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