Receivables

Question 1

Does IFRS permit recognition of accounts receivable when there is a firm sales commitment?

Answer 1

In some instances when the recognition criteria have been met.

Question 2

What factors affect receivable valuation?

Answer 2

• Trade discounts
• Sales discounts
• Sales returns and allowances
• Uncollectible accounts

Question 3

List the characteristics of accounts receivables.

Answer 3

• Typically related to customer contracts
• Short time frame
• Typically no interest element

Question 4

What is the measurement attribute of accounts receivable?

Answer 4

Net realizable value.

Question 5

List the characteristics of notes receivable.

Answer 5

• Typically non-customer transactions
• Longer time frame
• Have an interest element

Question 6

How are receivables accounted for using the gross method?

Answer 6

Records receivables at gross invoice price (before cash discount).

Question 7

What other name is used for customer accounts receivable?

Answer 7

Trade Receivable

Question 8

List the two methods of accounting for accounts receivable.

Answer 8

• Gross

- Net

Question 9

Define “contra to sales.”

Answer 9

Sales discounts.

Question 10

Are notes receivable typically related to customer transactions?

Answer 10

No, they are not typically related.

Question 11

What is the preferred method of accounting for uncollectible accounts receivable?

Answer 11

Allowance method.

Question 12

Which method of accounting for uncollectible accounts receivable is required if uncollectible accounts are probable and estimable?

Answer 12

The Allowance method.

Question 13

Describe the allowance method of accounting for bad debts.

Answer 13

Determine the amount uncollectible and provide an allowance to measure accounts receivable at net realizable value.

Question 14

Describe the direct write-off method for bad debts.

Answer 14

Direct write-off records bad debts expense only when a specific accounts receivable is considered uncollectible and is written off. Direct write-off method is rarely used.

Question 15

Describe the balance sheet approach for calculating an allowance balance.

Answer 15

Applies a percentage to ending accounts receivable.

Question 16

What purpose does analyzing ending accounts receivable serve?

Answer 16

The determination of the needed or desired balance in the allowance account.

Question 17

Describe the income statement approach for bad debts.

Answer 17

Estimates bad debts as a percentage of credit sales.

Question 18

Define “market rate.”

Answer 18

Interest rate used to determine the present value of a note receivable.

Question 19

How is the present value in a non-cash transaction determined?

Answer 19

The fair market value of the non-cash asset or of the note receivable, whichever is more readily determinable.

Question 20

How is the present value in a cash transaction determined?

Answer 20

The amount of cash that exchanged hands.

Question 21

At what value should a note receivable be recorded?

Answer 21

The present value of all future cash flows.

Question 22

What doe we call the (1) maker and (2) holder of a note?

Answer 22

(1) Maker is the buyer or borrower

(2) The holder is the seller or lender

Question 23

Describe the difference between an interest-bearing and a non-interest-bearing note receivable?

Answer 23

Interest-bearing: the amount of cash to be collected from an interest-bearing note is the face value of the note plus interest;

Non-interest-bearing: the face amount of the note includes principal and interest that will be collected at a maturity date.

Question 24

What are the three conditions of a sale?

Answer 24

(1) Transferred assets have been isolated from the transferor, even in bankruptcy;
(2) the transferee is free to pledge or exchange the assets;
(3) the transferor does not maintain effective control over the transferred assets through either an agreement that allows and requires the transferor to repurchase the assets or one which requires the transferor to return specific assets.

Question 25

Define “maker.”

Answer 25

A debtor who has borrowed funds or purchased an asset and provided a note to the original creditor.

Question 26

Describe a transaction with recourse.

Answer 26

The transferor is responsible for nonpayment on the part of the original maker of the receivable.

Question 27

What is the IFRS focus regarding sales or secure borrowing?

Answer 27

Whether the transferor has transferred the rights to receive the cash flows from the receivable and whether substantially all the risk and rewards of ownership were transferred.

Question 28

If three conditions for a sale are not met, what happens?

Answer 28

The receivable remains on the books for the transferor, and the transferor records a liability related to the borrowing transaction.

Question 29

Describe a transaction without recourse.

Answer 29

Transferor is not responsible for nonpayment on the part of the maker of the receivable.

Question 30

Who bears the cost of bad debts when factoring without recourse?

Answer 30

The factor (transferee) bears the cost of uncollectible accounts, but the seller (transferor) bears the cost of sales adjustments.

Question 31

What is the accounting treatment when factoring with recourse, as accounted for as a loan?

Answer 31

The transferor maintains receivables on its books and records a loan and interest expense over the term of the agreement.

Question 32

Who bears the costs of bad debts when factoring with recourse?

Answer 32

The seller (transferor) bears the cost of bad debts as well as the cost of sales adjustments.

Question 33

Define “factoring.”

Answer 33

The transferor (original creditor) transfers the receivables to a factor (transferee, a financial institution) immediately as a normal part of business.

Question 34

What is the accounting treatment when factoring with recourse, as accounted for as a sale?

Answer 34

The entries are similar to factoring without recourse except that the transferor must estimate and record a recourse liability.

Question 35

List the methods through which interest revenue is recognized after a write-down has occurred.

Answer 35

Interest and cost recovery methods.

Question 36

When does loan impairment occur?

Answer 36

When the creditor believes the loan payments actually to be received have a lower fair value than under the original agreement.

Question 37

What is the accounting treatment for loan impairments?

Answer 37

The receivable should be written down to:

(1) Present value of future cash flows using original effective interest rate, or
(2) Market value, if this value can be determined.

Question 38

When a receivable is impaired, what should it be written down to?

Answer 38

The PV of the future cash flows expected to be collected using original effective interest rate for the loan or market value if more determinable.

Question 39

How is the loss on impairment accomplished?

Answer 39

With a debit to bad debt expense and a credit to a contra-receivable account.