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FAR to proof > 2 Receivables > Flashcards

2 Receivables Flashcards

1
Q

Are amounts due from officers, employees, or stockholders included in accounts receivable?

A

No, they are reported separately

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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

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3
Q

What method for calculating bad debt expense results in better matching?

A

Income statement method (% of sales approach)

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4
Q

What method for calculating bad debt expense results in better asset valuation?

A

Balance sheet method (% of receivables approach)

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5
Q

Does writing off of receivables have an effect on their Net Realizable Value?

A

No, it has no effect on receivables’ NRV.

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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)

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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.
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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
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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

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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)

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11
Q

Which factoring method would generally, all things being equal, result in a greater amount of cash up front?

A

Factoring with recourse

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12
Q

Which factoring method results in writing off the receivable?

A

Factoring without recourse

b/c treated as sale

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13
Q

Which factoring method results in keeping the liability and creating a separate liability?

A

Factoring with recourse

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14
Q

When pledging or assigning receivables, does the firm remain the legal owner of the financial asset?

A

Yes

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15
Q

When pledging or assigning receivables, what journal entry records the receipt of cash?

A

Dr. Cash Cr. Note payable

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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.

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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

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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

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19
Q

What value are receivables that occur in the ordinary course of business (A/R) recorded at?

A

Face Value

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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

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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
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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
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23
Q

What is a trade receivable?

A

another name for customer accounts receivable

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24
Q

What is a non-trade receivable?

A

Those receivables created in non-customer transactions

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25
Q

Accounts Receivable

  1. valuation
  2. factors affecting valuation (general)
A
  • 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
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26
Q

What are the two methods of accounting for receivables?

A

The gross method (before discount) and the net method (after discount)

27
Q

Who is the maker of a note?

A
  • The buyer or borrower
  • This party is making an unconditional promise to pay principal and interest over the note term
28
Q

Who is the holder of a note?

A
  • The holder of the note (seller or lender)
  • is the creditor and is the firm recording the note receivable on its books.
29
Q

How are notes recorded?

A

at Present Value unless its less than a year term

30
Q

Trade (quantity) discount

A
  • offered for high volume/quantity
  • Chain discount: get multiple discounts
    • calculate = value * (1-x) * (1-y)
31
Q

Cash (sales) discounts

A
  • 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
Q

Sales returns and allowances

A
  • 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
Q

Accounts Receivable

2 methods in recording

A
  • Gross method: record rec at gross invoice price (before cash discounts)
  • Net method: record rec at net invoice price (after cash discount)
34
Q

Accounts Receivable

Journal entries

(both Gross + Net)

A

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
Q

Contra- accounts

  • accounts receivable
  • sales
  • other
A

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
Q

Accounts Receivable

Gross v Net Method

(general)

A

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
Q

FOB

Shipping Pt v Destination

A

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
Q

Accounts Receivable Recognition

GAAP v IFRS

A
  • 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
Q

Accounts Receivable

Uncollectibles

Accounts involved

A

I/SBad debt expense, BDE**(**uncollectible accounts expense):

  • records effects of uncollectible accts
  • Considered cost of doing business NOT sales adjustment

B/SAllowance for uncollectible accounts:

  • contra-account to AR
40
Q

Direct Write-off Method

Pros/cons

A

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
Q

Direct Write Off Method

Journal Entries

  • uncollectible
  • collection of previously written off
A

Account deemed uncollectible

(dr) Bad Debt Expense
(cr) Accounts Receivable

Collection of previously written off

(dr) Cash
(cr) Bad Debts Recovered

42
Q

Allowance Method

  • when used
  • when recorded
  • pros
A
  • 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
Q

Allowance for uncollectible accounts

2 methods to estimate

A

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
Q

Allowance for Doubtful Accounts

Journal Entries

  • end of period adjustment
  • write off
  • recovery of accounts
A

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
Q

Accounts Rec + Allowance

T-accounts of use

A

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
Q

Interest Elements in Notes Receivable

2 types

A

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
Q

Notes Receivable - Interest Stated

Journal Entries

  • date of sale
  • accruing interest
  • collection
A

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
Q

Notes Receivable: Non-Interest Bearing

Journal Entries

  • date of sale
  • accruing interest
  • collection
A

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
Q

Note Receivable

different rates used

A

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
Q

Note Receivable

total interest over life of loan

  • interest bearing
  • implicit
A

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
Q

Note Receivable

valuation

A

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
Q
A
53
Q

Note Receivable

Journal entries

discount / premiums

(seller of note)

A

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
Q

Receivables as Immediate sources of cash

3 parties involved

A
  • 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
Q

Transferring Receivables

criteria for sale

if met / not met

A

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
Q

Transfer of NR

  • recourse
  • notification
A

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
Q

Discounting - transfer of AR

A
  • 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
Q

Discounting Note Rec

Footnote method

  • calculation
  • JE
A

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
Q

Discounting Note Rec

contra asset

  • calculation
  • JE
A

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
Q

Impaired Loan (NR)

(def)

A

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
Q

Impaired Loan (NR)

  • Measurement
  • Initial Recognition
A

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
Q

Impaired Loan (NR)

Subsequent recognition of interest after impairment

2 methods

A

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
Q

Impaired Loan (NR)

IFRS

  • impairment determination
  • valuation
A
  • 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

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