Green book Flashcards
What are current assets and what is the time frame?
- Cash and cash equivalents (U.S. treasury bills, commercial paper, and money market funds)
- Items to be realized in cash
- Receivables and
- Investments in trading securities
- Items to be sold- inventories; and
- Items to be consumed– supplies, insurance, rent
During the normal operating cycle of the business or 1 yr, whichever is longer
What is the normal operaing cycle of a business?
Cash ⇒ Inventories ⇒ Accounts Receivalbe ⇒ Cash
How does GAAP and IFRS differ in listing current assets on the BS?
- US GAAP lists assets in order of liquidity (CAs above non CAs)
- IFRS lists non CAs above CAs.
What is accrued interest?
Accrued interest is interest that has been earned on a note receivalbe but whcih has not yet been received at the end of the year.
how is interest earned but not received at the end of the year recorded?
DR: Interest receivable
CR: Interest revenue
How is interest revenue calculated?
Principal x rate x time= interest revenue
What are the 2 methods to write off a bad debt?
Direct charge off- the expense is recognized in the year the receivables are written off.
Allowance method- the expense is recognized in the year the credit sales are made. The write off occurs in the period when business is aware of default.
What is the JE for Direct charge off?
DR: Bad debts expense 100
CR: Account receivable 100
*to write off customer’s AR of $100 in Year 2. The credit sale was made in Year 1*
Is direct charge of method acceptable under GAAP?
The direct charge off method is not considered acceptable under GAAP unless the amounts are immaterial.
What is the JE for debt write off under allowance method?
to recognize expense: Year 1
DR: Bad debts expense
CR: Allowance for uncollectible accounts
*to estimate amount of AR that will not be collected as of the end of year 1. The allowance is a contra to AR. the credit sale occurred in Year 1.
Write off: Year 2
DR: allowance for uncollectible accounts
CR: Accounts receivalbe
*to write off customer’s AR in year 2
What is the Net Realizable Value of AR?
AR - the allowance for uncollectible accounts = NRV, the amount of cash expected to be collected from the customrers as of the BS date
How do you record the reinstatement of the customer’s account using Direct charge off method?
DR: AR
CR: Bad debt expense
*basically reverse the write off*
To record collection of the AR
DR: Cash
CR: AR
*cash increases, income increases*
How do you record the reinstatement of a write off using the Allowance Method?
DR: AR
CR: Allowance for uncollectible accounts
To record collection of the AR:
DR: Cash
CR: Accounts Receivalbe
*Cash increases, allowance increases*
What are the 2 methods of estimating bad debts expense when using the allowance method?
- Percentage of sales method (IS approach)
- Aging of AR method (BS approach)
What are the steps in percentage of sales method?
- estimate percentage of credit sales not expected to be collected.
- Apply percentage to net sales/net credit sales.
3. Product of your multiplication is bad debts expense.
- Ignore any balance in the allowance account in making the adjusting entry.
- Stressed IS (matching) over the BS (NRV)
What are the steps in Aging of Accounts Receivable method?
- Estimate percentage of AR not expected to be collected.
- Apply percentage to ending balance in AR
3. Product of your multiplication is the required ending balance in the allowance account
- Bad debts expense for the period is the difference between the required ending balance and the balance before adjustment.
- Stresses the BS (NRV) over the IS.
One method of generating cash from ARs include borrowing. Borrowing assigns the rights to cash collection from specific AR to another party as collateral for a loan. This is referred to as a specific assignment. How is this recorded?
*the AR remain on borrower’s BS, but must be reclassified in the following manner (amount assumed).
DR: AR assigned 2000
CR: AR 2000
The borrowing transaction is recorded as follows, assuming that cash equal to 80% of the assigned accounts is received, less a commission of 5% of the AR assigned.
DR: Cash 1500
DR: Commission expense 100
CR: Notes payable 1600
One other method of generating cash from ARs include transferring AR to another party. These transactions may be accounted for as either a sale or a borrowing depending on whether the transferor surrenders control. How is it recorded if control is surrendered and if control is not surrendered?
If the transferor surrenders control the transaction should be recorded as a sale:
DR: Cash
DR: Loss on factoring
CR: AR
CR: Recourse liability
If control is not surrendered, then it is a borrowing:
DR: Cash
DR: Interest expense
DR: factoring fee
CR: Factor borrowing payable
Factor holdback is the same thing as:
due from factor
How is servicing shown on the financial statements?
On the BS as separate line items for FV amounts and amortization method amounts or display aggregate amounts with FV parenthetical disclosure.
What are the 2 types of subsequent events?
Events that provide additional evidence about conditions that existed at the BS date
Events that provide evidence about conditions that did not exist at the BS date but arise subsequent to the date.
For subsequent events that existed at the BS date requires what?
Requires an adjustment/disclosure to the FS.
For subsequent events that did not exist at the BS date, but arise subsequent to that date, is adjustment to the FS required?
Not required to record an adjustment to the FSs but disclosure is required.
What are cash equivalents?
Short- term, highly liquid investments with maturities less than or equal to 3 months from the date of purchase.