A/R (Mol 9)

Question 1

Risk of accounting loss on accounts receivable (credit risk)

Answer 1

This is the risk of loss resulting from not collecting amounts due from sales made on credit, and is the total amount of loss that Butler would suffer if those who owe it failed to make any payments and the receivables proved to be of no value. Since Butler’s net carrying value of accounts receivable is $230,000 ($250,000 - $20,000), that is the amount of risk of accounting loss.

Question 2

Off-balance sheet risk

Answer 2

This is the amount of risk of loss that does not show on the balance sheet. Since all of Butler’s net accounts receivable show on the balance sheet, there is no off-balance sheet risk associated with the accounts receivable.