F3 M2 Trade Receivables Flashcards
(13 cards)
Complete the following:
Factoring receivables is best described as a ____ transaction.
sales
A seller exchanges its receivables for cash from a buyer.
Who bears the risk of credit losses when receivables are factored with recourse?
The seller of the receivables.
What does it mean to pledge receivables?
Using receivables as collateral to obtain a loan
What does it mean to assign receivables?
Obtaining a loan by transferring to a lender the right to cash collected on receivables
What does it mean to discount a note receivable?
A note holder endorses a note receivable (with or without recourse) to a third party in exchange for cash.
How do you calculate the amount of cash a note holder receives when it discounts a note receivable?
Subtract the discount from the note’s maturity value.
Example: Acme has a $40,000, 90-day note receivable that is dated Sep. 30, bears interest at 12%, and matures on Dec. 30. On Oct. 30, Acme discounts the note at 15%.
Maturity value: $40,000 + ($40,000 x 12% x 90/360) = $41,200
Discount: $41,200 x 15% x 60/360 = $1,030
Cash proceeds: $41,200 - $1,030 = $40,170
How do you calculate the interest income (expense) from discounting a note receivable?
Subtract the face value of the note from the cash proceeds from discounting.
Example: Acme has a $40,000, 90-day note receivable that is dated Sep. 30, bears interest at 12%, and matures on Dec. 30. On Oct. 30, Acme discounts the note at 15%.
Maturity value: $40,000 + ($40,000 x 12% x 90/360) = $41,200
Discount: $41,200 x 15% x 60/360 = $1,030
Cash proceeds: $41,200 - $1,030 = $40,170
Interest income: $40,170 - $40,000 = $170
What is the current expected credit loss (CECL) method?
The CECL method records an expense and an allowance in the same period as the associated revenue and receivable. It emphasizes valuation of assets by estimating credit losses based on aging of accounts receivable.
CECL is consistent with accrual accounting because it matches revenues with expenses.
What is the direct write-off method?
The direct write-off method debits expense and credits accounts receivable when a receivable is deemed uncollectible. It emphasizes the income statement, overstates collectible accounts receivable, and does not match revenues with expenses.
The method is not consistent with accrual accounting because revenue and expense may be recorded in different periods.
When the current expected credit loss (CECL) method is used, what is the entry to record the credit loss adjustment (write-off) of a specific account?
Debit Allowance for Doubtful Accounts, credit Accounts Receivable
When the current expected credit loss (CECL) is used, how do you record the collection of an account previously written off?
- Debit Accounts Receivable, credit Allowance
- Debit Cash, credit Accounts Receivable
If a company pledges its accounts receivable as collateral for a loan, what entry must it record when it receives the cash proceeds of the loan?
Debit cash, credit Notes Payable
The company must disclose that it has pledged its receivables in the notes to its financial statements. But it does not make any entries in accounts receivable.
Debit Notes Payable, credit cash
