets Corporate Loans Total Amount $30 $170 $200 Liabilities/Equity Amount Deposits Equity Total $170 $30 $200 Suppose that depositors unexpectedly withdraw $70 million in deposits and the FI receives no new deposits to replace them. Assume that the FI cannot borrow any more funds in the short-term money markets, and because it cannot wait to get better prices for its assets in the future (as it needs the cash now to meet immediate depositor withdrawals), the FI has to sell any nonliquid assets (corporate loans) at 75 cents on the dollar. What will be the equity (in millions of dollars) of the FI after adjustments are made for the $70 million of deposit withdrawals? Assume no minimum cash reserve requirements.arrow_forward
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