27) Explain how a company can use its credit policy for customers and allowance for bad debts policies to manipulate earnings.
28) Explain what is meant by 'channel stuffing' and how this can be used to manipulate earnings.
29) Collier Port Authority has had a long-standing relationship with a nearby lumber company, which ships a significant amount of lumber through the port. To help finance the lumber company's operations, Collier advanced $10 million to them in return for a promissory note which specified payment of the $10 million, plus interest at 15%, due at the end of two years. However, due to adverse conditions in the lumber industry, the lumber company was unable to meet its obligation and pay Collier at the end of the two years. In light of the importance of the relationship between Collier and the lumber company, Collier extended the due date by three years (after the original two years), but increased the repayment amount to $14 million, inclusive of interest. The market interest rate for the loan remained at 15%.
Record the journal entries relating to the note receivable from the date of issuance to the restructuring date, inclusive.
30) The December 31, 2012 financial statements of Pure Air Works (PAW) show $125,000 for “Note receivable.” You learn that the company provided cash of $125,000 to a customer (a new chain of hotdog stands) in exchange for a promissory note.
The note was issued on January 1, 2011, bearing interest at 7% per year (which approximates the market interest rate), with principal and interest (total $133,750) due on January 1, 2012.
However, the hotdog chain has had numerous delays obtaining the required licenses to operate on street corners.
Consequently, on January 1, 2012, the chain and PAW renegotiated the promissory note so that the $133,750 in principal and interest would come due on January 1, 2014. Aside from the initial recording of the note receivable on January 1, 2011, PAW has not recorded any other journal entries relating to this note.
Present the necessary journal entries to correct PAW's accounts in 2011 and 2012. Round all values to the nearest dollar.