2 Receivables Flashcards
1
Q
Are amounts due from officers, employees, or stockholders included in accounts receivable?
A
No, they are reported separately
2
Q
Why is the Direct Write-off method not consistent with GAAP?
A
Because not MATCHING expense at time of sale and it is not CONSERVATIVE as A/R is carried at its full face/gross amount
3
Q
What method for calculating bad debt expense results in better matching?
A
Income statement method (% of sales approach)
4
Q
What method for calculating bad debt expense results in better asset valuation?
A
Balance sheet method (% of receivables approach)
5
Q
Does writing off of receivables have an effect on their Net Realizable Value?
A
No, it has no effect on receivables’ NRV.
6
Q
How might a company generate cash from receivables before collecting cash from the customer?
A
1) Pledging
2) Assigning
3a) Factoring (sale with recourse)
3b) Factoring (sale without recourse)
4) Discounting (used for longer term)
7
Q
What is meant by pledging a receivable?
A
- Offering (“pledging”) the receivable asset to the lender as collateral to secure the loan.
- less formal than assigning b/c no specific accounts ID
- When this occurs, it must be adequately disclosed in a footnote in the financial statements.
8
Q
What is meant by assigning a receivable?
A
- Borrowing cash from a lender in exchange for agreeing to used the proceeds from a specific receivable asset to repay the lender.
- Sometimes, the customer is notified to make payment directly to the lender instead of the client.
- borrower reclassifiesthe receivable
- accounts receivable assigned
9
Q
What is meant by factoring without recourse?
and Journal Entry
A
- Selling a receivable asset to another party (the factor),
- with the buyer assuming the risk that the receivable may not be collectible.
- This usually involves a “premium” that the seller “pays” in the form of receiving less of a cash payment.
(dr) Cash
(dr) Receivable from Factor (hold back % for sales returns)
(dr) Loss on Sale of AR (factoring fee)
(cr) Accounts Receivable
10
Q
What is meant by factoring with recourse?
and Journal Entry
A
- Selling a receivable to another party (the factor),
- with the buyer retaining the right to demand that the client make good on the receivable if the customer does not pay as promised.
- Given the “recourse” that the buyer has, there is less of a premium that the seller “pays” and, as such, receives a higher amount of a cash payment relative to a similar transaction without recourse.
(dr) Cash
(dr) Loss on Sale of AR (factor fee: incl recourse L)
(cr) Recourse Liability (% held for bad debts)
(cr) Accounts Receivable (total amt)
11
Q
Which factoring method would generally, all things being equal, result in a greater amount of cash up front?
A
Factoring with recourse
12
Q
Which factoring method results in writing off the receivable?
A
Factoring without recourse
b/c treated as sale
13
Q
Which factoring method results in keeping the liability and creating a separate liability?
A
Factoring with recourse
14
Q
When pledging or assigning receivables, does the firm remain the legal owner of the financial asset?
A
Yes
15
Q
When pledging or assigning receivables, what journal entry records the receipt of cash?
A
Dr. Cash Cr. Note payable
16
Q
What journal entry would be used to assign receivables?
A
Dr. A/R - Assigned Cr. A/R *This is in addition to the main (Dr. Cash; Cr. Note Payable) journal entry to record the proceeds from the borrowing.
17
Q
When discounting a note receivable, how is the maturity value determined?
A
Calculate the interest amount (face x interest rate x term) and add to the face amount
18
Q
When discounting a note receivable, does the discount apply to the face amount or the maturity value?
A
It applies to the maturity value
19
Q
What value are receivables that occur in the ordinary course of business (A/R) recorded at?
A
Face Value
20
Q
What value are receivables (Note Rec) that DO NOT occur in the ordinary course of business (Long-Term) recorded at?
A
Present Value (time value of money applies)
required by GAAP
exception: notes < 1yr
21
Q
What is a notes receivable?
A
Often related to non-customer transactions although many larger consumer items and transactions between businesses require a promissory note
- more formal financial instrument than AR
- valuation at PV
- typically from sale of PPE, conversion of AR, lending transactions
22
Q
What are the 4 types of receivables?
A
-
Accounts receivable:
- related to customer transactions,
- short length 30-90d,
- no interest element
- Trade receivable= accounts rec
-
Notes receivable:
- noncustomer (ex: sale of noncash A, lending transactions, conversion of other rec),
- longer time than AR
- interest element
- Nontrade receivable = noncustomer transactions
23
Q
What is a trade receivable?
A
another name for customer accounts receivable
24
Q
What is a non-trade receivable?
A
Those receivables created in non-customer transactions
25
Accounts Receivable
1. valuation
2. factors affecting valuation (general)
* Valued at **_net realizable value, NRV_** = amt cash expect to collect at due date or maturity
* on BS: AR *_less_* allowance for uncollectible amounts
5 factors
1. trade (quantity) discounts;
2. cash (sales) discounts;
3. sales returns and allowances;
4. non-collectible accounts.
5. freight charges FOB shipping/destination
26
What are the two methods of accounting for receivables?
The gross method (before discount) and the net method (after discount)
27
Who is the **_maker_** of a note?
* The buyer or borrower
* This party is making an unconditional promise to pay principal and interest over the note term
28
Who is the **_holder_** of a note?
* The holder of the note (seller or lender)
* is the creditor and is the firm recording the note receivable on its books.
29
How are notes recorded?
at Present Value unless its less than a year term
30
Trade (quantity) discount
* offered for high volume/quantity
* **_Chain discount_**: get multiple discounts
* calculate = value \* (1-x) \* (1-y)
31
Cash (sales) discounts
* *_contra_* account to sales, for early payment (failure to take is like interest)
* **_Sales discounts forfeited_**: misc Rev account, used in net method
* **_Allowance for sales discounts_**: *_contra_* to AR, adjusting entry for end of period, reduces both net sales and net acc rec
32
Sales returns and allowances
* **_Sales returns and allowances_**: *_contra_* account to sales
* **_Returns_:** merchandise returned from customer
* **_Allowance_**: price reductions of merchandise
* **_Allowance for sales returns and allowances:_** *_contra_* to AR, adjusting entry for end of period when sales transactions aren’t completed
33
Accounts Receivable
2 methods in recording
* **_Gross method_**: record rec at gross invoice price (before cash discounts)
* **_Net method_**: record rec at net invoice price (after cash discount)
34
Accounts Receivable
Journal entries
(both Gross + Net)
**_Original recognition of Sale_** (trade discounts in both)
(dr) Accounts Receivable
(cr) Sales
* **_Gross_** method: full value
* **_Net_** Method: decreased for sales discount
**_Payment rec'd w/in discount period_**
* **_Gross_** - decrease cash rec'd by amount of discount
(dr) Cash
(dr) Sales Discount
(cr) Accounts Receivable
* **_Net_** - discount already incorporated in A/R
(dr) Cash
(cr) Accounts Receivable
**_Payment rec'd outside discount period_**
* **_Gross_** - no adjustment for discount NOT taken
(dr) Cash
(cr) Accounts Receivable
* **_Net_** - record forfeit of discount
(dr) Cash
(cr) Accounts Receivable
(cr) Sales Discounts Forfeited
**_Returns and allowances_**
(dr) Sales Returns and Allowances
(cr) Accounts Receivable
* **_Gross_** method: full value
* **_Net_** Method: decreased for sales discount
**_Adjusting Entry for Estimated Sales Discounts_** (end yr)
(dr) Sales Discounts
(cr) Allowance for Sales Discounts
* **_Gross_** method only
* estimate amount of discounts taken by customers
35
Contra- accounts
* accounts receivable
* sales
* other
**_Accounts Receivable_**
*_Allowance for Sales Discounts_*
* GROSS method
* end-yr adj: estimated discounts next yr
**_Sales (cr)_**
*_Sales Discounts (dr)_*
* used in GROSS method
* payment w/in discount window
* end-yr adj: estimated discounts next yr
*_Sales Returns and Allowances (dr)_*
* used in BOTH
**_Other_**
*_Sales Discounts Forfeited (dr)_*
* NET method
* misc Revenue account
36
Accounts Receivable
Gross v Net Method
(general)
Gross Method
* Records original sale at full price
* Records sales discount if paid w/in windo
Net Method
* Record original sale with discount
* Records sales discount forfeited if paid outside window
37
FOB
Shipping Pt v Destination
**_FOB shipping point (FOB SP)_**
* Seller free of risk/pmt
* Buyer has risk/pmt
**_FOB Destination_**
* Seller has risk/pmt
* Buyer is free of risk/pmt
38
Accounts Receivable Recognition
GAAP v IFRS
* IFRS: defines Revenue from BS view, based on inflow of economic benefits from ordinary business
* AR (and Rev) can be recog if there is *_firm sales commitment*_ and _*recog_* criteria met
* Rev and A are recogn when:
* Probable future economic benefits
* Rev can be measured reliably
* Costs can be measured reliably
* Sign risk/rewards of ownership are transferred
* Managerial involvement is not retained as to ownership or control
* May meet IFRS for recog, but not in US
* Measurement criteria for reporting AR very similar: future economic benefit of AR is analogous to NRV
39
Accounts Receivable
Uncollectibles
Accounts involved
**_I/S_****_Bad debt expense, BDE**_(_**uncollectible accounts expense_**):
* records effects of uncollectible accts
* Considered cost of doing business NOT sales adjustment
**_B/S_****_Allowance for uncollectible accounts_**:
* contra-account to AR
40
Direct Write-off Method
Pros/cons
Cons: ***NOT considered GAAP***, no basis for estimating bad debts
* Poor BS valuation: AR is overvalued
* Poor matching Rev/Exp: Rev recog from credit sale in yr 1, BDE in subsequent yr
Pros:
* Might not be materially different in effect on FS relative to allow method
* Simple and practical to use
41
Direct Write Off Method
Journal Entries
* uncollectible
* collection of previously written off
**_Account deemed uncollectible_**
(dr) Bad Debt Expense
(cr) Accounts Receivable
**_Collection of previously written off_**
(dr) Cash
(cr) Bad Debts Recovered
42
Allowance Method
* when used
* when recorded
* pros
* Used by most large firms, required under GAAP if uncollectible accts are
1. probable
2. estimable
* Records estimate of BDE at *_end of each yr_* adjusting entry
* Allowance (contra-AR) created reduces Net AR
* ***Both Income and Net AR are reduced in yr of sale by***
* Pros:
* Value AR at **_net realizable value (NRV)_** on BS
* Recog Rev/Exp from credit sales in same acct year
43
Allowance for uncollectible accounts
2 methods to estimate
**_Income statement approach (% of sales)_**
* Estimate uncollectible AR as a % of sales
* uses prior year collection rates
* Directly calculates amt of BDE
* = *_Credit_* sales \* % of sales uncoll
* Previous balance in Allow acct not considered
* GOAL: properly value IS accounts
* Sales Rev
* BDE
**_Balance sheet approach (% of Receivables)_**
* Estim uncollectible AR as % of AR balance outstanding
* Direclty calculates *_ending balance of allowance_* acct
* = AR \* % of AR uncoll
* Need to find difference bet existing balance in allowance and desired balance
* GOAL to properly value BS accounts
* Net Accounts Rec
44
Allowance for Doubtful Accounts
Journal Entries
* end of period adjustment
* write off
* recovery of accounts
**_End of Period Adjustment_**
(dr) Bad Debt Expense
(cr) Allowance for Doubtful Accounts
**_Write off_**
(dr) Allowance for Doubtful Accounts
(cr) Accounts Receivable
**_Recovery of accounts_** previously written off
(dr) Accounts Rec
(cr) Allowance for Doubtful Accounts
(dr) Cash
(cr) Accounts Receivable
45
Accounts Rec + Allowance
T-accounts of use
**_Accounts Receivable (+A, dr)_**
* **(dr) Beg Balance**
* (dr) add: Credit Sales
* (dr) add: Reinstatements
* (cr) less: cash collections
* (cr) less: write offs
* **(dr) End Balance**
**_Allowance for uncollectible accounts (-xA, cr)_**
* **(cr) Beg Balance**
* (cr) add: BDE
* (cr) add: Reinstatements
(dr) less: write offs
* **(cr) End Balance**
46
Interest Elements in Notes Receivable
2 types
**_Interest-bearing note_**: interest element is *_explicitly_* stated
* Pay interest amt *_in addition_* to face amount of note
* Ex: 3yr, 9% NR amt collected is face amt (principle) + interest
**_Non-interest-bearing note (implicit interest)_**: not explicitly stated, but rather included in face value payment at end
* purchase price is reduced to change amt interest rec
* Use PV of future cash flows to calculate interest **_discounting a note_**
* Ex: 2yr, $13K non interest bearing NR amt collected is face amt of note (ncludes both principle and interest)
47
Notes Receivable - Interest Stated
Journal Entries
* date of sale
* accruing interest
* collection
**_Date of Sale_**
(dr) Note Receivable (face value)
(cr) Sales
**_Interest Accrued_**
(dr) Interest Receivable
(cr) Interest Income
**_Collection_**
(dr) Cash
(cr) Interest Receivable
(cr) Note Receivable (face value)
48
Notes Receivable: Non-Interest Bearing
Journal Entries
* date of sale
* accruing interest
* collection
*interest income brings PV to Face value*
**_Date of Sale_**
(dr) Note Receivable (use PV of face value)
(cr) Sales
**_Interest Accrued_**
(dr) **Note** Receivable
(cr) Interest Income
**_Collection_**
(dr) Cash
(cr) Note Receivable (face value)
49
Note Receivable
different rates used
**_Discount rate**_ used is _**market rate_** of interest on date of note creation
* \*\*might be different from note’s stated rate
* Any discount rates are **_amortized_** by applying the effective interest method
**_Stated rate_** is on face of note
50
Note Receivable
total interest over life of loan
* interest bearing
* implicit
Interest Bearing Note
* if equal payments over life of principle and interest
* total interest revenue = total amount rec'd - PV of note
Implicit Note
* interest is the amount that increases PV (at beginning) to face value (at collection)
51
Note Receivable
valuation
*Generally at PV*
**_Exchanged for Cash:_**
* only cash
* PV at issuance = cash proceeds exchanged
* if cash and promise to provide merchandise at a discount from mkt price
* record at PV
**_Interest-bearing:_**
* PV is same as face amount of note
**_Non-interest bearing (or unrealistic stated rate):_**
* report at whichever is more determinable:
* PV
* FV of property, good, service exchanged
* Discount/premium amortized using *_interest method_*
* Calculate interest with market rate applied to carrying amount of note at beginning of period
**_Loan origination fees_**: deferred/amortized over life of loan
* an adjustment to interest income
52
53
Note Receivable
Journal entries
discount / premiums
(seller of note)
**_PREMIUM_**: stated rate \< mkt rate
*_receive NR in exchange_*
(dr) Note Rec
(cr) Discount on NR
(cr) Asset
*_interest pmts rec'd_*
(dr) Cash
(dr) Discount on NR
(cr) Interest Income
*_rec loan principle_*
(dr) Cash
(cr) Note Rec
**_PREMIUM_**: stated rate \> mkt rate
*_receive NR in exchange_*
(dr) Note Rec
(dr) Premium on NR
(cr) Asset
*_interest pmts rec'd_*
(dr) Cash
(cr) Premium on NR
(cr) Interest Income
*_rec loan principle_*
(dr) Cash
(cr) Note Rec
54
Receivables as Immediate sources of cash
3 parties involved
* **_Maker (customer)_**: debtor that has borrowed funds or purchased A and provided NR to original creditor
* **_Original creditor**_: (_**transferor_**) furl that has loaned funds/sold A to maker
* **_3rd party financial inst**_: (_**transferee_**) provides funds to original creditor
55
Transferring Receivables
criteria for sale
if met / not met
***Meets ALL 3 conditions:***
* Transferred A isolated from transferor, even in bankruptcy
* Transferee is free to pledge or exchange A
* NO agreement in which T-or will be required to repurchase the A
**If all 3 conditions met --\> record as a SALE**
*_HAS continuing involvement_*
* remove/reclassify A
* recognized A recd, L incurred
* gain/loss recorded
*_NO continuing involvement_*
* remove A
* gain/loss recorded
**If NOT met is SECURED BORROWING:**
* transferor is borrowing funds AND using rec as collateral for loan
* A remains on books
* record a L
* No gain/loss on sale --\> is interest expense
56
Transfer of NR
* recourse
* notification
**_Recourse_**: T-or responsible for nonpmt on part of original maker of rec
* (ie: orig debtor defaults, original creditor assumes all pmts on rec)
* **_Without recourse_**: T-or NOT responsible for nonpayment
* Usually records as sales b/c control has based to T-ee
**_Notification_**: maker of rec is informed of transaction and instructed to make pmts to 3rd party
* **_Non-notification_**: maker not informed and continues to make pmts to original creditor
57
Discounting - transfer of AR
* sale of **_NOTE_** receivable to 3rd party
* usually with recourse
* uses a contra asset to NR
* calculations
* interest accrued prior to discounting
* proceeds to be rec'd
* discount charged by bank
* = disc rate \* maturity value (P+I) \*m/yr
* proceeds = maturity value - discount
* can use
* footnote disclosure: NR removed from books
* contra A: NR stays on books, use contra-account
58
Discounting Note Rec
Footnote method
* calculation
* JE
**_Accrued interest_** for time held NR
= face amt \* stated rate \* m-held/yr
**_Maturity Value_** = Face Amount + Total Interest
* **_Total Interest_** (prorated for original term)
* = face amt \* stated rate \* m/yr
**_Proceeds from Discounting Note Rec_**
= Maturity Value - Discount charged by bank
* **_Disc by bank_** = maturity value \* bank disc rate \* remaining m/yr
**_Discounting of NR_**
(dr) Cash (= proceeds)
(dr) Interest Expense (plug = tot interest at mat - bank disc)
(cr) Interest Income (accrued amount)
(cr) Note Rec (face value, remove from books)
**_Default (by maker w/ recourse)_**
(dr) N/R Overdue (=maturity value)
(cr) Cash
59
Discounting Note Rec
contra asset
* calculation
* JE
**_Accrued interest_** for time held NR
= face amt \* stated rate \* m-held/yr
**_Maturity Value_** = Face Amount + Total Interest
* **_Total Interest_** (prorated for original term)
* = face amt \* stated rate \* m/yr
**_Proceeds from Discounting Note Rec_**
= Maturity Value - Discount charged by bank
* **_Disc by bank_** = maturity value \* bank disc rate \* remaining m/yr
**_Discounting of NR_**
(dr) Cash (= proceeds)
(dr) Interest Expense (plug = tot interest at mat - bank disc)
(cr) Interest Income (accrued amount)
(cr) Note Rec Discounted (face value, remove from books)
**_Repayment of note by maker_**
(dr) N/R Discounted (=face value)
(cr) N/R
**_Default (by maker w/ recourse)_**
(dr) N/R Overdue (=maturity value)
(cr) Cash
(dr) N/R Discounted (=face value)
(cr) N/R
60
Impaired Loan (NR)
(def)
**_Impaired loan_**: present value (PV) of future cash flows expected to be collected (using original effective interest rate) \< carry value (CV)
* If the FV of loan is determinable use it instead of PV
* Loss is considered ***_bad debt expense / allowance for decline in NR_*** *(contra to receivable)*
61
Impaired Loan (NR)
* Measurement
* Initial Recognition
Measure impaired loan w/ one of 3 methods
* _Discounted Future Cash Flow_: PV of future P+I inflows (net of disposal costs)
* Discounted w/ loan’s effective interest rate
* Observable _market price_
* _FV of collateral_ method: if loan is collateral dependent
**Discounted Future Cash Flow method**
* given agreed reduction in principle and interest rate
* **_Unpaid Investment_** (due from borrower) @ this date
= _Principal_ (face) + _unpaid interest_ (to date, using stated rate)
\*also include any net deferred loan *_fees/costs*_ and unamort _*prem/disc_*
* **_PV of Reduced Principal and interest (_**agreed reduction amount)
* **_Allowance for impaired loan_**
= Unpaid Investment - PV of reduced P+I
**_Journal Entry_**
(dr) bad debt expense
(cr) Allowance for Impaired Loan
62
Impaired Loan (NR)
Subsequent recognition of interest *_after_* impairment
2 methods
**_Interest method_**: same as for any other note or bond
* interest rev for period is based on NET note balance at BEG of period
* Int rev = new CV (impaired principle) \* original int rate
**_Cost-recovery method_**:
* delays recog of interest REVENUE until entire new CV (after impairment) is received
* Int rev = 0 for each period until cumulative pmts have recovered the new CV (after impairment)
63
Impaired Loan (NR)
IFRS
* impairment determination
* valuation
* If CV of A \> amt coult be reoverd through A use or by selling it is impaired
* IFRS more flexible in allowing reversal of impairment losses
**_Recoverable amount_** = higher of Fair Value, less cost to sell OR value in use
**_Value in use_**: discounted PV of futures cash flows expected from A
**_Cash generating unit (CGU)_**: smallest group of As that can be IDd that generates cash flows, independently of cash flows from other A
