2 Receivables

Question 1

Are amounts due from officers, employees, or stockholders included in accounts receivable?

Answer 1

No, they are reported separately

Question 2

Why is the Direct Write-off method not consistent with GAAP?

Answer 2

Because not MATCHING expense at time of sale and it is not CONSERVATIVE as A/R is carried at its full face/gross amount

Question 3

What method for calculating bad debt expense results in better matching?

Answer 3

Income statement method (% of sales approach)

Question 4

What method for calculating bad debt expense results in better asset valuation?

Answer 4

Balance sheet method (% of receivables approach)

Question 5

Does writing off of receivables have an effect on their Net Realizable Value?

Answer 5

No, it has no effect on receivables’ NRV.

Question 6

How might a company generate cash from receivables before collecting cash from the customer?

Answer 6

1) Pledging
2) Assigning
3a) Factoring (sale with recourse)
3b) Factoring (sale without recourse)
4) Discounting (used for longer term)

Question 7

What is meant by pledging a receivable?

Answer 7

• Offering (“pledging”) the receivable asset to the lender as collateral to secure the loan.
• less formal than assigning b/c no specific accounts ID
• When this occurs, it must be adequately disclosed in a footnote in the financial statements.

Question 8

What is meant by assigning a receivable?

Answer 8

• 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.
• borrower reclassifiesthe receivable
  
  • accounts receivable assigned

Question 9

What is meant by factoring without recourse?

and Journal Entry

Answer 9

• 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.

(dr) Cash
(dr) Receivable from Factor (hold back % for sales returns)
(dr) Loss on Sale of AR (factoring fee)
(cr) Accounts Receivable

Question 10

What is meant by factoring with recourse?

and Journal Entry

Answer 10

• 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.

(dr) Cash
(dr) Loss on Sale of AR (factor fee: incl recourse L)
(cr) Recourse Liability (% held for bad debts)
(cr) Accounts Receivable (total amt)

Question 11

Which factoring method would generally, all things being equal, result in a greater amount of cash up front?

Answer 11

Factoring with recourse

Question 12

Which factoring method results in writing off the receivable?

Answer 12

Factoring without recourse

b/c treated as sale

Question 13

Which factoring method results in keeping the liability and creating a separate liability?

Answer 13

Factoring with recourse

Question 14

When pledging or assigning receivables, does the firm remain the legal owner of the financial asset?

Answer 14

Yes

Question 15

When pledging or assigning receivables, what journal entry records the receipt of cash?

Answer 15

Dr. Cash Cr. Note payable

Question 16

What journal entry would be used to assign receivables?

Answer 16

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.

Question 17

When discounting a note receivable, how is the maturity value determined?

Answer 17

Calculate the interest amount (face x interest rate x term) and add to the face amount

Question 18

When discounting a note receivable, does the discount apply to the face amount or the maturity value?

Answer 18

It applies to the maturity value

Question 19

What value are receivables that occur in the ordinary course of business (A/R) recorded at?

Answer 19

Face Value

Question 20

What value are receivables (Note Rec) that DO NOT occur in the ordinary course of business (Long-Term) recorded at?

Answer 20

Present Value (time value of money applies)

required by GAAP

exception: notes < 1yr

Question 21

What is a notes receivable?

Answer 21

Often related to non-customer transactions although many larger consumer items and transactions between businesses require a promissory note

• more formal financial instrument than AR
• valuation at PV
• typically from sale of PPE, conversion of AR, lending transactions

Question 22

What are the 4 types of receivables?

Answer 22

• Accounts receivable:
  
  • related to customer transactions,
  • short length 30-90d,
  • no interest element
  • Trade receivable= accounts rec
• Notes receivable:
  
  • noncustomer (ex: sale of noncash A, lending transactions, conversion of other rec),
  • longer time than AR
  • interest element
  • Nontrade receivable = noncustomer transactions

Question 23

What is a trade receivable?

Answer 23

another name for customer accounts receivable

Question 24

What is a non-trade receivable?

Answer 24

Those receivables created in non-customer transactions

Question 25

Accounts Receivable 1. valuation 2. factors affecting valuation (general)

Answer 25

* Valued at **_net realizable value, NRV_** = amt cash expect to collect at due date or maturity * on BS: AR *_less_* allowance for uncollectible amounts 5 factors 1. trade (quantity) discounts; 2. cash (sales) discounts; 3. sales returns and allowances; 4. non-collectible accounts. 5. freight charges FOB shipping/destination

Question 26

What are the two methods of accounting for receivables?

Answer 26

The gross method (before discount) and the net method (after discount)

Question 27

Who is the **_maker_** of a note?

Answer 27

* The buyer or borrower * This party is making an unconditional promise to pay principal and interest over the note term

Question 28

Who is the **_holder_** of a note?

Answer 28

* The holder of the note (seller or lender) * is the creditor and is the firm recording the note receivable on its books.

Question 29

How are notes recorded?

Answer 29

at Present Value unless its less than a year term

Question 30

Trade (quantity) discount

Answer 30

* offered for high volume/quantity * **_Chain discount_**: get multiple discounts * calculate = value \* (1-x) \* (1-y)

Question 31

Cash (sales) discounts

Answer 31

* *_contra_* account to sales, for early payment (failure to take is like interest) * **_Sales discounts forfeited_**: misc Rev account, used in net method * **_Allowance for sales discounts_**: *_contra_* to AR, adjusting entry for end of period, reduces both net sales and net acc rec

Question 32

Sales returns and allowances

Answer 32

* **_Sales returns and allowances_**: *_contra_* account to sales * **_Returns_:** merchandise returned from customer * **_Allowance_**: price reductions of merchandise * **_Allowance for sales returns and allowances:_** *_contra_* to AR, adjusting entry for end of period when sales transactions aren’t completed

Question 33

Accounts Receivable 2 methods in recording

Answer 33

* **_Gross method_**: record rec at gross invoice price (before cash discounts) * **_Net method_**: record rec at net invoice price (after cash discount)

Question 34

Accounts Receivable Journal entries (both Gross + Net)

Answer 34

**_Original recognition of Sale_** (trade discounts in both) (dr) Accounts Receivable (cr) Sales * **_Gross_** method: full value * **_Net_** Method: decreased for sales discount **_Payment rec'd w/in discount period_** * **_Gross_** - decrease cash rec'd by amount of discount (dr) Cash (dr) Sales Discount (cr) Accounts Receivable * **_Net_** - discount already incorporated in A/R (dr) Cash (cr) Accounts Receivable **_Payment rec'd outside discount period_** * **_Gross_** - no adjustment for discount NOT taken (dr) Cash (cr) Accounts Receivable * **_Net_** - record forfeit of discount (dr) Cash (cr) Accounts Receivable (cr) Sales Discounts Forfeited **_Returns and allowances_** (dr) Sales Returns and Allowances (cr) Accounts Receivable * **_Gross_** method: full value * **_Net_** Method: decreased for sales discount **_Adjusting Entry for Estimated Sales Discounts_** (end yr) (dr) Sales Discounts (cr) Allowance for Sales Discounts * **_Gross_** method only * estimate amount of discounts taken by customers

Question 35

Contra- accounts * accounts receivable * sales * other

Answer 35

**_Accounts Receivable_** *_Allowance for Sales Discounts_* * GROSS method * end-yr adj: estimated discounts next yr **_Sales (cr)_** *_Sales Discounts (dr)_* * used in GROSS method * payment w/in discount window * end-yr adj: estimated discounts next yr *_Sales Returns and Allowances (dr)_* * used in BOTH **_Other_** *_Sales Discounts Forfeited (dr)_* * NET method * misc Revenue account

Question 36

Accounts Receivable Gross v Net Method (general)

Answer 36

Gross Method * Records original sale at full price * Records sales discount if paid w/in windo Net Method * Record original sale with discount * Records sales discount forfeited if paid outside window

Question 37

FOB Shipping Pt v Destination

Answer 37

**_FOB shipping point (FOB SP)_** * Seller free of risk/pmt * Buyer has risk/pmt **_FOB Destination_** * Seller has risk/pmt * Buyer is free of risk/pmt

Question 38

Accounts Receivable Recognition GAAP v IFRS

Answer 38

* IFRS: defines Revenue from BS view, based on inflow of economic benefits from ordinary business * AR (and Rev) can be recog if there is *_firm sales commitment*_ and _*recog_* criteria met * Rev and A are recogn when: * Probable future economic benefits * Rev can be measured reliably * Costs can be measured reliably * Sign risk/rewards of ownership are transferred * Managerial involvement is not retained as to ownership or control * May meet IFRS for recog, but not in US * Measurement criteria for reporting AR very similar: future economic benefit of AR is analogous to NRV

Question 39

Accounts Receivable Uncollectibles Accounts involved

Answer 39

**_I/S_****_Bad debt expense, BDE**_(_**uncollectible accounts expense_**): * records effects of uncollectible accts * Considered cost of doing business NOT sales adjustment **_B/S_****_Allowance for uncollectible accounts_**: * contra-account to AR

Question 40

Direct Write-off Method Pros/cons

Answer 40

Cons: ***NOT considered GAAP***, no basis for estimating bad debts * Poor BS valuation: AR is overvalued * Poor matching Rev/Exp: Rev recog from credit sale in yr 1, BDE in subsequent yr Pros: * Might not be materially different in effect on FS relative to allow method * Simple and practical to use

Question 41

Direct Write Off Method Journal Entries * uncollectible * collection of previously written off

Answer 41

**_Account deemed uncollectible_** (dr) Bad Debt Expense (cr) Accounts Receivable **_Collection of previously written off_** (dr) Cash (cr) Bad Debts Recovered

Question 42

Allowance Method * when used * when recorded * pros

Answer 42

* Used by most large firms, required under GAAP if uncollectible accts are 1. probable 2. estimable * Records estimate of BDE at *_end of each yr_* adjusting entry * Allowance (contra-AR) created reduces Net AR * ***Both Income and Net AR are reduced in yr of sale by*** * Pros: * Value AR at **_net realizable value (NRV)_** on BS * Recog Rev/Exp from credit sales in same acct year

Question 43

Allowance for uncollectible accounts 2 methods to estimate

Answer 43

**_Income statement approach (% of sales)_** * Estimate uncollectible AR as a % of sales * uses prior year collection rates * Directly calculates amt of BDE * = *_Credit_* sales \* % of sales uncoll * Previous balance in Allow acct not considered * GOAL: properly value IS accounts * Sales Rev * BDE **_Balance sheet approach (% of Receivables)_** * Estim uncollectible AR as % of AR balance outstanding * Direclty calculates *_ending balance of allowance_* acct * = AR \* % of AR uncoll * Need to find difference bet existing balance in allowance and desired balance * GOAL to properly value BS accounts * Net Accounts Rec

Question 44

Allowance for Doubtful Accounts Journal Entries * end of period adjustment * write off * recovery of accounts

Answer 44

**_End of Period Adjustment_** (dr) Bad Debt Expense (cr) Allowance for Doubtful Accounts **_Write off_** (dr) Allowance for Doubtful Accounts (cr) Accounts Receivable **_Recovery of accounts_** previously written off (dr) Accounts Rec (cr) Allowance for Doubtful Accounts (dr) Cash (cr) Accounts Receivable

Question 45

Accounts Rec + Allowance T-accounts of use

Answer 45

**_Accounts Receivable (+A, dr)_** * **(dr) Beg Balance** * (dr) add: Credit Sales * (dr) add: Reinstatements * (cr) less: cash collections * (cr) less: write offs * **(dr) End Balance** **_Allowance for uncollectible accounts (-xA, cr)_** * **(cr) Beg Balance** * (cr) add: BDE * (cr) add: Reinstatements (dr) less: write offs * **(cr) End Balance**

Question 46

Interest Elements in Notes Receivable 2 types

Answer 46

**_Interest-bearing note_**: interest element is *_explicitly_* stated * Pay interest amt *_in addition_* to face amount of note * Ex: 3yr, 9% NR amt collected is face amt (principle) + interest **_Non-interest-bearing note (implicit interest)_**: not explicitly stated, but rather included in face value payment at end * purchase price is reduced to change amt interest rec * Use PV of future cash flows to calculate interest **_discounting a note_** * Ex: 2yr, $13K non interest bearing NR amt collected is face amt of note (ncludes both principle and interest)

Question 47

Notes Receivable - Interest Stated Journal Entries * date of sale * accruing interest * collection

Answer 47

**_Date of Sale_** (dr) Note Receivable (face value) (cr) Sales **_Interest Accrued_** (dr) Interest Receivable (cr) Interest Income **_Collection_** (dr) Cash (cr) Interest Receivable (cr) Note Receivable (face value)

Question 48

Notes Receivable: Non-Interest Bearing Journal Entries * date of sale * accruing interest * collection

Answer 48

*interest income brings PV to Face value* **_Date of Sale_** (dr) Note Receivable (use PV of face value) (cr) Sales **_Interest Accrued_** (dr) **Note** Receivable (cr) Interest Income **_Collection_** (dr) Cash (cr) Note Receivable (face value)

Question 49

Note Receivable different rates used

Answer 49

**_Discount rate**_ used is _**market rate_** of interest on date of note creation * \*\*might be different from note’s stated rate * Any discount rates are **_amortized_** by applying the effective interest method **_Stated rate_** is on face of note

Question 50

Note Receivable total interest over life of loan * interest bearing * implicit

Answer 50

Interest Bearing Note * if equal payments over life of principle and interest * total interest revenue = total amount rec'd - PV of note Implicit Note * interest is the amount that increases PV (at beginning) to face value (at collection)

Question 51

Note Receivable valuation

Answer 51

*Generally at PV* **_Exchanged for Cash:_** * only cash * PV at issuance = cash proceeds exchanged * if cash and promise to provide merchandise at a discount from mkt price * record at PV **_Interest-bearing:_** * PV is same as face amount of note **_Non-interest bearing (or unrealistic stated rate):_** * report at whichever is more determinable: * PV * FV of property, good, service exchanged * Discount/premium amortized using *_interest method_* * Calculate interest with market rate applied to carrying amount of note at beginning of period **_Loan origination fees_**: deferred/amortized over life of loan * an adjustment to interest income

Question 53

Note Receivable Journal entries discount / premiums (seller of note)

Answer 53

**_PREMIUM_**: stated rate \< mkt rate *_receive NR in exchange_* (dr) Note Rec (cr) Discount on NR (cr) Asset *_interest pmts rec'd_* (dr) Cash (dr) Discount on NR (cr) Interest Income *_rec loan principle_* (dr) Cash (cr) Note Rec **_PREMIUM_**: stated rate \> mkt rate *_receive NR in exchange_* (dr) Note Rec (dr) Premium on NR (cr) Asset *_interest pmts rec'd_* (dr) Cash (cr) Premium on NR (cr) Interest Income *_rec loan principle_* (dr) Cash (cr) Note Rec

Question 54

Receivables as Immediate sources of cash 3 parties involved

Answer 54

* **_Maker (customer)_**: debtor that has borrowed funds or purchased A and provided NR to original creditor * **_Original creditor**_: (_**transferor_**) furl that has loaned funds/sold A to maker * **_3^rd party financial inst**_: (_**transferee_**) provides funds to original creditor

Question 55

Transferring Receivables criteria for sale if met / not met

Answer 55

***Meets ALL 3 conditions:*** * Transferred A isolated from transferor, even in bankruptcy * Transferee is free to pledge or exchange A * NO agreement in which T-or will be required to repurchase the A **If all 3 conditions met --\> record as a SALE** *_HAS continuing involvement_* * remove/reclassify A * recognized A recd, L incurred * gain/loss recorded *_NO continuing involvement_* * remove A * gain/loss recorded **If NOT met is SECURED BORROWING:** * transferor is borrowing funds AND using rec as collateral for loan * A remains on books * record a L * No gain/loss on sale --\> is interest expense

Question 56

Transfer of NR * recourse * notification

Answer 56

**_Recourse_**: T-or responsible for nonpmt on part of original maker of rec * (ie: orig debtor defaults, original creditor assumes all pmts on rec) * **_Without recourse_**: T-or NOT responsible for nonpayment * Usually records as sales b/c control has based to T-ee **_Notification_**: maker of rec is informed of transaction and instructed to make pmts to 3^rd party * **_Non-notification_**: maker not informed and continues to make pmts to original creditor

Question 57

Discounting - transfer of AR

Answer 57

* sale of **_NOTE_** receivable to 3rd party * usually with recourse * uses a contra asset to NR * calculations * interest accrued prior to discounting * proceeds to be rec'd * discount charged by bank * = disc rate \* maturity value (P+I) \*m/yr * proceeds = maturity value - discount * can use * footnote disclosure: NR removed from books * contra A: NR stays on books, use contra-account

Question 58

Discounting Note Rec Footnote method * calculation * JE

Answer 58

**_Accrued interest_** for time held NR = face amt \* stated rate \* m-held/yr **_Maturity Value_** = Face Amount + Total Interest * **_Total Interest_** (prorated for original term) * = face amt \* stated rate \* m/yr **_Proceeds from Discounting Note Rec_** = Maturity Value - Discount charged by bank * **_Disc by bank_** = maturity value \* bank disc rate \* remaining m/yr **_Discounting of NR_** (dr) Cash (= proceeds) (dr) Interest Expense (plug = tot interest at mat - bank disc) (cr) Interest Income (accrued amount) (cr) Note Rec (face value, remove from books) **_Default (by maker w/ recourse)_** (dr) N/R Overdue (=maturity value) (cr) Cash

Question 59

Discounting Note Rec contra asset * calculation * JE

Answer 59

**_Accrued interest_** for time held NR = face amt \* stated rate \* m-held/yr **_Maturity Value_** = Face Amount + Total Interest * **_Total Interest_** (prorated for original term) * = face amt \* stated rate \* m/yr **_Proceeds from Discounting Note Rec_** = Maturity Value - Discount charged by bank * **_Disc by bank_** = maturity value \* bank disc rate \* remaining m/yr **_Discounting of NR_** (dr) Cash (= proceeds) (dr) Interest Expense (plug = tot interest at mat - bank disc) (cr) Interest Income (accrued amount) (cr) Note Rec Discounted (face value, remove from books) **_Repayment of note by maker_** (dr) N/R Discounted (=face value) (cr) N/R **_Default (by maker w/ recourse)_** (dr) N/R Overdue (=maturity value) (cr) Cash (dr) N/R Discounted (=face value) (cr) N/R

Question 60

Impaired Loan (NR) (def)

Answer 60

**_Impaired loan_**: present value (PV) of future cash flows expected to be collected (using original effective interest rate) \< carry value (CV) * If the FV of loan is determinable use it instead of PV * Loss is considered ***_bad debt expense / allowance for decline in NR_*** *(contra to receivable)*

Question 61

Impaired Loan (NR) * Measurement * Initial Recognition

Answer 61

Measure impaired loan w/ one of 3 methods * _Discounted Future Cash Flow_: PV of future P+I inflows (net of disposal costs) * Discounted w/ loan’s effective interest rate * Observable _market price_ * _FV of collateral_ method: if loan is collateral dependent **Discounted Future Cash Flow method** * given agreed reduction in principle and interest rate * **_Unpaid Investment_** (due from borrower) @ this date = _Principal_ (face) + _unpaid interest_ (to date, using stated rate) \*also include any net deferred loan *_fees/costs*_ and unamort _*prem/disc_* * **_PV of Reduced Principal and interest (_**agreed reduction amount) * **_Allowance for impaired loan_** = Unpaid Investment - PV of reduced P+I **_Journal Entry_** (dr) bad debt expense (cr) Allowance for Impaired Loan

Question 62

Impaired Loan (NR) Subsequent recognition of interest *_after_* impairment 2 methods

Answer 62

**_Interest method_**: same as for any other note or bond * interest rev for period is based on NET note balance at BEG of period * Int rev = new CV (impaired principle) \* original int rate **_Cost-recovery method_**: * delays recog of interest REVENUE until entire new CV (after impairment) is received * Int rev = 0 for each period until cumulative pmts have recovered the new CV (after impairment)

Question 63

Impaired Loan (NR) IFRS * impairment determination * valuation

Answer 63

* If CV of A \> amt coult be reoverd through A use or by selling it is impaired * IFRS more flexible in allowing reversal of impairment losses **_Recoverable amount_** = higher of Fair Value, less cost to sell OR value in use **_Value in use_**: discounted PV of futures cash flows expected from A **_Cash generating unit (CGU)_**: smallest group of As that can be IDd that generates cash flows, independently of cash flows from other A