F3/M2 Trade Receivables

Question 1

Trade receivables vs. Non-trade receivables

Answer 1

Both are ORAL promises
Trade = customer
Non-trade = other than customer (i.e. employee)

Question 2

What decreases Accounts receivable?

Answer 2

• Cash collections
• Accounts written off as bad debts
• Accounts converted to notes payable

Question 3

Gross method v. Net method (Recording sales discounts)

Answer 3

Gross Method: no JE to record discount initially
- Debit “Sales Discount” contra-revenue account if discount is taken

Net Method: Record revenue @ net amount
- Credit revenue if discount is not taken

Question 4

Trade Discount

Answer 4

• Discounts are taken sequentially
• 40% and 10%; take 40%, then 10%
• Always record revenue and receivables net of discount

Question 5

(T/F): The Direct Write-Off Method is GAAP

Answer 5

False; Used for income tax purposes

• When account is deemed uncollectible-
  Dr: Bad Debt Expense
  CR: AR
• there is no allowance account

Question 6

% of Sales Method (Income Statement Approach)

Answer 6

Dr: Bad Debt Expense
Cr: Allowance for uncollectible accounts (contra-asset)

• emphasize matching

Question 7

(T/F): When you write off an accounts receivable, there is no change in the NRV of AR

Answer 7

TRUE
- JE -
Dr: Allowance for uncollectible accounts (reduce a contra-
asset)
Cr: Accounts receivable (reduce an asset)

Question 8

(T/F): Pledging receivables requires only a footnote disclosure, no adjustment

Answer 8

True

Question 9

Factoring receivables without recourse

Answer 9

• True sale, A/R goes down (off books)

- JE to record sale WITHOUT recourse -
Dr: Cash                          94
Dr: Due from factor           1
Dr: Loss on sale                5
Cr:                 A/R                       100

Question 10

Factoring receivables with recourse

Answer 10

If all of the following can be met, treat as sale;

1. “Due from…” can be estimated
2. Transferor surrenders control
3. Transferor isn’t required to repurchase

Otherwise, treat with footnote disclosure

Question 11

(T/F): Face value of promissory note (-) unearned interest (-) finance charges = Present Value

Answer 11

True

Question 12

(T/F): If the seller pre pays deliver costs, the seller is expecting to receive the portion of delivery costs back from the buyer when they remit payment

Answer 12

True

Question 13

(T/F): First deduct quantity discounts, then sales discounts

Answer 13

True

Question 14

(JE) Expected returns (when estimated)

Answer 14

Cr: Sales returns and allowances
Dr: Accounts receivable