08 Trade receivables Flashcards
What is the preferred method of accounting for uncollectible accounts receivable?
Allowance method
Describe the direct write-off method for bad debts.
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.
Describe the allowance method of accounting for bad debts.
Determine the amount uncollectible and provide an allowance to measure accounts receivable at net realizable value.
List the characteristics of notes receivables.
Typically they are noncustomer transactions.
They have a longer time frame.
They have an interest element.
List the characteristics of accounts receivables.
Typically they are related to customer contracts.
They have a short time frame.
Typically they have no interest element.
How are receivables accounted for using the gross method?
Receivables are recorded at gross invoice price (before cash discount)
Describe the balance sheet approach for calculating an allowance balance.
It is a percentage to ending accounts receivable.
Define “factoring.”
The transferor (original creditor) transfers the receivables to a factor (transferee, a financial institution) immediately as a normal part of business.
Describe a transaction without recourse.
The transferor is not responsible for nonpayment on the part of the maker of the receivable.
Describe a transaction with recourse.
The transferor is responsible for nonpayment on the part of the original maker of the receivable.
At what value should a note receivable be recorded?
The present value of all future cash flows
What is the accounting treatment when factoring with recourse, as accounted for as a sale?
The entries are similar to factoring without recourse except that the transferor must estimate and record a recourse liability.
What is the accounting treatment when factoring with recourse, as accounted for as a loan?
The transferor maintains the receivables on its books and records a loan and interest expense over the term of the agreement.
Who bears the costs of bad debts when factoring with recourse?
The seller (transferor) bears the cost of bad debts as well as the cost of sales adjustments.
Who bears the cost of bad debts when factoring without recourse?
The factor (transferee) bears the cost of uncollectible accounts, but the seller (transferor) bears the cost of sales adjustments.
Once the allowance is estimated based on the aging of the accounts receivable, what additional estimate is needed?
The entity must estimate the current and expected credit loss (CECL) associated with the accounts receivable.
What factors affect receivable valuation?
Trade discounts
Sales discounts
Sales returns and allowances
Uncollectible accounts
Describe the difference between an interest-bearing and a noninterest-bearing note receivable.
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.
With respect to the transfer of receivable, what are the three conditions of a sale?
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.
In the transfer of receivables, if the three conditions for a sale are not met, what happens?
The receivable remains on the books of the transferor, and the transferor records a liability related to the borrowing transaction.
How is the present value in a noncash transaction determined?
The fair market value of the noncash asset or of the note receivable, whichever is more readily determinable
