2B Trade receivables

Question 1

Direct write off method

Answer 1

1. No allowance account
2. Not GAAP (matching principle)
3. Tax accounting method
4. Cash basis
5. Estimates not used

JE:
Dr - Bad Debt Expense
Cr - Accounts Receivable

Question 2

Allowance method

Answer 2

1. Allowance account used
2. GAAP
3. Financial accounting method
4. Estimates used
5. Accrual basis

JE:
Dr - Bad Debt Expense
Cr - Allowance for doubtful accounts

Question 3

Invoice is deemed uncollectible and then recovered under direct write off method

Answer 3

To write off uncollectible invoice:
Dr - Bad debt expense
Cr - Accounts Receivable

To recover and collect AR:
Dr - Account receivable
Cr - Bad debt expense

Dr - Cash
Cr - Accounts receivable

Question 4

Invoice is deemed uncollectible and then recovered under allowance method

Answer 4

To write off uncollectible invoice:
Dr - Allowance for doubtful accounts
Cr - Accounts Receivable

To recover and collect AR:
Dr - Account receivable
Cr - Allowance for doubtful accounts

Dr - Cash
Cr - Accounts receivable

Question 5

Methods of determining Net Realizable Value of Allowance

Answer 5

1. Income Statement
   Percentage of Sales
2. Balance Sheet (considers prior balance)
   • Percentage of receivables
   • Aging of receivables

Question 6

Secured borrowings conditions

Answer 6

1. Transferred assets were isolated from seller
2. Factor has the right to pledge or sell
3. Seller does not maintain control through repurchase agreements

Question 7

Question to ask if all three secured borrowings conditions are met

Answer 7

If the seller has continuing involvement

Question 8

Seller does have continued involvement on secured borrowings

Answer 8

• Reduce receivables
• Recognize what is received and record any liabilities incurred.
• Record gain or loss

Question 9

Seller does NOT have continued involvement on secured borrowings

Answer 9

• Reduce receivables

- record gain or loss

Question 10

If secured borrowings conditions are not met

Answer 10

• Company borrowing money and using AR as collateral will record liability
• will record interest expense on secured loan

Question 11

Factoring with recourse

Bank actually purchases the receivables

Answer 11

Seller agrees to pay the factor if the customer fails to pay.

Seller JE:
Dr - Cash
Dr - Due from Factor
Dr - Fee expense (loss on sale of receivables)
       Cr - AR

Question 12

Factoring without recourse

Bank actually purchases the receivables

Answer 12

Seller is not responsible to pay the factor if the company does not pay.

Factor JE:
Dr - AR
       Cr - Due to Seller
       Cr - Interest Revenue
       Cr - Cash

Question 13

Assignment of AR

Answer 13

Assigns the right to collect receivables to a financing institution and will receive cash for a % of the AR.

Question 14

Assignment of AR JE’s

Answer 14

Dr - Cash
Dr - Finance charge
Cr - Loan Payable
to assign receivables

Dr - AR, assigned
Cr - AR
to reclassify receivables

Dr - Loan Receivable
Cr - Cash
Cr - Fee revenue
receipt of assigned receivables

Question 15

Pledging of AR

Answer 15

Rights to use the AR as collateral

Question 16

Pledging of AR JE’s

Answer 16

Dr - Cash
Dr - Finance charge
Cr - Loan Payable
to assign receivables

Dr - AR, pledged
Cr - AR
to reclassify receivables

Dr - Loan Receivable
Cr - Cash
Cr - Fee revenue
receipt of assigned receivables

Question 17

Rollforward of AR

Answer 17

Beginning balance
\+ Sales on accounts
- Write off receivables
- Collection of receivables
\_\_\_\_\_\_\_\_\_\_
Ending balance

Question 18

AR source information for rollforward

Answer 18

• Prior period financials
• Sales Journals
• Sales invoices
• Collection agency’s report
• Aging schedule
• Cash receipts journal

Question 19

AR variance GL to Subledger

Answer 19

Step 1: Compare GL to subledger
Step 2: Identify omissions or errors
Step 3: Perform reconciliation
Step 4: Post JE’s