08 Trade receivables

Question 1

What is the preferred method of accounting for uncollectible accounts receivable?

Answer 1

Allowance method

Question 2

Describe the direct write-off method for bad debts.

Answer 2

The direct write-off method records bad debt expense only when a specific account receivable is considered uncollectible and is written off. The direct write-off method is rarely used.

Question 3

Describe the allowance method of accounting for bad debts.

Answer 3

Determine the amount uncollectible and provide an allowance to measure accounts receivable at net realizable value.

Question 4

List the characteristics of notes receivables.

Answer 4

Typically they are noncustomer transactions.
They have a longer time frame.
They have an interest element.

Question 5

List the characteristics of accounts receivables.

Answer 5

Typically they are related to customer contracts.
They have a short time frame.
Typically they have no interest element.

Question 6

How are receivables accounted for using the gross method?

Answer 6

Receivables are recorded at gross invoice price (before cash discount)

Question 7

Describe the balance sheet approach for calculating an allowance balance.

Answer 7

It is a percentage to ending accounts receivable.

Question 8

Define “factoring.”

Answer 8

The transferor (original creditor) transfers the receivables to a factor (transferee, a financial institution) immediately as a normal part of business.

Question 9

Describe a transaction without recourse.

Answer 9

The transferor is not responsible for nonpayment on the part of the maker of the receivable.

Question 10

Describe a transaction with recourse.

Answer 10

The transferor is responsible for nonpayment on the part of the original maker of the receivable.

Question 11

At what value should a note receivable be recorded?

Answer 11

The present value of all future cash flows

Question 12

What is the accounting treatment when factoring with recourse, as accounted for as a sale?

Answer 12

The entries are similar to factoring without recourse except that the transferor must estimate and record a recourse liability.

Question 13

What is the accounting treatment when factoring with recourse, as accounted for as a loan?

Answer 13

The transferor maintains the receivables on its books and records a loan and interest expense over the term of the agreement.

Question 14

Who bears the costs of bad debts when factoring with recourse?

Answer 14

The seller (transferor) bears the cost of bad debts as well as the cost of sales adjustments.

Question 15

Who bears the cost of bad debts when factoring without recourse?

Answer 15

The factor (transferee) bears the cost of uncollectible accounts, but the seller (transferor) bears the cost of sales adjustments.

Question 16

Once the allowance is estimated based on the aging of the accounts receivable, what additional estimate is needed?

Answer 16

The entity must estimate the current and expected credit loss (CECL) associated with the accounts receivable.

Question 17

What factors affect receivable valuation?

Answer 17

Trade discounts
Sales discounts
Sales returns and allowances
Uncollectible accounts

Question 18

Describe the difference between an interest-bearing and a noninterest-bearing note receivable.

Answer 18

Interest-bearing note: The amount of cash to be collected from an interest-bearing note is the face amount of the note plus interest.
Noninterest-bearing note: The face amount of the note includes principal and interest that will be collected at maturity date.

Question 19

With respect to the transfer of receivable, what are the three conditions of a sale?

Answer 19

The transferred assets have been isolated from the transferor, even in bankruptcy.
The transferee is free to pledge or exchange the assets.
The transferor does not maintain effective control over the transferred assets through either an agreement that allows and requires the transferor to repurchase the assets or one that requires the transferor to return specific assets.

Question 20

In the transfer of receivables, if the three conditions for a sale are not met, what happens?

Answer 20

The receivable remains on the books of the transferor, and the transferor records a liability related to the borrowing transaction.

Question 21

How is the present value in a noncash transaction determined?

Answer 21

The fair market value of the noncash asset or of the note receivable, whichever is more readily determinable