Receivables

Question 1

Define Accounts receivable

Answer 1

An asset recognized to reflect a claim against another party for the receipt of money, goods, or services.

Question 2

Define Trade Receivables

Answer 2

Current assets arising from credit sales to customers in the normal course of business and due in customary trade terms.

Question 3

What items that are considered to be nontrade receivables?

Answer 3

1) Lease receivables
2) Deposits to guarantee payment or to cover possible loss
3) Advances to shareholders, directors, officers, etc
4) Subscriptions for the entity’s securities
5) Tax refunds
6) Claims for insurance proceeds or amounts arising from litigation
7) Interest, dividends, rent, or royalties accrued

Question 4

List the 3 discount types for trade receivables and their definition

Answer 4

1) Trade discounts - adjust gross (list) price for different buyers, quantities, and costs. Net price after the trade discount is the basis for recognition
2) Chain-Trade discounts - More than 1 discount is given to a customer. The discounts calculated separately
3) Cash Discounts (sales discounts) accelerate cash collection by rewarding customers for early payment.

Question 5

What are the 2 methods used to account for cash discounts?

Answer 5

Gross method - accounts for receivables at their face amount. Used for customers not likely to pay within the discount period

Net Method - records receivables net of the cash discount for early payments. Used for customers likely to pay within the discount period.

Question 6

What is the journal entry under the Gross method to record payment received within the discount period?

Answer 6

Cash                      (amount after discount taken)
Sales discount      (Discount amount)
     Accounts receivable                (Face amount)

Question 7

What is the journal entry under the Net method to record payment received after the discount period?

Answer 7

Cash (Face amount)
A/R (After discount taken)
Sales discount (discount amount)
Forfeited

Question 8

What method is used for sales returns that are material?

Answer 8

An allowance for sales returns (contra assets) should be established.

Question 9

How are accounts receivables presented on the balance sheet?

Answer 9

On the face of the balance sheet, A/R reported NET of any allowance and adjustments. @ Net realizable value

The amounts of the allowance and adjustments are indicated within the text.

Question 10

What disclosures should be made relating to accounts receivables?

Answer 10

1) Related party receivables
2) Loss contingencies
3) Pledged or assigned receivables
4) Concentrations of credit risk

Question 11

How are Notes Receivables presented on the balance sheet?

Answer 11

Notes receivables are reported at present value without a separate allowance account.

Question 12

According to GAAP, what are the 2 approaches to accounting for bad debts?

Answer 12

1) Direct write-off method (NOT allowed under GAAP) - expenses bad debts when they are determined to be uncollectible

2) Allowance method (required under GAAP) - attempts to match bad debt expense with the related revenue.
Records bad debt expense as a % of sales or A/R on an annual basis

Question 13

What is the periodic journal entry to record bad debt expense?

Answer 13

Bad debt expense Dr..

Allowance for uncollectible accounts Cr.

Question 14

1) What is the journal entry to record a write off of a specific accounts receivable?
2) What are the journal entry’s to record an A/R that was previously written off but paid at a later time?

Answer 14

1) Allowance for uncollectible accounts DR
Accounts receivable CR

2) Accounts Receivable DR
Allowance for uncolletible accounts CR

 Cash   DR
       Accounts Receivable CR

Question 15

Under the allowance method, what are the 2 approaches to calculating the amount charged to bad debt expense?

Answer 15

1) Income Statement approach (% of Sales)
Embodies the matching principle. It treats bad debts as a function of sales on account.

2) Balance Sheet Approach ( % of Receivables)
The ending balance of the allowance for uncollectible accounts is a percentage of the ending balance of accounts receivable.
–The bad debt expense reflects the adjustment of the allowance to its correct ending balance

Question 16

What is the equation to reconcile the beginning and ending balances of the Allowance for Uncollectible Accounts?

Answer 16

Beginning allowance for uncollectible accounts
+ Bad debt expense recognized for the period
- Accounts receivable written off
+ Collection of accounts receivable previously written
off
= Ending allowance for uncollectible accounts

Question 17

Define factoring

Answer 17

A transfer of receivables to a 3rd party (a factor) who assumes the responsibility of collection

Question 18

What is the difference between factoring without recourse vs with a recourse?

Answer 18

Sale Without recourse means the transferee(creditor) assumes the risks and receives the rewards of collection. Sale is final, and the seller has no further liabilities to the transferee.

Sale With recourse means the transferor my still be required to make payments to the transferee or buy back receivables.

Question 19

Define Pledging

Answer 19

A pledge (a general assignment) is the use of receivables as collateral (security) for a loan. 
Because a pledge is an informal agreement, it is not reflected in the accounts. 

(If a pledge is not a sale, its a secured borrowing)

Question 20

Define Secured Borrowings

Answer 20

A formal borrowing agreement. The borrower signs a promissory note and financing agreement, and specific receivables are pledged as collateral

Question 21

What is accounting for transfers of financial assets based on?

Answer 21

Financial -Components Approach

Question 22

What are the objectives for each party in the transfer of financial assets?

Answer 22

1) Recognize the assets it controls and the liabilities it has incurred
2) Derecognize the assets when control has been given up, and
3) Decrecognize liabilities when they have been extinguished

Question 23

Define continuing involvement

Answer 23

The right to receive benefits from the assets or an obligation to provide additional assets to a party related to the transfer

Question 24

Transfer of financial assets include transfers of

Answer 24

1) an entire financial asset
2) a group of entire financial assets, and
3) a participating interest in an entire financial asset

Question 25

How is a transfer of financial assets determined to be a sale?

Answer 25

When the transferor relinquishes control

Question 26

What conditions must be met for the transferor to relinquish control?

Answer 26

1) The transferred assets are beyond the reach of the transferor and its creditors
2) Transferees may pledge or exchange the assets or interest received, and

3) The transferor does not maintain effective control through,
a) an agreement to reacquire the assets before
maturity
b) the unilateral ability to benefit from causing the
holder to return specific assets, or
c) An agreement making it probable that the
transferee will require repurchase

Question 27

When transferring a participating interest, the carry amount of the entire financial asset is….

Answer 27

allocated based on the relative fair values between the interests sold and retained.

Question 28

Define Notes Receivables

Answer 28

A debt evidenced by a two-party writing (a promissory note). It must comply with the law of negotiable instruments. More formal promises to pay than A/R

Question 29

How are notes with original maturities of 3 months or less treated?

Answer 29

Treated as case equivalents and accounted for at Net Realizable Value

Question 30

How are Notes recorded when they are classified as Current Assets and Noncurrent Assets?

Answer 30

Current Assets are usually recorded at face amount minus allowances (NRV)

Noncurrent Assets are recorded at Present Value of the Expected future cash flows
-An difference between the proceeds and the face amount must be recognized as a premium or discount and amortized

Question 31

Describe the characteristics of a noninterest-bearing note

Answer 31

• Sometimes issued w/o a state rate and an unknown effective rate.
• The rate must be imputed (estimated) based on other facts surrounding the transaction
• Interest in implicit

Question 32

What is the journal entry to record noninterest-bearing notes that DO have an explicit interest?

Answer 32

Note Receivable (Face Amount) DR
Cash CR
Discount on note CR

At end of period:
Discount on Note DR
Interest Revenue CR

Question 33

Describe the characteristics of noninterest-bearing note with unreasonable interest

Answer 33

When a note bears interest at a rate that is unreasonable in the circumstances, interest must be imputed (estimated).
-A not with imputed interest also results in amortization of discount or premium.

Question 34

The steps in discounting are to compute:

Answer 34

1) Total interest receivable on the note
(Face amount x stated rate x note term)
2) Maturity amount
( Face amount + total interest receivable)
3) Accrued interest receivable
( Face amount x stated rate x note term elapsed)
4) Bank’s discount
(Maturity amount x bank’s discount rate x note term
remaining)
5) Cash proceeds
( Maturity amount - Bank’s discount)
6) Carrying amount of the note
(Face amount + accrued interest receivable
7) Gain/Loss
(Proceeds - Carry amount)

Question 35

What is the journal entry to record the notes receivable when discounting?

Answer 35

Cash Dr. (Proceeds)
Note receivable Cr. (Face Amount)
Interest Receivable Cr. (Accrued interest amount)
Dr/Cr Gain or Loss on sale

Question 36

Define Sale as it relates to the transfer of financial assets

Answer 36

A transfer of financial assets over which the transferor relinquishes control

Question 37

A form of continuing involvement by a transferor that has relinquished controlled is what type of transfer of assets?

Answer 37

Recourse obligation

Question 38

Define Securitization

Answer 38

The transfer of a portfolio of financial assets to a trust or other entity and the sale of beneficial interests to investors.