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Question 1 (20 minutes)

On January 1, 2020, Lender Corp. lent $1,000 to its Chief Executive Officer, interest-free (no interest charge). However, the loan is repayable in four instalments, each December 31, until paid. The market rate for similar loans (with similar credit risk) is 6%.

Required: (Amounts are low for exam purposes.)

1. Prepare the journal entry to record the loan on January 1. (Be sure to think your way through this problem.)
2. Record any other journal entry related to the loan for 2020.

Present Value of $ 1
Period	6%	7%	8%	9%
1	0.9434	0.9346	0.9259	0.9174
2	0.89	0.8734	0.8573	0.8417
3	0.8396	0.8163	0.7938	0.7722
4	0.7921	0.7629	0.735	0.7084
5	0.7473	0.713	0.6806	0.6499

Present Value of an Ordinary Annuity of $ 1
Period	6%	7%	8%	9%
1	0.9434	0.9346	0.9259	0.9174
2	1.8334	1.808	1.7832	1.7591
3	2.673	2.6243	2.577	2.5313
4	3.4651	3.3872	3.312	3.2397
5	4.2124	4.1002	3.9926	3.8896

Question 2 (20 minutes)

On May 1, 2020, NoCash Ltd. factored $200,000 of accounts receivable with Finance Corp. on a without recourse basis. Under the arrangement, NoCash was to handle disputes concerning service, and Finance was to make the collections, handle the sales discounts, and absorb the credit losses. Finance assessed a finance charge of 6% of the total accounts receivable factored and retained an amount equal to 3% of the total receivables to cover sales discounts. NoCash uses IFRS.

Required:

1. Prepare the journal entry required on NoCash's books on May 1 assuming that the risks and rewards of the A/R accounts are deemed to have been transferred.

Journal entry may 1:

DR accounts receivable

CR

2. Prepare the journal entry required on NoCash's books on May 1 assuming that the arrangement is WITH recourse, and the risks and rewards of the A/R accounts are deemed NOT to have been transferred.

Question 3 (30 minutes)

Tommy Toys Company has been facing much more competition from its competitors. Sales have been declining. For the year ended December 31, 2020, the financial director has collected the following information related to its assembly-line equipment and operations: (Amounts are small for testing purposes.) The assembly line represents a cash-generating unit.

Machine X Machine Y Machine Z Total

Original cost $ 200 $80 $120 $400

Accumulated depn 50 30 20 $100

Fair value (less disposal costs) 147 n/a * n/a * $270

*n/a: Machines Y and Z do not have available fair value information. Total fair value for all 3 machines is estimated to be $270.

Assume disposal costs of $0.

Incremental cash flows from continuous use of machines:

2021 $ 81

2022 $ 81

2023 $ 81

2024 $ 81

2025 and future: $0 and discount rate: 7%

Required:

1. Calculate the impairment loss, if any, for 2020, using the Rational Entity Method.
2. Prepare any journal entry, if required, to record any impairment. Each asset has its own individual account in the balance sheet. Use the Rational Entity Method.
3. Calculate the impairment loss, if any, for 2020, using the Cost Recovery Method.
4. Prepare any journal entry, if required, to record any impairment. Each asset has its own individual account in the balance sheet. Use the Cost Recovery Method.

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