FAR - Financial Statement Acct - Receivables Flashcards
Notes Receivable Characteristics
Accounts Receivable Characteristics (trade receivables)
Factors affect receivable valuation?
Measure A/R on B/S?
Typically non-customer transactions;
Longer time frame;
Have an interest element.
Typically related to customer contracts;
Short time frame;
Typically no interest element.
Trade discounts - disc for high volume transaction Sales discounts - disc for early payment Sales returns and allowances - return bad goods Uncollectible accounts - uncollectibles
Net Realizable Value, expected value to collect
Gross Method Receivables
Net Method Receivables
Contra to Sales
records receivables at gross invoice price (before disc)
records receivables at net price (after disc/allow)
Sales discounts, returns/allowances
true/false
If material amounts of cash discounts are expected to be forfeited by customers next year on sales of the current year, they should be recorded in an adjusting journal entry under the net method.
The gross method of accounting for cash discounts separately records cash discounts not taken by customers.
The sales price of an item before trade and cash discounts is $50. A trade discount of 2% is available as well as a 4% cash discount. An allowance of $8 (based on the $50 price) is granted and payment remitted before the cash discount period ended. The amount remitted is $39.51
Allowance for sales discounts is contra to accounts receivable.
The gross method of accounting for cash discounts records receivables at gross invoice price, which is the price before applying the trade discount.
false
false
true
true
false
True/False
When specific accounts are written off, bad debt expense is increased under the direct write-off method of accounting for uncollectible accounts.
In most cases, the direct write-off method of accounting for uncollectible accounts is not permissible under US GAAP.
The aging of receivables method of estimating uncollectible accounts is based on the theory that bad debts are a function of accounts receivable collections during the period. The aging of receivables method emphasizes reporting accounts receivable at their net realizable value. It is a balance-sheet approach, which stresses the collectibility (valuation) of the receivable balance. Once the balance of the allowance account required to reduce net accounts receivable to their realizable value has been computed, bad debts expense is merely the amount needed to adjust the allowance account to the computed balance.
Sales are debited to AR and credited to sales; collections are debited to cash and credited to AR. Under the direct write-off method, write-offs of customer accounts are debited to bad debts expense, and credited to AR. To adjust sales to cash collections from customers, Bee must subtract the increase in accounts receivable (because Bee has not yet received cash for the sales remaining in AR). Bee must also subtract the accounts written off, because these sales have not resulted in cash receipts (and probably never will).
The allowance method must be used if bad debts are probable and estimable
True
True
True
True
A company uses the allowance method to recognize uncollectible accounts expense. What is the effect at the time of the collection of an account previously written off on each of the following accounts?
Increase Allowance for uncollectible Accounts,
Decrease Uncollectible Expense Account
True/False
During an accounting period, Bee’s cash collections from customers equal sales adjusted for the addition or deduction of the following amounts:
Deduction of accounts written off
Deduction of the increase in A/R Balance
True
Income Statement Approach - Bad Debt Expense Computation
Balance Sheet Approach = Allowance for uncollectible A/R
Ending A/R purpose?
% of Credit Sales = Bad debt expense -> used to determine allowance balance
% of uncollectible A/R = allowance balance -> used to determine bad debt expense
To determine desired/needed balance in the allowance account
True/False
The entry to write off an account under the allowance method has no effect on net accounts receivable.
Recovery of a previously written-off account under the allowance method increases net accounts receivable.
The ending allowance for doubtful accounts balance before recording the adjustment for bad debt expense affects the amount of bad debt expense to be recorded under both the income statement and balance sheet approaches.
True
False
False
Notes Receivables valued at?
Maker and holder of a note?
Market rate ?
PV of noncash asset determined?
PV of cash transaction?
PV of cash flows
Maker = buyer/borrower, Holder = Seller/Lender
interest rate used to determine PV of a note receivable
FMV of non-cash asset or N/R
Amount exchanged
Interest bearing vs. non-interest bearing
Interest-bearing: the amount of cash to be collected from an interest-bearing note is the face amount of the note plus interest;
Noninterest-bearing: the face amount of the note includes principal and interest that will be collected at maturity date.
Market rate > Note’s stated rate
Non-interest bearing note pays interest
A mortgage note pays equal monthly payments at the end of each month. Interest revenue for a particular month is based on the principal balance at the end of the month
Discount recorded
True
False
true/false
The question does not specify the exact meaning of the term “note receivable balance.” When the term “gross” is not applied, it is safe to assume that the balance referred to is the net balance, that is, net of interest yet to be recognized.
Notes are reported at present value, which is the amount net of interest yet to be recognized. However, note balances under the installment method include deferred gross margin yet to be realized, because deferred gross margin is subtracted as a separate line item.
Thus, the question is referring to the notes receivable balance exclusive of interest yet to be recognized, but inclusive of deferred gross margin yet to be realized. The note’s balance is the present value of the remaining payments. This is a two-year note. Therefore, valuation at present value is required. The note’s valuation is the present value of the remaining payments at the original discount rate.
True
When a note is issued with a stated rate (8% in this case) below the market rate (10% in this case), the note will be issued at a discount. The entry for the recipient of the note on July 1 would be as follows:
Notes receivable xxx
Disc. on notes rec. xxx
Service revenue xxx
On December 31, the company must accrue interest on the note. The following entry would be made:
Interest receivable (6 months at stated rate) Disc. on notes rec. (6 months amortization) Interest revenue (6 months interest at market rate)
Note that interest receivable is debited for an amount based upon the stated (face) rate of the note. This is because the stated rate will determine the amount of cash interest that will be received upon maturity of the note. Since the bond was held for six months (7/1/Y1 to 12/31/Y1) as of 12/31/Y1, the amount of the receivable would be determined as follows:
Interest receivable = Face value of note × Stated rate × Period held
= Face value × 8% × (6/12 months)
= 4% × Face value
true
Receivables bearing an unreasonably low stated interest rate should be recorded at their present value. However, this rule does not apply to receivables arising through the normal course of business that mature in less than one year. Therefore, the Hart receivable would be recorded at face value ($10,000), since it matures in nine months. The Maxx receivable would be recorded at its present value, since it matures in five years. The Maxx receivable will result in a lump-sum collection of $11,593 ($10,000 × 1.1593), so its present value is $7,883 ($11,593 × .680).
true
Transaction w/o recourse
Transaction w/ recourse
3 conditions of criteria for sale
transferor is not responsible for nonpayment part of the maker of the receivable
transferor is responsible for nonpayment part of the maker of the receivable
1) assets isolated from transferor
2) transferee free to pledge/exchange assets
3) transferor has no control over assets and no agreement to repurchase assets
