Receivables Flashcards
Are amounts due from officers, employees, or stockholders included in accounts receivable?
No, they are reported separately
What value should accounts receivable be reported at?
Net Realizable Value, which is the gross amount of accounts receivable less allowance for doubtful/uncollectible accounts
What is Net Realizable Value?
The amount owed to us that we expect to convert to cash within one year or the accounting cycle, whichever is longer.
What three methods are used for calculating bad debt expense?
1) Direct Write-off method
2) Income statement method (% of sales approach)
3) Balance sheet method (% of receivable approach)
Why is the Direct Write-off method not consistent with GAAP?
Because not MATCHING expense at time of sale and it is not CONSERVATIVE as A/R is carried at its full face/gross amount
What method for calculating bad debt expense results in better matching?
Income statement method (% of sales approach)
What method for calculating bad debt expense results in better asset valuation?
Balance sheet method (% of receivables approach)
What is the journal entry to write off receivables?
Dr. Allowance for doubtful accounts
Cr. A/R
Does writing off of receivables have an effect on their Net Realizable Value?
No, it has no effect on receivables’ NRV.
How is the recovery of previously written off receivables recorded?
Effectively as if you wrote off the wrong account (actually a net of TWO J/E’s):
Dr. Cash received
Cr. Allowance for doubtful accounts
How might a company generate cash from receivables before collecting cash from the customer?
1) Pledging
2) Assigning
3a) Factoring (sale with recourse)
3b) Factoring (sale without recourse)
4) Discounting (used for longer term)
What is meant by pledging a receivable?
Offering (“pledging”) the receivable asset to the lender as collateral to secure the loan. When this occurs, it must be adequately disclosed in a footnote in the financial statements.
What is meant by assigning a receivable?
Borrowing cash from a lender in exchange for agreeing to used the proceeds from a specific receivable asset to repay the lender. Sometimes, the customer is notified to make payment directly to the lender instead of the client.
What is meant by factoring without recourse?
Selling a receivable asset to another party (the factor), with the buyer assuming the risk that the receivable may not be collectible. This usually involves a “premium” that the seller “pays” in the form of receiving less of a cash payment.
What is meant by factoring with recourse?
Selling a receivable to another party (the factor), with the buyer retaining the right to demand that the client make good on the receivable if the customer does not pay as promised. Given the “recourse” that the buyer has, there is less of a premium that the seller “pays” and, as such, receives a higher amount of a cash payment relative to a similar transaction without recourse.
Which factoring method would generally, all things being equal, result in a greater amount of cash up front?
Factoring with recourse
Which factoring method results in writing off the receivable?
Factoring without recourse
Which factoring method results in keeping the liability and creating a separate liability?
Factoring with recourse
What is it called when the client borrows the necessary cash, and offers the receivable to the lender as collateral in order to secure the loan?
Pledging a receivable
What is it called when the client borrows the necessary cash, and agrees to use the proceeds from the receivable to repay the lender?
Assigning a receivable
What is it called when the client sells the receivable to another party, with the buyer assuming the risk that the receivable may not be collectible?
Factoring a receivable without recourse
What is it called when the client sells the receivable to another party, with the buyer retaining the right to demand that the client make good on the receivable if the customer does not pay as promised?
Factoring a receivable with recourse
What three conditions satisfy a sale (surrender) of receivable assets to another party?
1) Transferred financial instruments have been isolated beyond the reach from the transferor and its creditors (to include bankruptcy)
2) Transferees have the right to pledge or exchange the asset received without restrictions and without providing more than a trivial benefit to the transferor
3) Transferor does not maintain effective control over the financial instrument (doesn’t include any repurchase clauses on the specific assets)
* *Effectively, the receivable has been a) “transferred out of our reach”, b) “the purchaser can do anything they want with it”, and c) “there aren’t any buyback agreements”
When pledging or assigning receivables, does the firm remain the legal owner of the financial asset?
Yes
When pledging or assigning receivables, what journal entry records the receipt of cash?
Dr. Cash
Cr. Note payable
What journal entry would be used to assign receivables?
Dr. A/R - Assigned
Cr. A/R
*This is in addition to the main (Dr. Cash; Cr. Note Payable) journal entry to record the proceeds from the borrowing.
What is a factor’s holdback (or “due from factor”)?
An amount that provides a factor with a margin of protection against sales discounts, sales returns and allowances, and disputed accounts. Will be received from factor once they have received the receivable.
What is a recourse obligation?
An amount included as protection for the transferee (purchaser) against uncollectible accounts
What is an amount that provides a factor with a margin of protection against sales discounts, sales returns and allowances, and disputed accounts referred as?
Factor’s holdback
What is an amount included as protection for the transferee against uncollectible accounts referred as?
Recourse obligation
What is the usual process of selling a note receivable to a bank referred as?
Discounting
When discounting a note receivable, how is the maturity value determined?
Calculate the interest amount (face x interest rate x term) and add to the face amount
When discounting a note receivable, does the discount apply to the face amount or the maturity value?
It applies to the maturity value
When discounting a note receivable, how are the proceeds determined?
Calculate the discount amount (maturity value x discount rate x time remaining) and subtract from the maturity value
What represents a proportionate interest in a financial instrument?
A participating interest
What administrative functions would be included in servicing a financial asset?
Sending debtors monthly statements, collecting payments, allocating payments between principal and interest, and sending tax forms to the debtor.
After receiving cash for a note receivable, does a seller have to continue servicing the receivable?
It is fairly common that the seller retains the obligation of these “servicing rights”
What is it called when the entity with the servicing rights receives compensation below the fair compensation for performing the servicing obligations?
A servicing liability
What is it called when the entity with the servicing rights receives compensation exceeding the fair compensation for performing the servicing obligations?
A servicing asset
What value is a servicing asset or servicing liability initially recognized at?
Fair Value
What two methods are used to account for servicing assets and liabilities?
Amortization and Fair Value methods
What is a component of a financial instrument that is either retained as part of the consideration for the portion of the instrument transferred, or are considered compensation for the service obligations?
An interest-only strip (i-o strip)
What are interest-only strips (i-o strips)?
The interest portion of mortgage, Treasury, or bond payments, which are separated and sold individually from the principal portion of those same payments; thus, yielding synthetic zero-coupon bonds.
How are interest-only strips (i-o strips) accounted for?
As either available for sale securities or trading securities, as appropriate
What is the process of taking a group of homogenous securities, consolidating them, and then transferring them into an entity?
Securitization
What are payments received by the securitization mechanism that are used to pay off debt securities referred as?
Pay-through
What are payments received by the securitization mechanism that are attributed to investors referred as?
Pass-through
When a debtor provides a creditor with collateral for a loan, who retains control of the collateral in most circumstances?
The debtor
When a debtor provides a creditor with collateral for a loan, does the creditor recognize the asset in its financial statements?
No, not until a default on the loan arises
Upon default, whereupon the creditor takes control of the collateral, how will the creditor recognize the event?
The creditor will recognize the asset at fair value and offset the receivable amount. A gain or loss is recognized for the difference.
Upon default, whereupon the creditor takes control of the collateral, how will the debtor recognize the event?
The debtor will eliminate the carrying value of the asset and offset the debt account(s). A gain or loss is recognized for the difference.
In the rare circumstance that the creditor (transferee) receives control of the collateral for the loan, how is this recognized in the financials?
The creditor will recognize a “return” liability of the collateral by entering the following journal entry:
Dr. Asset (collateral)
Cr. Liability (value of collateral, recognizing the obligation to return the collateral)
In the rare circumstance that the creditor (transferee) controls the collateral for a loan and the debtor subsequently defauls, how is this recognized in the financials?
The creditor will eliminate the receivable from the debtor as well as the return liability of the collateral, with a gain or loss as the difference.
If it appears that you won’t collect the amount loaned (impairment), what values does one write the loan down to? (In order of prominence)
1) Present value of future principal and interest inflows
2) Loan’s market price
3) Fair value of the collateral
Are recoveries of impairments permitted under GAAP?
No, like other impairments, US GAAP prohibits the reversal of impairment losses.
What value are receivables that occur in the ordinary course of business (A/R) recorded at?
Face Value
What value are receivables that don’t occur in the ordinary course of business (Long-Term) recorded at?
Present Value (time value of money applies)
When exchanging a note receivable for goods or services, how is the fair market value (exchange value) of the asset determined?
It is the value of the notes receivable less/net of any discounts on those notes receivable
When exchanging a note receivable for goods or services, how is the gain on sale “plug” determined?
It is the difference between the fair market value of the asset and the carrying value of the asset.
When exchanging a note receivable for goods or services and the interest rate is not stated or is unreasonable, how is the discount on the note determined?
The fair market and carrying values of the asset being exchanged will have to be provided, which will then allow the proper discount on the note to be derived.
When exchanging a note receivable for goods or services and the interest rate is not stated and the FMV of the goods or FMV of the note is not determinable, how are the asset values of both items determined?
By imputing the interest rate, using a discount rate that is reasonable for the type of note to determine a reasonable estimate of the note’s FMV. When netting against the carrying value of the equipment, the gain on sale will be the final “plug” figure.
