FAR 4 - Working Capital and Its Components Flashcards
How to record sales returns and allowances?
If sales returns are expected - DON’T record - wait for actually occurrence in order to book sales return.
If past experience shows that a material percentage of receivables are returned, an allowance should be booked.
Dr: Sales returns and allowances (contra revenue)
Cr: Accounts receivable
How to record net realizable value of accounts receivable. What are the two methods? Which one is GAAP and which is not GAAP?
1) Direct Write -off Method - Not GAAP - No accrual
2) Allowance Method - GAAP - Accrual
What is journal entry to record Direct Write-off Method?
You don’t do journal entry until you find out you won’t get paid, violates tax, TAX PURPOSES ONLY
Dr: Bad debt expense
Cr: Accounts receivable
What are three ways to estimate uncollectible accounts receivable under allowance method?
Book the expense NOW for uncollectible accounts receivable
1) Percentage of sales method
2) Percentage of accounts receivable method
3) Aging of accounts receivable method
What is T- Account and journal entry for percentage of sales method for allowance of uncollectible accounts receivable.
This is an INCOME STATEMENT APPROACH
Allowance Account
- Left + Right
-Write (+Beg
Offs) (+ Current year bad debt expense % of sales)
How to record percentage of accounts receivable method?
Percentage of accounts receivable - is the amount of estimated allowance calculated in the ending balance that should be in the allowance for doubtful accounts on the balance sheet.
Percentage of A/R is ending balance required in ALLOWANCE ACCOUNT.
Bad debt expense is a PLUG
Allowance Account
- Left + Right
(-Write (+Beg)
offs)
(+ Current year bad debt expense is plug)
(+ Ending balance from percentage of A/R)
How to record aging of accounts receivable method?
Liability x estimated uncollectible % is ending balance needed in ALLOWANCE ACCOUNT.
The bad debt expense in allowance account is a PLUG.
How to write-off a specific account receivable under GAAP?
NO BALANCE SHEET EFFECT and NO INCOME STATEMENT AFFECT
Dr: Allowance for doubtful accounts
Cr: Accounts Receivable
How to record account receivable that was previously recorded as written off UNDER NON-GAAP?
Dr: Cash
Cr: Uncollctible accounts recovered (revenue account)
How to record account receivable that was previously recorded as written off GAAP?
To restore the account previously written off:
Dr: Accounts receivable
Cr: Allowance for uncollectible accounts
To record the cash collection
Dr: Cash
Cr: Accounts receivable
What is pledging and what is journal entry?
Pledging is the process where the company uses existing accounts receivable as collateral for a loan.
- The company retains the title to the receivable.
- Footnote required only
Dr: Cash
Cr: Note payable
What is factoring of accounts receivable without recourse?
It is a TRUE sale. The factor (the assignee) assumes the risk of any losses on accounts receivable collection. The buyer is safe against the accounts receivable it can not collect.
Dr: Cash
Dr: Due from factor (factor’s margin)
Dr: Loss on sale of receivable
Cr: Accounts receivable
What is due from factor?
Due from factor is a receivable from buyer. That is security deposit given to buyer (bank)
What is factoring of accounts receivable with recourse?
Sale OR loan
If following are not met, treat as loan. If following is met, treat as sale:
1) The transferor’s (seller’s obligation for uncollectible accounts can reasonably be estimated - (THERE IS DUE FROM FACTOR (LIKE SECURITY DEPOSIT)
2) The transferor surrenders control of the future economic benefits of the receivables to the buyer
3) The transferor cannot be required to repurchase the receivables, but may be required to replace the receivables with other similar receivables.
- If it is treated as loan - footnote disclosure
What is journal entry for notes receivable WITH recourse?
Dr: Cash
Cr: Notes receivable discounted (contra asset)
OR
Dr: Cash
Cr: Notes receivable
Footnote disclosure required
