FAR 2B - AR Flashcards
What is the formula for the Allowance for Doubtful Accounts rollforward?
Allowance for Doubtful Accounts Rollforward = Beginning Balance + Bad Debt Expense - Write-Offs + Recoveries = Ending Balance.
Beginning balance is $5,000, bad debt expense is $1,500, write-offs are $1,000, and recoveries are $200, then Ending Allowance = $5,000 + $1,500 - $1,000 + $200 = $5,700.
What is the formula for the Accounts Receivable (A/R) rollforward?
A/R Rollforward = Beginning Balance + Credit Sales - Collections - Write-Offs + Recoveries = Ending Balance.
Example: If the beginning A/R balance is $50,000, credit sales are $20,000, collections are $10,000, and there are $5,000 in write-offs, then A/R = $50,000 + $20,000 - $10,000 - $5,000 = $55,000.
What happens to total assets and net income when an account is written off under the allowance method?
Writing off an account has no effect on total assets or net income. Both A/R and the allowance for doubtful accounts are reduced by the same amount, leaving net A/R unchanged
How is interest revenue calculated for notes receivable?
Interest Revenue = Principal × Interest Rate × Time.
Example: For a note of $10,000 at a 6% annual interest rate over 6 months, the interest revenue is $10,000 × 6% × 6/12 = $300.
What is the Present Value (PV) formula for a note receivable?
PV = Maturity Value / (1 + r)^n
If a note has a maturity value of $10,000, an interest rate of 5%, and a term of 2 years, the PV = $10,000 / (1 + 0.05)^2 = $9,070.
What is the effective interest rate, and how is it calculated?
The effective interest rate adjusts the contractual interest rate for any net deferred fees, costs, premium, or discount.
Example: If the stated rate is 5% but there is a 1% loan origination fee, the effective interest rate is approximately 5.06%.
What happens when a note is sold with recourse?
Selling a note with recourse means the seller is liable if the maker of the note fails to pay, creating a contingent liability for the seller.
What is the percentage-of-receivables (aging) method for calculating the Allowance for Doubtful Accounts?
Under the aging method, the required ending balance in the Allowance for Doubtful Accounts is calculated based on the outstanding A/R balance and historical uncollectible percentages.
What is the effect of recoveries on the A/R and Allowance for Doubtful Accounts?
Recoveries increase both the A/R and the Allowance for Doubtful Accounts. Recoveries refer to amounts collected on accounts that were previously written off.
How are bad debt expense and uncollectible accounts related?
Bad Debt Expense (also called Uncollectible Accounts Expense) represents the estimated amount of credit sales that are expected to be uncollectible.
What is the impact of a write-off on A/R and the Allowance for Doubtful Accounts?
A write-off reduces both the A/R and the Allowance for Doubtful Accounts by the same amount, leaving net A/R unchanged.
What happens when a non-interest-bearing note is issued?
A discount on the note for imputed interest should be recorded as a valuation account and amortized over the life of the note using the Effective Interest Method.
How do you calculate interest revenue for a note using the Effective Interest Method?
Interest Revenue = Beginning Carrying Amount of the Note × Effective Interest Rate.
If the beginning carrying value of a note is $9,500 with an effective interest rate of 5%, interest revenue for the period = $9,500 × 5% = $475.
How is the Present Value (PV) of a note affected by a discount?
The Present Value of a note is reduced by the discount, which is recognized as interest revenue over the life of the note using the Effective Interest Method.
