Trade Receivables

Question 1

Cash discount formula 2/10, net 30

Answer 1

Customer may take a 2% discount if payment is made within 10 days. Otherwise, no discount is given and the total amount is due in 30 days.

Question 2

True or False: GAAP uses accrual and allowance method (for receivables and not direct write-off)

Answer 2

True

Question 3

What is factoring?

Answer 3

It is a transaction in which an entity sells its AR for cash to a 3rd party (i.e. a factor) at a discount (i.e. a factoring fee). This method allows the entity to collect cash faster than it would by waiting the full collection period for the receivables to be paid. Factoring can be done with recourse or without recourse.

Question 4

Negative adjustment (during my own calc) means REVERSAL of credit losses/expense in IS.

Answer 4

True

Question 5

Is there any impact on the credit loss expense if A/R is later recovered after being written off?

Answer 5

No, no effect. The A/R is temporarily reinstated and then immediately removed when recording the collection of cash. The CV of A/R will decrease. Allowance for credit loss will increase.

Question 6

Writing off of AR will have no effect of NI and no effect on Total Assets

Answer 6

True

Question 7

A company entered into a loan with a lender for 100,000 and pledged $120,000 of the company’s accounts receivable as collateral. The lender does not have the right to sell or repledge the AR. When the company receives the cash for the loan proceeds, what entry should be made to AR?

Answer 7

No entry is required because the lender does not have the right to sell or repledge the AR. Footnote disclosure of the pledge is required.

Question 8

Annual Interest Cost

Answer 8

Net Cost/Net Amount received

Net Cost = Fee-Savings
Net Amount Received = % of advance received from the factor

Question 9

Long-term receivables and short-term sales not under customary trade terms

Answer 9

Use Fair rate of Interest (market rate)

Question 10

Less than 1 year note receivable

Answer 10

Report at Face Value (int component can be ignored)

Question 11

Credit loss expense will be _____

Answer 11

Calculated figure in the middle (which is used to get to year end balance)

Question 12

Use the ___________ value while calculating discounting a note

Answer 12

MATURITY value

Question 13

Write-offs decrease A/R as well as the allowance for credit losses.

Answer 13

True

Question 14

FACTORING

Answer 14

Sale of SHORT TERM A/R

Question 15

DISCOUNTING

Answer 15

Sale of LONG TERM Note Receivable

Question 16

FACTORING

Answer 16

Buyer applies a factoring fee,

Question 17

Factoring without recourse is a ______

Answer 17

Sale

Question 18

DISCOUNTING

Answer 18

Calculate bank discount on MATURITY VALUE (face value + Int)

Question 19

Regardless of the accounting method, the $1,000 initial investment and $500 capital draw affect only the balance sheet and not the income statement.

Answer 19

True

Question 20

Loan write-off should be removed
Sales return entry - Credit entry
Assignment or Transfer entry - Credit entry
Write off - Credit entry

Answer 20

True

Question 21

Credit sales or sales on credit

Answer 21

Debit entry

Question 22

Factor’s holdback accounts for the proceeds retained by the factor to cover estimated sales discounts, sales returns and sales allowances. When all amounts have been collected by the factor, the balance in factor’s margin is returned to the seller.

Answer 22

Therefore, this account is a receivable reported as a current asset on the balance sheet.

Question 23

In a specific assignment of receivables, collections on the assigned accounts are generally remitted to the assignor. A specific assignment of receivables bestows more formal rights upon the assignee (lender) in that the AR do not simply collateralize the loan, but collections on the assigned accounts are actually remitted to the assignor who remits them to the assignee (lender).

Answer 23

True

Question 24

Once a company sells receivables to a factor it normally has no further involvement with the receivables. The factor usually collects the remittances directly from the customer.

Answer 24

True

Question 25

Transfers of receivables in which the transferee can require the transferor to repurchase the receivables may not be considered a sale.

Answer 25

True

Question 26

In a transfer of receivables with recourse accounted for as a borrowing, the difference between the receivables and the total of the factor’s holdback plus the proceeds is a financing cost that should be amortized to interest expense over the term of the receivables.

Answer 26

The difference between the amount of receivables sold to a factor in a borrowing transaction and the total of the factor’s holdback plus the proceeds is recorded in a discount on transferred AR or interest expense account. This account represents interest cost and should be recognized over the term of the receivables. If interest expense is debited, an adjusting entry to defer some of the interest as discount would be required if some of the discount pertains to a later period.