Lesson 8: Trade Receivables Flashcards

1
Q

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

A
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2
Q

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

A

-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

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3
Q

What is default?

A

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

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4
Q

What is the allowance for impairment of trade receivables?

A

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

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5
Q

What is a Contra-asset account?

A

Asset reduction account

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6
Q

What is a General Allowance?

A

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.

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7
Q

What is Specific allowance?

A

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

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8
Q

What is the Impairment loss on Trade Receivables?

A

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

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9
Q

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

A
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10
Q

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

A
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11
Q

Note: Sold on account means sold on credit

A
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12
Q

How does net value represent the prudence concept?

A

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

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13
Q

How is impairment loss related to the matching concept?

A

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.

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14
Q

Formula

A

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

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15
Q

Note:

When reversing impairment loss in income statement

A

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)

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16
Q

Recovery of trade receivables that was previously written off

A

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]