F3 - M2 - Trade Receivables

Question 1

Account Receivable

Answer 1

“oral promises” to pay debts, current assets, either “trade receivable” (purchasers of companies goods) or “Nontrade receivables” (other than customers such as advances to employees)

Question 2

Account Receivable - Net Realizable Value

Answer 2

balance of the account adjusted for uncollectible, sales discount, sales returns and allowances

Question 3

Valuation of Accounts Receivable

Answer 3

Original value, may be adjusted for sales or cash discounts (speed or trade)

o Sales or Cash Discounts – Speed; Gross or Net; 2/10, n/30
o Gross Method – records sale WITHOUT available discount; if sales occurs with discount, use contra revenue
o Net Method – record sale WITH discount; if received without discount, use contra revenue

Question 4

Trade Discounts

Answer 4

“Quantity” discounts; sales / AR recorded net of trade discounts

Question 5

Estimating Uncollectable Accounts Receivable

Answer 5

NRV on balance sheet; amount reduced by amount of uncollectable receivables; Two methods

o Direct Write-Off Method

o Allowance Method

Question 6

Direct Write-Off Method

Answer 6

Direct Write-Off Method – NOT GAAP (does not match bad debt expense with revenue)

Federal Income Tax Purposes; No JE until written off; no allowance account recorded so AR is overstated cause no attempt is made to account for unknown bad debts

Question 7

Allowance Method

Answer 7

“CECL” Current Expected Credit Losses model, based on current conditions, past experiences and future expectations; possible of credit losses over the entire life of the receivable; when known amounts are written off, debited to the allowance account

Percentage of Accounts Receivable at year end Method (BA approach)
• DR: BDE – CR: Allowance Increase It

Aging of Receivables Method – Emphasizes asset valuation “NRV”

Question 8

Bad Debt Expense

Answer 8

Charged to earning for bad debt expense of the period

o Provision made each period
o Adjustment made at year-end to increase / decrease balance

Question 9

Pledging (Assignment)

Answer 9

uses existing AR as collateral for loan; broke; note disclosure

Question 10

Factoring of AR

Answer 10

With or Without Recourse (Final), selling AR; convert AR into Cash, assign a “factor”

Without recourse – FINAL, assignee assumes all risk

With Recourse – Sales – AR and Pledge; factor has an option to re-sell any uncollectable back to the seller; Loan or sell
Sell
• Uncollectables can be reasonably estimated
• Seller surrender control
• Seller cannot be required to repurchase

Question 11

Securitization

Answer 11

AR transferred intercompany, then entity secure securities by AR and investors receive cash as AR are paid

Question 12

Note Receivables

Answer 12

written promises to pay a debt; promissory note; either current or long term asset

• Face Value = P; Maturity Value = P + Int.
• FS, unearned interest and finance charges are deducted from face amount for present value
• Discounting Notes Receivable – get cash now; endorse note with or without recourse to a third party for cash
  o With recourse – discounted; contra asset; note removed from balance sheet
  o Without recourse – cash loss; note receivable