CPA Study Group
Never in the question does it explain that a dollar for dollar reduction upon the 50,000 residual based failure of a collection of AR. Are we just supposed to know that? Seem, unclear at best. If you read the question. I would seem the total 50,000 would be forfeited. I guess my concern is too often in these CPA questions there are assumptions made that the reader understand exactly what the question is asking but, like this example, it was not as clear at it may seem.
In this question, the goal of a commercial finance company is to protect its "profit" on the transaction by holding the residual amount of $50,000. If the amount collected dips below $420,000 they will start to lose profit. Between $420,000 and $470,000, their profit is $20,000 because any difference is compensated by Ambrose as a reduction in the residual payment. The finance company can make up to $50,000 if they collect all the receivables.
Sometimes the facts are not specified to the degree that we would like. This happens on occasionally on exam questions, including ours, and certainly on the real exam. When you see a question like this, sometimes it pays to form a conclusion and run the calculation.
There is no answer choice that makes sense under any sort of pro rata arrangement, and a complete forfeit does not make sense as the finance company would make $51,000 vs. $20,000 on the deal for subpar collections. The way that the question is structured protects both parties as interests are aligned in collecting the receivables.
" ...unclear at best. .... in these CPA questions there are assumptions made that the reader understand exactly what the question is asking but, like this example, it was not as clear at it may seem."
please quote about the official/AICPA/GAAP rule about this case!
never seen, never heard of such...