B. TRADE RECEIVABLES

Question 1

_{B. TRADE RECEIVABLES}

How is AR recorded on the Balance Sheet?

Answer 1

AR is recorded at net realizable value on the balance sheet- the amount of cash the company expects to actually collect.

Question 2

_{B. TRADE RECEIVABLES}

What items reduce AR? (3)

Answer 2

• sales discounts,
• sales returns, and
• uncollectible amounts.

Question 3

_{B. TRADE RECEIVABLES}

When a company offers discounts, what two (2) ways can the AR be recorded on balance sheet?

Answer 3

Gross Method: Under the gross method, when AR is recorded, the gross amount is shown, along with a journal entry for the discount.

Net Method: Under the net method, AR is recorded with the discount already factored in.

Question 4

_{B. TRADE RECEIVABLES}

Uncollectible AR: assumption

Answer 4

There has to be some estimate of AR that won’t be collected, because realistically not all AR will be collected.

Question 5

_{B. TRADE RECEIVABLES}

Uncollectible AR

Direct write-off method

Answer 5

This is rarely used and doesn’t conform to GAAP, but is used for tax purposes.

When the account becomes uncollectible, it is written off to bad debt expense and AR is reduced by the same amount.

Example:

Bad debt expense XX

Accounts receivable XX

Question 6

_{B. TRADE RECEIVABLES}

Uncollectible AR

Allowance method

Answer 6

The allowance is a contra account to AR, so it has a credit balance.

The idea is that an allowance amount is set for the year, (it’s an estimate), and when bad debt is actually written off, the allowance is debited (lowered).

Then, to get the allowance back where management wants it, it is credited, and that credit’s debit side is bad debt expense.

Normal Balance:

Accounts receivable XX

Allowance for doubtful accounts XX

To write-off uncollectible debt:

Allowance for doubtful accounts XX

Accounts receivable XX

To bring the allowance account back to where it needs to be:

Bad debt expense XX

Allowance for doubtful accounts XX

Question 7

_{B. TRADE RECEIVABLES}

Uncollectible AR

Income statement approach

Answer 7

This approach estimates bad debt as a % of SALES,

and it directly calculates the amount of bad debt expense.

Question 8

_{B. TRADE RECEIVABLES}

Uncollectible AR

Balance sheet approach

Answer 8

This approach estimates bad debt allowance as a % of AR instead of sales,

and it directly calculates the ending balance of the allowance account.