FAR 10 - RECEIVABLES Flashcards
A/R - Net Realizable Value (NRV)
NRV = Gross A/R - Amounts that wont be collected
What are the three ways of calculating bad debt expense>?
- Direct Write-off Method (non-GAAP)
- I/S Approach - % of Credit Sales Method
- B/S Approach - % of Receivables Method
NOTE: Both 2 & 3 are GAAP
I/S Approach - % Of Credit Sales Method
Base expense on percentage of Credit Sales
Emphasis is on the matching principle
Calculation:
+ Credit Sales
x % estimated of amounts not collected
= Bad Debt Expense
B/S Approach - % of Receivables Method
Emphasis on Asset Valuation principle
Calculation:
Outstanding A/R
x Uncollectible % of A/R (mgmt estimate)
= New Allowance for Bad Debt (Target Amt)
Note: New Target should be the ending balance of the Allowance of Bad Debt account. Adjust to the ending balance.
Receivables Journal Entries
Write Off & Recovery (2)
NOTE: When write-off A/R, there is NO net effect on value, why? Because A/R is recorded at NRV.
To Record Bad Debt Expense (Receivable at NRV)
DR: Bad Debt Expense
CR: Allowance (B/S)
To Write Off Receivables:
DR: Allowance
CR: A/R
Revovery of A/R (2 JEs)
DR: A/R
CR: Allowance
DR: Cash
CR: A/R
4 Basic Techniques of Generating Cash from A/R
- Pledging - “pledges” the A/R to the lender as collateral
- Assigning - use proceeds from A/R to repay the lender
-
Factoring - a form of selling A/R with or without recourse
a. ) Without recourse - buyer assumes the risk that the A/R may not be collectible
b. ) With recourse - client make good on promise of selling the A/R and makes payments to the buyer for funds not collectible - ) Discounting - when an interest bearing note receivable is sold to the bank
Accounting for a transfer of a financial instrument, sale or borrow?
Borrow - Control has NOT been surrendered
Sale- Control HAS been surrendered, and meet the following
- Financial instruments has been isolated from transferor & beyond the reach of the transferor
- Transferee has the right to pledge or exchange the financial instrument
- Transferor does not maintain effective control of financial instument
Pledging or Assigning JE
How pledging or assiging JEs look like: 2 ways
DR: Cash
CR: Note Payable
DR: A/R Assigned (simple reclass)
CR: A/R
Sale or Borrowing of A/R JEs
(Control surrendered vs. Not surrendered)
Control NOT surrendered (Borrowing)
DR: Cash
DR: Interest Expense
CR: Note Payable
Control IS surrendered (Sale)
DR: Cash
DR: Due from Factor (with held amount <strong>if </strong>there are <strong>returns of goods</strong>)
DR: Loss on sale of A/R (if Any)
CR: A/R
Factoring - Selling A/R JEs
With & Without Recorse
Without Recorse JE:
DR: Cash
DR: Loss on Factoring
DR: Allowance for Bad Debts (since AR is being sold)
CR: Accounts Receivable
With Recourse JE:
DR: Cash
DR: Loss on Factoring
DR: Allowance for Bad Debts (since A/R is being sold)
CR: Liability on Transferred Receivable
CR: Estimated recourse liability
NOTE: With recourse, the A/R becomes a liablity because the seller still needs to pay the buyer if it cant collect the A/R.
Discounting
Discounting - when an interest bearing note is sold to the bank
Calculation:
+ Face Value = $100
x Interest at Maturity (10%) + $10
= Maturity Value = $110
x- Discount (10%) - $111 (Discount % x Time Remaining)
= Net paid by bank = $99
Journal Entry:
DR: Cash
DR: Loss on Discouting
CR: Note Receivable
NOTE: ( Discount % = Discount Rate x Time Remaining)
How are A/R & Long Term Receivables recorded?
A/R - record at Face Value
(Notes Receivables under 1 year = Face Value)
Long Term Receivables - Record at Present Value
For Notes Receivables - Calculate the maturity value first then multiply by the present value rate.
NOTE: If note says “DUE” then PV the entire note since it’s already at maturity value. If not doesnt have “due” then find out the maturity value AND THEN PV the Note.
