Trade Receivables Flashcards
Cash discount formula 2/10, net 30
Customer may take a 2% discount if payment is made within 10 days. Otherwise, no discount is given and the total amount is due in 30 days.
True or False: GAAP uses accrual and allowance method (for receivables and not direct write-off)
True
What is factoring?
It is a transaction in which an entity sells its AR for cash to a 3rd party (i.e. a factor) at a discount (i.e. a factoring fee). This method allows the entity to collect cash faster than it would by waiting the full collection period for the receivables to be paid. Factoring can be done with recourse or without recourse.
Negative adjustment (during my own calc) means REVERSAL of credit losses/expense in IS.
True
Is there any impact on the credit loss expense if A/R is later recovered after being written off?
No, no effect. The A/R is temporarily reinstated and then immediately removed when recording the collection of cash. The CV of A/R will decrease. Allowance for credit loss will increase.
Writing off of AR will have no effect of NI and no effect on Total Assets
True
A company entered into a loan with a lender for 100,000 and pledged $120,000 of the company’s accounts receivable as collateral. The lender does not have the right to sell or repledge the AR. When the company receives the cash for the loan proceeds, what entry should be made to AR?
No entry is required because the lender does not have the right to sell or repledge the AR. Footnote disclosure of the pledge is required.
Annual Interest Cost
Net Cost/Net Amount received
Net Cost = Fee-Savings
Net Amount Received = % of advance received from the factor
Long-term receivables and short-term sales not under customary trade terms
Use Fair rate of Interest (market rate)
(1) Less than 1 year note receivable
(2) More than 1 year bond
(1) Report at Face Value (int component can be ignored)
(2) Calc int component on it first and then use PV factor on the entire maturity value
Credit loss expense will be _____
Calculated figure in the middle (which is used to get to year end balance)
Use the ___________ value while calculating discounting a note
MATURITY value
Write-offs decrease A/R as well as the allowance for credit losses.
True
FACTORING
Sale of SHORT TERM A/R
DISCOUNTING
Sale of LONG TERM Note Receivable
FACTORING
Buyer applies a factoring fee,
Factoring without recourse is a ______
Sale
DISCOUNTING
Calculate bank discount on MATURITY VALUE (face value + Int)
Regardless of the accounting method, the $1,000 initial investment and $500 capital draw affect only the balance sheet and not the income statement.
True
Loan write-off should be removed
Sales return entry - Credit entry
Assignment or Transfer entry - Credit entry
Write off - Credit entry
True
Credit sales or sales on credit
Debit entry
Factor’s holdback accounts for the proceeds retained by the factor to cover estimated sales discounts, sales returns and sales allowances. When all amounts have been collected by the factor, the balance in factor’s margin is returned to the seller.
Therefore, this account is a receivable reported as a current asset on the balance sheet.
In a specific assignment of receivables, collections on the assigned accounts are generally remitted to the assignor. A specific assignment of receivables bestows more formal rights upon the assignee (lender) in that the AR do not simply collateralize the loan, but collections on the assigned accounts are actually remitted to the assignor who remits them to the assignee (lender).
True
Once a company sells receivables to a factor it normally has no further involvement with the receivables. The factor usually collects the remittances directly from the customer.
True
