M2 AR

Question 1

A method of estimating credit losses that emphasizes asset valuation rather than income measurement is the current expected credit loss (CECL) method based on:

Answer 1

Aging the receivables

Question 2

When asked to calculate credit loss expense, how should you do it? (think structure)

Answer 2

Start with the beginning balance, and work your way to the ending balance, think BASE

B: Beg, allowance for CL (original amount estimated not to collect) $30
A: FIND, credit loss expense: $34
S: Write offs: -$40
E: End, allowance for CL: $24

Question 3

What does it mean to factor an AR outstanding?

Answer 3

To sell AR to the factor “buyer” for cash, with or without recourse

This is the quickest way to covert AR to cash

Question 4

What is factoring AR without recourse?

Answer 4

Its a true sale, where the factor assumes all risk for uncollectable AR

Removes AR from our books completely

Db Cash (paid now)
Db Due from factor (paid later)
Db Loss on sale of receivable (loss incurred)
Cr AR (write off original AR)

Question 5

What is factoring AR with recourse?

Answer 5

The factor has the option to resell the uncollectibles if certain conditions are met

If all conditions aren’t met, then this transfer is treated as a loan

Question 6

What does it mean to securitize AR?

Answer 6

Transfer of AR to an investor for less (50%) than their total value, then the investor can buy them like a security in hopes that more than 50% are collectable