Receivables Flashcards
in valuating receivables how are discounts accounted for?
-prompt payments for example my give a discount 2/10, net/30 which means if paid in 10 day then you get a 2% discount but its still due in 30
what is the gross method?
show at gross if discount is taken then it is considered a reduction of sales
what is the net method?
show at net, if discount not taken considered as interest income for the discount amount
what are sales returns and allowances?
an estimate of amounts expected to be returned in the future, considered a reduction of sales and receivables.
Journal entry
debit-sales returns (contra sales acct)
credit-allowance for sales returns (contra A/R)
what is the JE for uncollectible A/R?
Initial Sale
Debit-A/R
Credit-Sales
Uncollectible amount
Debit-bad debt expense
credit -allowance for uncollectible accounts (doubtful accts)
what is the direct write off method and why is it not considered GAAP?
- bad debt expense is recognized when a specific account is determined to be uncollectible, no valuation account used
- *lacks matching - bad debt not recorded at time of sale
- *not conservative-A/R carried at face amount which will overstate the A/R balance in the B/S.
what are the two acceptable GAAP methods for calculating bad debt expense?
- % of credit sales (I/S approach)
- % of receivables (B/S approach)
what is the % of credit sales method?
- I/S approach
- base bad debt expense on a % of credit sales
- record expense at point of sale (emphasis on matching principle)
calculated: credit sales X % estimate of amounts not collected = bad debt expense and this amount is the actual amount for the journal entry
under the % of CREDIT SALES method what are the effects of bad debt expense?
- reduces carrying amnt of A/R to net realizable value
- *referred to as valuation account
- *reported as contra-asset to A/R
- *increased when bad debt expense recorded
- *decreased when accounts written off
- *increased when recoveries occur
what is the % of RECEIVABLES METHOD?
- aging of A/R
- age all the outstanding receivables
- emphasis on ASSET Valuation principle
calculation:
Outstanding AR X uncollectible % of A/R (which is managements estimate) = the allowance for bad debt (this is the target amount so you will book the DIFFERENCE to make it equal the target)
what is pledging of securities and how are they accounted for in the financials
receivables are used as collateral to secure the loan. this must be adequately disclosed in the FS notes.
the company remains the legal owner of the financial asset and simply records a liability for the amount borrowed:
Journal entry:
debit-cash
credit-note payable
what is assigning of receivables?
the client borrows the necessary cash, and agrees to use the proceeds from the receivable to repay the lender. customer maybe notified to pay the lender directly instead of the client.
what is factoring with recourse?
the client sells the receivable to another party w/the buyer retaining the right to demand the client make good on the receivable if the customer does not pay as promised.
what is factoring w/o recourse?
the client sells the receivable to another party (a factor) with the buyer assuming the risk that the receivable may not be collectible.
how are transfers & servicing of financial assets accounted for?
- if control has been surrendered, the transfer will be recognized as a sale along with a related gain or loss
- if control has NOT been surrendered, the transfer will be recognized as a secured borrowing w/the financial instrument pledged as collateral.
what are the journal entries on the b/s to show assigned A/R?
debit-A/R assigned
credit- a/r
net affect in assets is zero just letting potential investors and creditors know that there are receivables that are pledged as collateral.
what is a factor’s holdback
“due from factor” is an amount which provides a margin of protection against sales discounts, sales returns & allowances, and disputed accounts.
what is a recourse obligation?
probable uncollectible accounts is an amount included as protection for the transferee against uncollectible accounts such obligations result in a continuing interest in the asset.
what is the sale of a receivable w/o recourse?
means that the buyer cannot come back and request payment if the customers don’t pay.
what is the sale of a receivable w/recourse?
means that the buyer can demand payment from the seller if the customers don’t pay.
what is the journal entry for the sale of receivables w/recourse and a factoring fee that results in a loss?
debit: Cash (for the net amount of cash&factoring fee)
debit: Loss on factoring (amount of factoring fee)
debit: allowance for doubtful accounts (plug amount)
credit: liability on transferred receivable (face amount of receivable)
credit: estimated recourse liability (for amount of bad debt expense)
What is the formula for calculating the net proceeds (amount paid by the bank) for a discounted note?
Face value (of the accts recv) x interest rate @ maturity X length of the note = the maturity value
Maturity value x the discounted interest rate X time remaining in the original term of the note
Maturity value - the value of the discounted interest = the net proceeds from a discounted note or the amount of paid by the bank.
what is the journal entry for the proceeds received for a discounted amount for the receivable?
debit-cash (maturity value minus the discount amount)
debit-loss on discounting
credit- notes receivable for the full face amount of the note.
what is a servicing liability
the entity with the servicing rights may not receive any compensation or may receive compensation that is below the fair value compensation for performing the servicing obligation
what is a servicing obligation?
servicing a note receivable includes such administrative functions as sending debtors monthly statements, collecting payments, allocating payments between principal and interest & sending tax information forms to debtors.
what is a servicing asset?
the entity may receive compensation that exceeds the fair compensation for performing the servicing obligation
what is the amortization method when there is a servicing asset or servicing liability?
- the servicing asset/liability is amortized over the period during which servicing income(asset) or loss (liability) will be recognized.
- the amortization w/be in proportion to the amount of income or loss
- the asset or liability is assessed for impairment(asset) or increased obligation (liability) @ each reporting date.
what is the fair value method when there is a servicing asset or servicing liability?
- the servicing asset or liability is adjusted to fair value on each reporting date
- increases or decreases are reported in earnings
- selecting the FV method involves an irrevocable election.
how are i-o strip (interest-only strip) accounted for?
- considered financial instruments not servicing assets
- the entity receives a proportionate amount of each interest payment received
- they are reported at FV when received
- they are subsequently accounted for as available for sale securities or trading securities as appropriate.
when is a receivable tested for impairment?
when it appears it won’t be collected
what are the steps if a loan is considered impaired?
write the loan down to either of the following:
- PV of future principal & interest inflows
- loans market price
- FV of the collateral
what is the journal entry for a impaired receivable?
debit-bad debt expense
credit-allowance for impaired loan
how is the amount of an impaired receivable calculated?
if a note receivable is impaired the loss is measured by the creditor as the difference btwn the investment in the loan (usually the principle plus accrued interest) & the expected future cash flows discounted @ the loan’s historical effective interest rate. US GAAP prohibits the reversal of an impairment loss.
when do you impute an interest rate?
when the interest rate is not stated and the FMV of the note is not determinable or the interest rate isn’t fair. Use a reasonable rate for a note of this type. use the PV of a note similar to this type.
when does the AICPA permit a company to ignore interest components?
- when the receivable will be collected w/in 30 days
- the entire receivable will be collected w/in a year
- the terms of the sale are customary in the trade
under IFRS how are receivables classified?
a financial asset b/c it represents a contractual right to receive cash.
how does IFRS determine what a current asset is?
- the asset will be realized, sold, or consumed w/in one operating cycle
- the asset is being held for trading purposes
- the asset is expected to be realized w/in 12 months of the date of the financial statements or
- the asset is cash or a cash equivalent that is not restricted.
under IFRS how are receivables accounted for?
required to be reported separately from
- trade customers
- related parties
- other amounts including prepayments
what are the differences in GAAP and IFRS in regards to receivables?
- transaction costs attributable to acquisition of receivable included in carrying value reducing effective rate
- required to be tested for impairment loss may be recovered
- uses the word provision for instead of the word “allowance for”
