Lesson 8: Trade Receivables

Question 1

Note:
Some credit customers may run into financial difficulties and are not able to pay their amount owing.

This uncollectable amount is an IMPAIRMENT LOSS ON TRADE RECEIVABLES

Question 2

What are the objective evidence of impairments to determine whether the receivables are impaired?

Answer 2

-Significant financial difficulty from a receivable or debtor such as bankruptcy
-Breach of contract by debtor when a debtor defaults on payments
-Delayed payments despite repeated reminders

Question 3

What is default?

Answer 3

A default is a missed payment or multiple missed payments on money you’ve borrowed

Question 4

What is the allowance for impairment of trade receivables?

Answer 4

It represents the company’s estimate of the amount of uncollectible receivables

Question 5

What is a Contra-asset account?

Answer 5

Asset reduction account

Question 6

What is a General Allowance?

Answer 6

The amount of allowance is estimated based on a certain percentage of total credit sales (Income Statement Approach) or a certain percentage of total trade receivables outstanding (Balance sheet approach)

The percentage could depend on the history of repayment by the credit customers in general, the state of the economy etc.

Question 7

What is Specific allowance?

Answer 7

allowance is made on the specific trade receivables that have the possibility of being uncollectable based on customer-specific information

Question 8

What is the Impairment loss on Trade Receivables?

Answer 8

The difference between the beginning balance and the required ending balance after adjusting for write-offs is the impairment loss on trade receivables

Question 9

Note:
‘allowance for impairment of trade receivables’ is a contra-asset account [asset reduction account] and has a CREDIT balance

Question 10

Note:
the allowance for impairment will result in an impairment loss which is an OPERATING EXPENSE in the INCOME STATEMENT in the current period

Question 11

Note: Sold on account means sold on credit

Question 12

How does net value represent the prudence concept?

Answer 12

Showing ‘net’ value is to comply with the prudence concept

which states that provision or allowance should be made for all foreseeable losses and that assets should not be carried in excess of amounts expected to be realised from their sale or use

Question 13

How is impairment loss related to the matching concept?

Answer 13

The allowance for impairment will result in an impairment loss which is an operating expense in the Income Statement in the current period.

This is to comply with the
matching concept by ensuring that the impairment loss is matched to its related revenue in the same accounting period to ensure that profit is accurately determined.

Question 14

Formula

Answer 14

(Beginning allowance) - (Receivables write-offs) + (Impairment loss) = Ending allowance

Question 15

Note:

When reversing impairment loss in income statement

Answer 15

Add: Reversal of impairment loss on trade receivables 50

For balance sheet, just change to new amount

e.g. from 150 to 100,

Less: Allowance for impairment of trade receivables (100)

Question 16

Recovery of trade receivables that was previously written off

Answer 16

Dr Trade receivable
Cr Allowance for impairment of Trade receivables
[To reinstate the customer’s account to its balance before the write-off]

Dr Cash/Bank
Cr Trade receivable
[To record collection from the customer]

Question 17

Note:

Beginning allowance - Receivables write offs + Impairment loss = Ending allowance