Receivables

Question 1

Receivables are recorded at what

Answer 1

Net realizable value

Question 2

Accounts Receivable

Answer 2

The amount of cash the company expects to actually collect.

Question 3

Items that reduce AR

Answer 3

Sales Discounts
Sales Returns
Non-collectible amounts

Question 4

Gross Method

Answer 4

When AR is recorded, the gross amount is shown along with a journal entry for the discount.

Question 5

Net Method

Answer 5

AR is recorded with the discount already factored in.

Question 6

Uncollectible AR

Answer 6

There has to be some estimate of AR that won’t be collected, because realistically not all AR will be collected.

Question 7

Direct Write-off method

Answer 7

Doesn’t conform to GAAP and is rarely used

When the account becomes uncollectible, it is written off to bad debt expense and AR is reduced by the same amount.

Example:

Bad debt Expense
Accounts Receivable

Question 8

Allowance method

Answer 8

The allowance is a contra account to AR, so it has a credit balance. The idea is that an allowance amount is set for the year, (it’s an estimate), and when bad debt is actually written off, the allowance is debuted (lowered). Then, to get the allowance back where management wants it, it is credited, and that credit’s debit side is bad debt expense.

Question 9

Journal Entries for Allowance method

Answer 9

To write-off uncollectible debt:

Allowance for doubtful accounts
Accounts Receivable

To bring the allowance account back to where it needs to be:

Bad debt expense
Allowance for doubtful accounts

Question 10

Income Statement approach

Answer 10

This approach estimates bad debt as a % of sales and it directly calculates the amount of bad debt expense.

Question 11

Balance Sheet approach

Answer 11

This approach estimates bad debt allowance as a % of AR instead of sales, and it directly calculates the ending balance of the allowance account.

Question 12

Factoring Receivables

Answer 12

The company is selling their receivables at a discount in exchange for cash but depending on the specifics of the transaction, it will either be considered a loan or a sale of the receivables.

Question 13

3 criteria for determining if a transfer of receivables is considered a loan or a sale

Answer 13

1. The transferred receivables are not accessible by the company or its creditors (control is given up)
2. The transferee has the right to sell or pledge the receivables
3. There’s no agreement that lets the company keep control of the receivables

Question 14

Secured Borrowing

Answer 14

If the receivables are transferred but the transferree doesn’t have the right to sell the receivables and the transferor keeps control, then the transaction is “secured borrowing”. They are just using their receivables as collateral and receiving a loan.

Question 15

Journal Entry for a secured borrowing transaction

Answer 15

Cash

Note Payable

Question 16

Factoring Receivables

Answer 16

Company assigns their receivables to a factor (usually a bank) for a fee and receives cash in return.

Question 17

Factoring Receivables without recourse

Answer 17

Considered a sale of the receivables, because once transferred the receivables are up to the factor to deal with and collect on.

Question 18

Journal entry for factoring receivables without recourse

Answer 18

Cash
Loss on Sale of receivables
Accounts Receivable

Question 19

Factoring receivables with recourse

Answer 19

If it is with recourse, it depends on the specifics whether it’s treated as a sale or borrowing. The company might be required to make payments to the factor or possibly buy back receivables. If the transaction meets the requirements of a sale but there is recourse, then a “recourse liability” must be reflected in the books

Question 20

Journal entry for factoring receivables with recourse

Answer 20

Cash
Loss on sale of receivables
Accounts receivable
Recourse liability

Question 21

Pledging (or assigning) Receivables

Answer 21

Another form of using receivables as collateral for a loan but is less formal than secured borrowing. There is nothing reflected in the accounts with a pledge - the agreement is basically that the company will use collections from receivables to pay back the loan, and if the company defaults the transferee can assume the remaining receivables as collateral.