F3-M2-Trade Receivables

Question 1

At what value should non-interest-bearing promissory notes be recorded?

Answer 1

At the present value of all future payments required by the note. The payments should be discounted at the market interest rate.

Question 2

Notes receivable may be discounted “with” or “without” recourse. What is the difference?

Answer 2

Discounting with recourse:
The holder remains contingently liable.

Discounting without recourse:
The holder assumes no further liability after discounting

Question 3

Describe the computational steps required in “discounting a note”.

Answer 3

1. Compute maturity value (remember to include interest to maturity)
2. Compute the “discount” (remember to use maturity value)
3. Get proceeds by subtracting discount from maturity value
4. Compute interest income as the difference between proceeds and face of note.

Question 4

Name two methods of accounting for the recognition of credit loss adjustments (write-offs) of outstanding accounts receivable

Answer 4

Direct Write-Off:
Dr Bad debt (or credit loss) expense
Cr Accounts Receivable

Weaknesses: Bad debt (or credit loss) expense is not matched to sales, and accounts receivable are overstated. Not allowed under US GAAP.

Current Expected Credit Loss (CECL) Method:
Dr Allowance for credit losses
Cr Accounts Receivable

Question 5

Name two method for estimating credit losses

Answer 5

1. Percentage of accounts receivable at year-end
2. Aging of accounts receivable at year end

Question 6

Using the current expected credit loss (CECL) method, give the two journal entries to recognize the estimated credit losses and then to adjust expected credit losses for write-offs of outstanding accounts receivable

Answer 6

Recognize estimated credit losses:
Dr Credit loss expense
Cr Allowance for credit losses

Adjust credit losses for write-offs:

Dr allowance for credit losses
Cr Accounts Receivable

Question 7

What is the difference between factoring with recourse and without recourse

Answer 7

With Recourse:
The factor may return the account to the company if it subsequently requires a credit loss adjustment. Potential liability and risk of loss remains with the company.

Without Recourse:
The factor assumes the risk of loss if the account requires a credit loss adjustment (write-off).