Accounts Receivable and Bad Debt Expense Flashcards
What is a contra asset account?
an account that is always shown along with another account but as a reduction
What 4 figures are normally needed to arrive at an ending balance for A/R?
beginning balance
credit sales
cash collections
write-off accounts
Why is inclusion of an allowance for doubtful accounts necessary when reporting A/R?
the allowance reduces A/R balance from total due to the net realizable value
How is the j/e made to recognize bad debt exp?
Bad debt exp xxx
Allowance for doubtful accounts xxx
What is the j/e to write off an account as uncollectible?
allowance for doubtful accounts xxx
A/R xxx
What is the impact on NI of writing off more accounts during a period as uncollectible than had been anticipated?
there is no direct impact on NI.
it would signify that a larger allowance would be required which has an impact on NI (larger bad debt exp)
What happens if a previously written off account is then collected in the current period?
Cash xxx
AFDA xxx
In what ways can bad debt exp be estimated?
percentage of sales method - either gross sales or net sales
percentage of receivables method - based on total A/R at the end of the period can further be broken down by A/R aging
An entity has the following information
AFDA $200 debit balance
$800,000 credit sales for the year
$500,000 A/R balance
no bad debt exp as the adj. needs to be made
the entity anticipates bad debt exp will be 1% of credit sales.
What is the ending bad debt exp and the ending AFDA?
bad debt exp 8,000
AFDA 8,000
AFDA debit balance (200) + 8,000 = $7,800 Cr balance
An entity has the following information
AFDA $200 debit balance
$800,000 credit sales for the year
$500,000 A/R balance
no bad debt exp as the adj. needs to be made
the entity anticipates bad debt exp will be 1% of ending A/R.
What is the ending bad debt exp and the ending AFDA?
Bad debt exp 5,200
AFDA 5,200
AFDA Dr balance (200) + 5,200 = $5,000
What is meant by the term factoring A/R?
factoring means that A/R are sold.
What is meant by the term securitization of A/R?
the entity sells the right to future cash flows that are generated by its A/R.
Assume Company A sells its A/R to Company Z with recourse. What does the term with recourse mean?
company Z has a right to collect these A/R. Due to the sale with recourse if a customer fails to pay then Z has the right to collect the money from A who has an obligation to pay if a customer defaults
Company A has received $50,000 note receivable from a customer, which will come due in 6 mos, earning 12% annually. After one, A needs cash, so the note is discounted at the local bank at a 10% annual rate. How much money will A receive from discounting the note?
- Calculate the maturity value of the note
$50,000 x 12% x 6/12 mo = $3,000 interest
$50,000 + $3,000 = $53,000 maturity value - Calculate the bank profit
$53,000 x 10% x 5/12 mo = $2,210 - Calculate the amount received from the bank
$53,000 - $2,210 = $50,790
Company A sells $200,000 of A/R to Company Z for $189,000 with recourse. How does selling the A/R with recourse impact the recording made by A?
A has a potential liability. The FV of that liability must be estimated and recognized. If it is expected to be $3,000 the entry would be as follows.
Cash 189,000
loss 14,000
A/R 200,000
Recourse obligation 3,000
