5 Valuation of Accounts Receivable

Question 1

What are these?
Accounts receivable
Allowance for impairment of AR
Impairment loss of AR

Answer 1

Accounts receivable: Asset
Allowance for impairment of AR: Contra-Asset
Impairment loss of AR: Expense

Question 2

What is the cost of selling on credit?

Answer 2

Impairment loss of A/R or Uncollectible acc expense or bad debt expense

Question 3

How to calculate Net Realisable Value (NRV) - what the business expects to collect as AR

(On Notes to the financial statements)

Answer 3

NRV = Trade receivables - Allowance for impairment of AR

Question 4

What is the allowance method? Journal entry?

Answer 4

Used to estimate and account for bad debts (uncollectible accounts) instead of waiting for a specific account to be identified as uncollectible

Dr Impairment of AR (expense)
Cr Allowance for impairment of AR (contra-asset)

Question 5

What is the direct write-off method? Journal entry?

Answer 5

Waits until specific amt is uncollectible to record expense

Dr AR impairment/ bad debts
Cr AR

Question 6

Receivables turnover ratio

Answer 6

Net credit sales/ Average accounts receivable (net)

No. of times that average AR is collected

Higher better

Question 7

Average collection period?

Answer 7

365/Receivables turnover ratio

Lower better

Question 8

How to calcultae Net AR?

Answer 8

Net AR = Gross AR - Adjusted allowance for impairment of AR (AR x estimated % uncollectable)

Question 9

How to adjust entry to bring Allowance for impairment of AR to proper amt at year end? (eg alr written off but customer pays outstanding sum later)

Answer 9

Dr Allowance for impairment of AR
Cr Impairment LOSS of AR