Accounts Receivable

Question 1

What is an Account Receivable?

Answer 1

Accounts receivable = trade receivables: verbal promise to pay normally within 30-60 days
• measured at net realizable value = gross balance less
allowance for doubtful accounts
• note receivable typically has different than normal credit terms -
these are written promises with specified terms (interest rate and due date)

Question 2

What is a Valuation Allowance?

Answer 2

A valuation allowance is a reserve that is used to offset the amount of a deferred tax asset. The net receivable balance reported on the balance sheet is meant to approximate cash that will be collected, i.e. its net
realizable value
• adjust for the following:
• cash discounts and sales returns and allowances that will be taken on outstanding accounts receivable
• allowance for uncollectible accounts

Question 3

What are two approaches for Valuation of Accounts Receivable?

Answer 3

• Balance sheet approach: we estimate the amount needed in the allowance for doubtful accounts; any remainder goes to bad debt expense (aging, % of AR, specific identification)
• income statement approach: we estimate the amount of bad debt expense directly (usually as a % of credit sales); this amount increases the allowance for doubtful accounts

We cannot simultaneously estimate the allowance for doubtful account and bad debt expense

Question 4

When the allowance for doubtful accounts is adjusted, what is the corresponding debit or credit to bad debt expense?

Answer 4

Dr. Bad debt expense

Cr. Allowance for doubtful accounts

Question 5

When accounts are actually written off, what is the corresponding entree?

Answer 5

Dr. Allowance for doubtful accounts

Cr. Accounts receivable

Question 6

When a previously written-off account subsequently gets recovered, what is the corresponding entree?

Answer 6

Dr. Accounts receivable
 Cr. Allowance for doubtful accounts
• we then record the collection of the account:
 Dr. Cash
 Cr. Accounts receivable

Question 7

Accounts receivable may be transferred to another party via?

Answer 7

• Factoring: individual accounts transferred to another party for collection
• Securitization: bundle of receivables sold as a portfolio
• transfer may be with or without recourse

Question 8

Transfers of A/R may be recorded as a?

Answer 8

• Sale: accounts receivable are derecognized
• Borrowings: AR are left on the books, cash received is
  recorded as a loan payable until the customer actually pays