8.2 Uncollectible A/R

Question 1

HOW CAN some accounts become uncollectible

Answer 1

ex: if a corporate customer experiences downturn in eocnomy and not enough money

ex: person laid off

Question 2

how do we deal with potentially uncollectible accounts under IFRS?

Answer 2

Companies are REQUIRED to recognize any expected credit losses!!

all receiables are reported net of an allowance for losses!!

Question 3

expected credit losses synonym

Answer 3

allowance for doubtful accounts, allowance for credit losses, expected credit loss allowance, impairment loss allowance, or credit loss allowance.

Question 4

what do expected credit losses do?

Answer 4

gives a margin of error for potentially unollectible revenue accounts

Question 5

what are the expected credit losses based on?

Answer 5

a companys historcial credit loss expereience

higher for aging businesses, and accounts for expected future economic conditions

Question 6

how are potentially uncollectible revenue accounts reported under aspe?

Answer 6

accounts are reported net of an allowance for expected credit losses for reciebales

The estimate of uncollectible amounts is determined by an aging of balances, past loss experience, and current economic conditions

Question 7

what is the difference in the potnential future account receivable losses area in ASPE as compared to IFRS

Answer 7

ASPE is less future oriented than IFRS!!

Question 8

HOW DO we report the credit losses from uncollectable receivables?

Answer 8

debit to an account called CREDIT LOSSES!!

Question 9

WHY do we use a credit losses account for potential future credit losses as opposed to decreasing a revenue acc?

Answer 9

because at the time a sale happens, we expect the receivable to still be collectible

Question 10

Credit losses are also called bad debt expense or impairment losses.

Answer 10

Credit losses are also called bad debt expense or impairment losses.

Question 11

when do you report credit losses?

Answer 11

-> at the end of each period “allowance method”

if you wait until you know for sure that it is a credit loss, the credit loss will be reported in adiff period then when revenue was collected

Question 12

what is the allowance method

Answer 12

-> allowance is recorded for the expected credit losses (diff between cash flows expected to be received in the future and amount of the A/R)
->corresponding loss is also recorded for the period (remember accrual basis of accounting)

DR Credit Loss
CR Allowance for expected credit loss

Question 13

what happens if you dont use allowance method in reporting receivables

Answer 13

ex: lots of sales in Y1!! EVERYONE WANTS YOU1!!!! overstated NET INCOME

but y2 no one can pay!!!!! so u broke as hell!!! understated net income

Question 14

DR Credit Loss
CR Allowance for expected credit loss

what is the allowance account?

Answer 14

contra asset account to A/R
-normal balance: credit

-net it with account receibable to determine carrying amount of accounts receivable
-carrying amount of A/R is presented on the sofp

Question 15

why do we use a contra asset account

Answer 15

A contra account must be used because expected credit losses are an estimate and, at the time the amount is determined, the company does not know which specific customer accounts will not be paid. If the specific customer accounts are not known, then no entry can be made in the accounts receivable subsidiary ledger. If this is not possible, then no entry can be made to Accounts Receivable either, because it is the control account.

Question 16

SO!!! how do we arrive at the amount of A/R reported on the SOFP

Answer 16

1) Sum all the subledger a/r accounts
2) put this as the debit of A/R
3) then find the usm of all theallowance for expected credit losses
4) subtract a/r-expected credit losses account
5) this is the sofp a/r

Question 17

how do companies estimate expected credit losses

Answer 17

-based on past credit loss experience, adjusted by forward looking factors (economic environment, financial conditions, industry averagegs etc)

-> a/r can be broken up by AGE, TYPE OF CUSTOMER, GEOGRAPHY

Question 18

A/R being broken up into AGE, type of customer, geography to determine expected credit loss

Answer 18

AGE: elngth of time the recievable has been outstanding
Type of customer: individual vs smlal large retailer
Geographic location: regions or countries (Experience diff economic conditons)

Question 19

Stratification process: aging the accounts recivable

Answer 19

using the basis of the age of an account to determine the credit risk

the older an account- the more difficulty collecting receivables

Question 20

The amount of credit losses to be expensed in the period is determined by calculating the difference between the required balance and the existing balance in the allowance account

Answer 20

When using the aging of accounts receivable approach, the credit loss for the period is equal to the change needed to bring the allowance for expected credit losses to its desired balance

Question 21

is it possible for the allowance account to have a debit balance b4 adjustment?

Answer 21

yes! cuz of write offs

Question 22

how are credit losses reproted in soi

Answer 22

operating expense

Question 23

what are ways to collect past due accounts

Answer 23

-letters
-phone calls
-collection agencies
-legal action

Question 24

if there is no way to collect an account?

Answer 24

write it off- a manager must do this

AOR!!! someone who has access to cash cant do this one

Question 25

journal entry for wrrite off

Answer 25

DR. aallowance for expected credit losses
CR A/R
(write off of —– account)

Question 26

Note that a write-off has no effect on the amount of credit losses recorded by a company.The Allowance for Expected Credit Losses account is debited when recording a write-off, not the Credit Losses operating expense account.It would be incorrect to record a credit loss when an account is written off because thiswas already recognized at the end of the previous period when the adjusting entry to record expected credit losses and adjustthe allowance balance was recorded.

Answer 26

Note that a write-off has no effect on the amount of credit losses recorded by a company.The Allowance for Expected Credit Losses account is debited when recording a write-off, not the Credit Losses operating expense account.It would be incorrect to record a credit loss when an account is written off because thiswas already recognized at the end of the previous period when the adjusting entry to record expected credit losses and adjustthe allowance balance was recorded.

Question 27

which statement does a write off affect

Answer 27

only SOFP, because A/R is affected and allowance for expected credit losses is equally affected
->carrying amt on sofp is the same

Question 28

what if a previously assumed uncollectible account becomes collectible?

Answer 28

THIS IS A CREDIT LOSS RECOVERY!!!!!
TWO ENTRIES ARE MADE!!!

1) ONE TO REVERSE THE WRITE OFF ENTRY
(DR A/R, CR ALLOWANCE FOR EXPECTED CREDIT LOSSES)
2) RECORD THE CASH COLLECTIO
(DR CASH, CR A/R)

Question 29

WHAT statements does recvoery of a credit loss affect

Answer 29

only the sofp accounts!!

->IMPACT at the end: dr cash, credit to allowance of expectcredit losses

Question 30

In summary, there are three types of transactions when accounts receivable are measured and recorded using the allowance method:Measuring and recording estimated uncollectible accounts (credit loss entry): Estimated uncollectible accounts receivable are determined by using a percentage of total receivables or an aging schedule. This adjusting journal entry debits Credit Losses and credits Allowance for Expected Credit Losses. This entry ensures that credit losses are recorded in the same period as the related revenue and that the carrying amount of accounts receivable reflects management’s best estimate of the amount that will ultimately be collected after expected credit losses.Recording the write-off of an uncollectible account (write-off entry): A write-off takes place when a specific customer account is determined to be uncollectible. To write off the account, Allowance for Expected Credit Losses is debited, and Accounts Receivable is credited. This reduces the allowance because the account is no longer doubtful and reduces accounts receivable because the account is not collectible. This entry has no effect on the carrying amount of accounts receivable.Recording the recovery of an uncollectible account (recovery entries): Any recovery of accounts that have previously been written off is recorded using two separate entries. The first reverses the original write-off by debiting Accounts Receivable and crediting Allowance for Expected Credit Losses. This re-establishes the receivable. The second entry records the collection of the account by debiting Cash and crediting Accounts Receivable. Note that neither the write-off nor the subsequent recovery affects the statement of income.

Answer 30

In summary, there are three types of transactions when accounts receivable are measured and recorded using the allowance method:Measuring and recording estimated uncollectible accounts (credit loss entry): Estimated uncollectible accounts receivable are determined by using a percentage of total receivables or an aging schedule. This adjusting journal entry debits Credit Losses and credits Allowance for Expected Credit Losses. This entry ensures that credit losses are recorded in the same period as the related revenue and that the carrying amount of accounts receivable reflects management’s best estimate of the amount that will ultimately be collected after expected credit losses.Recording the write-off of an uncollectible account (write-off entry): A write-off takes place when a specific customer account is determined to be uncollectible. To write off the account, Allowance for Expected Credit Losses is debited, and Accounts Receivable is credited. This reduces the allowance because the account is no longer doubtful and reduces accounts receivable because the account is not collectible. This entry has no effect on the carrying amount of accounts receivable.Recording the recovery of an uncollectible account (recovery entries): Any recovery of accounts that have previously been written off is recorded using two separate entries. The first reverses the original write-off by debiting Accounts Receivable and crediting Allowance for Expected Credit Losses. This re-establishes the receivable. The second entry records the collection of the account by debiting Cash and crediting Accounts Receivable. Note that neither the write-off nor the subsequent recovery affects the statement of income.