FAR 3 Module 2 Flashcards
When the Current Expected Credit Loss (CECL) method is used, what is the journal entry to record the credit loss adjustment (write-off) of a specific account?
What type of account is Allowance for Credit losses?
Debit: Allowance for credit losses
Credit: Accounts receivable
Allowance for credit losses is a CONTRA ASSET Account
What would be the JE’s
To restore account previously written off
To record the cash collection on the account
What impact does a credit loss adjustment (write-off) under the CECL method have on net income and total assets?
Net income: No effect (credit loss was already recognized earlier).
Total assets: No effect - Both are asset accounts, so no effect
How would you determine the credit loss expense for the following?
How would you calculate the credit loss expense for the following?
BASE
T- Account BASE
AR Account Analysis Format
When calculating for cash received from factoring receivables.
If the Factor retained 10% of AR as allowance for sales returns
And charged 5% commission on the gross amount
How would this be calculated?
AR Factored without recourse
MINUS: 10% of total Factor retained of AR allowance for sales returns
MINUS 5% commission on the gross amount of the factor receivables
= Total Cash received
What would be Beech Co. JE entry for the following?
A 120-day 12% interest-bearing note receivable was DISCOUNTED
At a bank at 15%
After beging Held for 40 days
The proceeds received from the bank equal:
Face value?
Maturity?
At what discount?
The proceeds received from the bank equal:
Maturity Value less the discount at 15%
The discount is always applied on the Maturity date
What does “factoring receivables without recourse” mean, and how is it classified?
Meaning: Selling accounts receivable to a third party (e.g., a bank) to get immediate cash, with the risk of nonpayment transferred to the buyer.
Classification: It is a sale of receivables, not a loan.
Key point: The seller has no further responsibility if customers fail to pay (risk belongs to the buyer).
What does discounting the note mean?
Discounting a note means selling a promissory note to a bank or a third party before it matures in exchange for immediate cash.
Exchanging for immediate cash as a reduced amount
Which method of recording credit loss expense is consistent with accrual accounting?
Allowance Method?
Direct Write off Method?
Allowance Method: Consistent with accrual accounting.
It estimates credit losses in the same period as revenue is earned, following the matching principle.
Direct Write-off Method: NOT consistent with accrual accounting.
It records credit losses only when an account is identified as uncollectible, which may not align with the period in which the related revenue was earned.
The current expected credit loss (CECL) method is used to match expenses with revenues and to record the proper carrying amount for accounts receivable.
What is recording a credit loss?
If a company sells goods on credit but expects some customers will not pay,
it estimates how much it won’t collect and records that as an expense, reducing the value of its receivables
Directly related to allowance for doubtful accounts
Which method does the Current Expected Credit Loss (CECL) approach use to estimate credit losses?
The CECL method uses aging the receivables to estimate credit losses.
It looks at how long accounts have been outstanding to determine the likelihood of uncollectible amounts valuing the receivables based on expected losses over time.
How would you calculate the allowance for credit losses?
Using the information, how would we calculate the Credit loss expense on Year 2 Income statement?
How would you calculate the amount of cash received from the bank?
DO BINSE
What is this for?
Simple Bank Reconciliation
E for - Errors
Add or Deduct depending on cause of error
