10 - Receivables

Question 1

Income statement approach - % of credit sales method

Answer 1

• based on matching principle
• credit sales x % estimate of amounts not collectible = bad debt expense (actual JE)

Question 2

Balance sheet approach - % of receivables method

Answer 2

• aging of a/r
• age all outstanding a/rs
• emphasis on aset valuation principle
• Oustanding AR x uncollectible % of AR (management estimate) = allowance of bad debt (target amount)

Question 3

JEs for bad debt expense

Answer 3

To record bad debt expense:

Bad debt expense x

allowance (BS) x

Write off receivables

allowance x

AR x

Recovery of AR (2 JE’s)

AR x

allowance x

cash x

AR x

Question 4

Pledging

Answer 4

• the client borrows the necessary cash, and “pledges” (offers) the receivable to the lender as collateral to secure the loan. When this occurs it must be adequately disclosed in a footnote in the financial statements.

Question 5

Assigning

Answer 5

• client borrows necessary cash, and agrees to use the proceeds from the receivable to repay the lender. Sometimes, the customer is notified to make payment directly to the lender instead of the client.

Question 6

Factoring

Answer 6

• company converts its AR into cash by assigning or selling it either with or without recourse
  
  • sales without recourse - the client sells the receivable to another party (a factor) with the buyer assuing risk that the receivable may not be collectible.
  • sales with recourse - buyer retaining right to ask client make good on receivable if not paid.