Financial 3 - Trade Receivables

Question 1

Allowance for Uncollectible Accounts (Formula)

Answer 1

Beginning Allowance Balance
ADD: Provision for Bad Debts (Sales * Uncollectible %)
LESS: Bad Debt write offs
Ending Allowance Balance

Provision reflects the actual expense of bad debt for the period

*** Provision + Adj. to Estimated Uncollectible = Total Expense

Use formula above to find the amount of adjustment for the period. Adjustment is difference of estimate and actual ending uncollectible account balance

Question 2

Estimating Bad Debts

Answer 2

• Estimating uncollectible accounts emphasizing asset valuation is the aging of the receivables. This focuses on the Balance sheet side of things
• ** This results in a good matching of revenue and expense
• Estimating bad debts based on sales emphasizes the income statement and results in a good matching of revenue and expense

Question 3

Net Proceeds at a Discount (Formula)

Answer 3

Face of Note
* Interest rate on Note
= Maturity Value of Note
*Discount by bank (new rate * time left on note)
- Discount
= Proceeds from Bank

Question 4

Components of Accounts Receivable

Answer 4

AR INCLUDES: Trade AR, allowance for uncollectible (net of AR), claim against goods lost in transit (current period)

AR EXCLUDES: Inventory (consigned goods are Inventory), security deposits (not current)

Question 5

Allowance Method of Recognizing Uncollectible Accounts

Answer 5

Entry to Write-Off Uncollectible Account

• DR: Allowance for Uncollectible
• CR: Accounts Receivable

This entry has no effect on Net Income. The allowance account is decreased (normal credit balance)

When a specific uncollectible account is written off under the allowance method of recognizing bad debt expense, the “allowance for bad debt” account would decrease (see entry above)

A collection of previously written-off account receivable would INCREASE the allowance account (normal credit balance)

** Allowance method is used to match expenses and revenues and to record the proper carrying amount for accounts receivable. Direct write-off method does not achieve these objectives

Question 6

Receivables Transactions

Answer 6

1. Factoring Receivables without recourse is a sales transaction. Factoring without recourse transfers the risk of uncollectible accounts to the buyer
2. Assigning Receivables is the process of obtaining a loan by transferring the debtor’s right to cash collected on receivables to the lender
3. Pledging Receivables is the process of obtaining a loan using the receivables as collateral

Question 7

Calculating Remittance in Full on Sale of Merchandise WITH Trade Discounts

Answer 7

Cost of Merchandise Sold
* any and all trade discounts (Keep a rolling balance on the right)
New Balance * Cash discount (if credit terms are met)
- Discount
+Any Prepaid amounts for Delivery (treated as a loan for customer)
= Expected Remittance

Question 8

Calculating Interest Revenue on Note Discounts (Include Appropriate PV Factors)

Answer 8

Annual Payment = Face of Note / PV of an Ordinary Annuity
* Years of Note
= Total Payments
LESS: Discounted Note = (Annual Payment (from first line) * New PV of Ordinary Annuity
= Total Interest Revenue on Discounts

Simpler Terms: Maturity Value of the Note LESS the Discount of the Note = Proceeds Received in Interest

*** Discount is ALWAYS applied to the maturity value

Question 9

Components of Gross AR

Answer 9

• Beginning AR Balance
• Credit Sales (Net of Collections)
• Sales Returns (decreases AR)
• Accounts Written Off (decreases AR)

DOES NOT Include Allowances for (future) estimated sales returns and uncollectible accounts