F3 M2 Flashcards
Trade receivables are AR from customers
NRV of AR = AR - allowance for doubtful accs, discounts, and returns
Beg balance - allowance for doubtful accs - cash collected - AR converted to NR = end
balance
Gross method for AR: debit AR and credit sales for full amount. If disc is taken, debit
(original amt - disc) cash, debit sales discounts taken (amt of disc), and credit AR for full
amt
Net method for AR: debit AR and credit sales for total amt - discounts. If disc is not
taken, I would debit cash for full amt and credit AR and sales disc for disc amt
For comps that receive trade discounts (discounts for buying in bulk), then I must not net
multiple discounts together (ex: list price is 100 and there is a 40% and 10% disc. I
would do 100 x .4 = 60 and then 60 x .1 to get a total AR balance of 54)
2 methods of recognizing uncollectible accounts: Allowance method and direct-write off
method (allowance is the only method allowed by GAAP)
Direct write off method: debit bad debt exp and credit AR for amt of write-off in the year
that the write off occurs (this violates matching principle and it is used w/tax basis
accounting, think of DTAs)
AR is always overstated w/direct method
Allowance method has two methods for recording BDE and allowance for doubtful accs:
% of AR at YE method and age of receivables method
% of AR at YE method: Uncollectible accs are estimated as a certain % at YE. If beg
allowance > end balance, then I would debit allowance for doubtful accs and credit BDE.
If end allowance > beg allowance, I would debit BDE and credit allowance. The JEs
would be the difference between the beg and end balance
Age of receivables method: This method bases the % of uncollectible accs on past
experience. Under this method, amts of AR will be classified into diff categories (ex:
current, 31-60 days, and 61-90 days). I will then multiply each amt in each category by
the % of uncollectible amts for each of those categories. This will give me total YE
allowance for doubtful accs. I will then need to subtract that from the beg balance to find
out how much the allowance increased from the beginning bal. I will then debit BDE and
allowance using the same logic as above (if beg > end, i will do the opposite)
JEs for amt written off in allowance method: debit allowance and credit AR
JEs for amt written off that is recovered in allowance method: debit AR and credit
allowance (it’s a reversal of the first entry made when written off). When cash is
collected, I will debit cash and credit AR
When doing allowance problems, make a T account with write offs on the left side
(decreases allowance) and on the right side, put beg + CY provision + recoveries =
ending (it will say “A/R not expected to be collected” or i will need to calculate this #)
The problem will give me ending, beg, and CY provision most likely (at least 2 of those)
If after putting in all of the #’s into the T account gives me a # that is higher than the
stated ending balance, then I must create an AJE to bring that # down bc the ending
balance is the FINAL balance and what the TRUE BALANCE must be. To do this, debit
allow and credit BDE. If other way around, then debit BDE and credit allow
When a comp pledges their AR, they are putting their AR balance as collateral and they
must put it as a FN
Factoring is when a comp sells their AR to a bank or someone else w/o or w/recourse
Comps factor their AR in order to receive cash now. Is is almost always at an amt less
than AR bc the comp is willing to make that loss in order to get cash ASAP (debit cash,
debit loss, and credit AR)
W/o recourse = the buyer of the AR can’t do anything if the customers fail to pay the
remaining balance of the AR
W/recourse = the buyer can come after the seller if the sellers default on paying the
remaining AR balance
If a transfer w/recourse doesn’t meet 3 reqs, then it could be considered a loan instead
When discounting a note, I must calculate the total int I would earn on my note if I did not
sell it to the bank. Then, I will add that interest to the note and multiply by how much time
is left and by the % the bank is giving to us. Finally, subtract the total of the loan if it
wasn’t sold and the amt that we lose by selling it to the bank to see how much $ was
received
