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 = 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.
How does the matching principle apply to bad debt expense?
Bad debt expense should be recognized in the same period as the related revenue, ensuring proper matching of expenses to the revenues they help generate
How does a prepaid asset for a contract discount affect the financial statements?
A prepaid asset is recorded when a contract includes a discount. This amount is recognized as the discount reduces the cost of purchases over time.
How does the percentage-of-receivables (aging) method determine the Allowance for Doubtful Accounts?
The ending balance in the Allowance for Doubtful Accounts is based on the outstanding A/R and the historical uncollectible percentage, as calculated using the aging of receivables.
What is the impact of selling a note to the bank before maturity?
The bank uses a higher discount rate than the interest rate on the note to calculate the present value, which creates fees and discounts for the bank.
What is the Allowance for Discounts?
The Allowance for Discounts estimates the portion of customers that will not take advantage of a sales discount, e.g., if 50% of customers take a 2% discount, the company sets an allowance for the customers that won’t take the discount.
How do recoveries affect both A/R and the Allowance for Doubtful Accounts?
Recoveries of previously written-off accounts increase both A/R and the Allowance for Doubtful Accounts, reversing the previous write-off. Then cash is debited and A/R credited, so overall it has no effect on A/R
When using the allowance method, what is the effect on the Allowance for Doubtful Accounts at the time of collection of a small account that was previously written off?
✅ The Allowance for Doubtful Accounts increases, because the write-off is reversed before recording the cash collection.
There is no impact on net income at the time of collection.
Any adjustment to the allowance based on updated aging happens later, at period-end.
