Receivables

Question 1

define accounts receivable

Answer 1

accounts receivable arise from the sale of goods or the performance of services that have not been paid.

If they are not related to the normal operations such as amounts due from officers, employees or stockholders, then they are reported separately from trade accounts receivable (ASC 310)

Question 2

what are receivables valued at on the balance sheet

Answer 2

net realizable value (NRV)

Question 3

for bad debt is the direct write-off or the allowance method GAAP

Answer 3

the allowance method is GAAP

Question 4

what are the 2 acceptable methods of bad debt expense

Answer 4

income statement approach (% of credit sales)

balance sheet approach (% of receivables method)

Question 5

which bad debt method better applies the matching principle, income statement approach or balance sheet approach

Answer 5

income statement approach

Question 6

which bad debt method better applies the asset valuation principle, income statement approach or balance sheet approach

Answer 6

balance sheet approach

Question 7

what are the 4 basic techniques for generating immediate cash from a receivable

Answer 7

1. pledging
2. assigning
3. factoring: sale without recourse
4. factoring: sale with recourse

Question 8

define pledging of receivables

Answer 8

the client borrows the necessary cash and “pledges” (offers) the receivable to the lender as collateral to secure the loan. When this occurs it must be adequately disclosed in a footnote in the financial statements

Question 9

define assigning of receivables

Answer 9

the client borrows the necessary cash, and agrees to use the proceeds from the receivable to repay the lender. Sometimes, the customer is notified to make payment directly to the lender instead of the client

Question 10

define receivable factoring: sale without recourse

Answer 10

the client sells the receivable to anther party (a factor), with the buyer assuming the risk that the receivable may not be collectible

Question 11

define receivable factoring: sale with recourse

Answer 11

the client sells the receivable to another party, with the buyer retaining the right to demand the client make good on the receivable if the customer does not pay as promised

Question 12

what 3 criteria must be met for a transfer of assets to be considered a sale and not a borrowing/assignment

Answer 12

1. Assets are isolated and beyond the reach of the transferor and its creditors
2. Transferee can pledge/exchange assets without unreasonable constraints or conditions
3. The transferor does not maintain effective control over the transferred financial assets or third-party beneficial interest (may not have a repurchase or redemption agreement)

Question 13

In the case of assigning or pledging a receivable, what accounts are debited & credited

Answer 13

debit Cash

credit Note payable

Question 14

In the case of selling a receivable, what accounts are debited & credited

Answer 14

debit cash
credit A/R
credit gain or debit loss

Question 15

define discounting of receivable

Answer 15

the sale or assignment of an interest bearing note

Question 16

what is the difference between factoring and discounting

Answer 16

factoring is the sale of short-term accounts receivable. Discounting is the sale or assignment of long term notes receivable

Question 17

define servicing

Answer 17

collecting payments, late fees, foreclosure, collections, etc. This can be done contractually on behalf of another company

Question 18

what are the 2 methods that servicing contract assets/liabilities can be measured

Answer 18

1. amortization method (initially recorded at fair value)

2. fair value method

Question 19

define securitization

Answer 19

the transformation of financial assets into securities (i.e. asset backed securities including mortgages, credit cards, collateralized debt obligations, etc)

Question 20

what are the 3 types of payment methods in the securitization mechanism

Answer 20

1. pay-through
2. pass-through
3. revolving-period

Question 21

what is the accounting standard codification (ASC) for impairments on receivables

Answer 21

ASC 360

Question 22

is short term A/R (due within 1 year or business cycle) carried at face value or present value

Answer 22

face value

Question 23

is long term A/R carried at face value or present value

Answer 23

present value

Question 24

IFRS - what is the term used for the recuction accounts receivable for possible loss

Answer 24

provision (called allowance under GAAP)

Question 25

if a receivable has been previously written off, but then money is later received, what accounts are hit for the recovery

Answer 25

debit cash, credit allowance for doubtful accounts (increase)