Receivables Flashcards
Valuation of Receivables
Valuation of Receivables
A/R should be reported at their net realizable value (NRV). The NRV is the gross amount of A/R less estimates of amounts that won’t be collected due to:
a.) Uncollectible accounts receivables
b.) Discounts for prompt payments (EX. 2/10, N/30)
1.) Gross method – show that gross, if discount is taken, consider a reduction of sales
2.) Net method – show at net, discount not taking, considered interest income
c.) Trade discount – recorded net of any sale or trade discounts
d.) Sales returns and allowances – an estimate of amounts expected to be returned in the future. Considered a reduction of sales and receivables.
Direct Write-Off Method(Not GAAP)
Direct Write-Off Method– (Not GAAP)
– bad debt expense is recognized when a specific account is determined to be uncollectible. No valuation account is used
– A/R is reduced when accounts written off & recorded as bad debt expense.
– Violates GAAP in two ways (but used for tax purposes)
not matching – bad debt expense not recorded at time of sale.
Not conservative – A/R carried at base amount which will overstate the A/R balance in the Balance Sheet.
Income Statement Approach (GAAP)
Income Statement Approach – % of Credit Sales Method – GAAP
Base expense on a percentage of Credit Sales
record expense at point-of-sale. The emphasis is on the matching principle
Credit Sales X % estimate of the amount not collected = bad debt expense (Actual JE)
allowance for bad debts reduces carrying amount 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
Balance Sheet Approach – % of Receivables Method
Balance Sheet Approach – % of Receivables Method
– better asset valuation
– aging of A/R
– age all outstanding A/R’s
– emphasis on Assets valuation
– Outstanding A/R x Uncollectible % of A/R (management estimate)/Allowance for bad debt (target amount)
– separate calculations maybe then four different A/R categories based on age
Transfers and Servicing of Financial Assets (ASC 860)
Transfers and Servicing of Financial Assets (ASC 860)
when a component of a financial asset is not considered a participating interest is transferred, it will be accounted for as a secured borrowing with pledge collateral.
a component of a financial instrument is a participating interest if it has certain characteristics:
– it represents a proportionate interest in the entire instrument
– all cash flows from the instrument, other than those allocated as compensation for services, are divided proportionately among just interest holders.
– The rights of all participating interests have the same priority and are not subordinated to one another.
– all participating interests must agree in order for a party to pledge or exchange the entire financial instrument.
Transfers and Servicing of Financial Assets (ASC 860)
control
Transfers and Servicing of Financial Assets (ASC 860)
the accounting for a transfer of a financial instrument, group of financial instruments, or a participating interest in a financial interest is determined on the basis of whether or not the transferor has surrendered control of the instrument.
– If control has been surrendered, a transfer will be recognized as a sale, along with related gains losses
– if control has Not been surrendered, the transfer will be recognized as a secure borrowing with a financial instrument pledged as collateral
control of a financial instrument
control of a financial instrument has been surrendered (considered a sale) only when all of the following three conditions are met:
1.) the transferred financial instrument has been isolated from the transferor and beyond the reach of the transferor or it’s creditors, including creditors in bankruptcy.
2.) Transferees have the right to pledge or exchange asset it received without restrictions and without providing more than a trivial benefit to the transferor.
3.) The transferor does not maintain effective control over the financial instrument, considering all of the transfer order’s continuing involvement with the instrument. The transferor does maintain effective control when:
a.) An agreement, Internet into contemporaneously with the transfer, both in Steve’s and obligates the transferor to repurchase or regain the transferred answer asset at a fixed or determinable price.
b.) An agreement allowing transferor the unilateral ability to require the transferee to return specific financial assets.
c.) An agreement allowing the transferee to require the transferor to repurchase the financial assets at a price significantly favorable to the transferee.
Unless all three of these conditions are satisfied, the financial asset is considered to have been merely pledged or assigned as collateral for a loan (borrowing transaction).
