301 Chap 7

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how are receivable in troubled debt restructuring actually settled

-Cash -Some other noncash assets, or -Even shares of the debtor's stock •In that case, the creditor records a loss for the difference between the carrying amount of the receivable and the fair value of the asset(s) or equity securities received

what are the 4 purposes of internal control

-To encourage adherence to company policies and procedures - To promote operational efficiency -To enhance the reliability and accuracy of accounting data -To minimize errors and theft

what are the steps in the sale of receivables

-removes the receivables from the accounts -recognizes at fair value any assets acquired or liabilities assumed by the seller in the transaction -records the difference as a gain or loss

Which of the following is a cost of offering a cash discount?

A reduction in the amount of cash collected from customers who take advantage of the discount.

What does a sales discount represent?

A reduction in the amount to be paid if paid within a specified period of time.

journal entry for when previously written off accounts are reinstated

A/R allowance for uncollectible accounts (CR)

net method relating to receivables\ journal entry

AR (for the discount amount) sales revenue

Which of the following are potential benefits of offering cash discounts to customers? (Select all that apply.)

Accelerated customer payment Increased sales volume Reduction in bad debt

Which of the following is not true about factoring receivables? a.Cash received upon transfer is less than the amount of receivables transferred b.A transfer without recourse means that the transferor bears the risk of the receivables not being collected c.A larger loss is recorded by the transferor when receivables are transferred with recourse d.The transferor removes the factored accounts receivable from its balance sheet

B

committee of sponsoring organizations

COSO •Defines internal control as a process designed to provide reasonable assurance regarding the achievement of objectives in the following: -Effectiveness and efficiency of operations -Reliability of financial reporting -Compliance with applicable laws and regulations

Company A offers Company B discount terms of 2/10, n/30. What does this mean?

Company B will receive a 2% discount if payment is made within 10 days

journal entry to record collection on noninterest bearing notes

Discount on note receivable interest revenue (CR) cash note receivable (face amount)(CR)

what is a factoring arrangement

In a factoring arrangement, the company sells its accounts receivable to a financial institution. The financial institution typically buys receivables for cash, handles the billing and collection of the receivables, and charges a fee for this service.

direct write-off method

Not GAAP •Wait until a particular account is deemed uncollectible and write it off at that time -Not allowed by GAAP -Required for income tax purposes for most companies •The two shortcomings: 1.Overstates the balance in accounts receivable in the periods prior to the write-off 2.Distorts net income by postponing recognition of any bad debt expense until the period in which the customer actually fails to pay

Who has the receivables on their balance sheet in a sale of receivables?

Transferee

When a creditor changes the terms of a debt agreement in response to the debtor's financial difficulties, this is referred to as what?

Troubled debt restructuring

Cash management involves a trade-off between earning lower returns and accepting higher risk. T/F

True

gross method relating to receivables journal entry

accounts receivable (for the whole amount) sales revenue

how to find the book value of a recivable

accrued interest + principal

A contra-asset account is used to reduce the carrying value of accounts receivable to the amount of cash expected to be received under the Blank______ method of accounting for bad debts.

allowance

The first step in using a balance sheet approach to estimate bad debts is to calculate the desired ending balance in which account?

allowance for uncollectible accounts

journal entry for when accounts are deemed uncollectible

allowance for uncollectible accounts A/R (CR)

When initially recorded, the typical accounts receivable is valued at the

amount expected to be received.

The balance sheet approach to measuring bad debt expense focuses on

appropriate carrying value of accounts receivable.

The balance sheet approach estimates _______ ______________ expense by determining the appropriate carrying value of accounts receivable

bad debt

net method journal entry to record payment not on time for discount

cash A/R (CR) sales discounts forfeited (CR)

discounted note treated as a sale journal entry

cash loss on sale of note receivable not receivable( CR) interest receivable(CR)

journal entry for accounts receivable factored without recouse

cash loss on sale of receivables receivable from factor accounts relievable (book value sold) (CR)

sale of receivables-securitization what are the steps

company creates an SPE that buys -trade receivables -credit card receivables loans and sells - related securities, typically debt such as -bonds -commercial paper

An allowance for sales return account is classified as a(n)

contra account to sales revenue.

The most critical element in determining if a company can account for the transfer of receivables as a sale is the surrender of ___

control

how are notes receivable classified as current or noncurrent

depending on expected collection date

The required accounting treatment for pledging receivables requires

disclosure in the notes to financial statements.

A trade discount is a reduction from the list price, which is to (Select all that apply.)

disguise real prices from competitors. give quantity discounts to customers. change prices without publishing a new catalog.

Internal control consists of plans to (Select all that apply.)

encourage adherence to company policies and procedures. promote operational efficiency. minimize errors and theft.

how to calculate interest on notes

face amount x annual rate x fraction of the annual period

A financial institution that buys receivables for cash and charges a fee for this service is referred to as a(n)

factor

Companies finance with their receivables to (Select all that apply.)

increase cash flow. shorten the operating cycle. receive cash before customers would pay amounts due.

how to find the effective rate of interest for a loan with a compensating balance

interest (based on total loan amount)/ (amount of loan - compensating balance)

what is the journal entry for settling debt by receiving something other than cash

land (fair value) allowance for uncollectible account bad debt expense interest receivable (CR)(amount of interest earned so far) notes receivable (CR)(amount of original loan)

journal to record payment as a note receivable

note receivable sales revenue (CR)

A formal credit arrangement between a creditor and debtor is called a(n)

note receivable.

Companies finance with receivables to

obtain immediate cash.

journal entry to record the subsequent to year end when the returns are settled

refund liability cash (CR) inventory inventory-est. returns(CR)

A cash discount representing a reduction in the amount to be paid by a credit customer if the customers pay within a specified period of time is also referred to as a(n) ______ discount

sales

The gross method and the net method are two ways to record _________ discounts

sales

If a company believes its sales returns will be material, an adjusting entry for expected returns should be made to which account?

sales returns

A critical aspect of a good internal control system is

separation of duties

what is the main control for cash receipts

separation of duties

A petty cash account is used for

small amounts of cash needed for low-cost items.

Which of the following items are classified as receivables? (Select all that apply.) tax refund claims amounts due suppliers amounts owed by customers amounts paid for expenses amounts loaned and expected to be repaid

tax refund claims amounts owed by customers amounts loaned and expected to be repaid

how to find the loss amount

the book value of the receivable - the present value of the new receivable

______ discount is a way to change prices without publishing a new catalog

trade

the ____ recognizes a note receivable in a secured borrowing agreement.

transferee

Under the allowance method, when is bad debt expense recognized?

when the allowance is created

2/10, n/30 means

—meaning a 2% discount if paid within 10 days, otherwise full payment within 30 days

sales with recourse

•When a company sells accounts receivable with recourse, the seller retains all of the risk of bad debts -To compensate the seller for retaining the risk of bad debts, the buyer usually charges a lower factoring fee when receivables are sold with recourse

step 2: adjustments to book balance

1. add collections made by the bank on the company's behalf and other increases in cash that the company is unaware of until the bank statement is received 2. deduct service and other charges 3. deduct NSF checks 4. company errors: either increases or decreases

step one: adjustments to bank balance

1. add deposit outstanding. these represent cash amounts received by the company and debited to cash that have not been deposited in the bank by the bank statement cutoff date and cash receipts deposited in the bank near the end of the period that are not recorded by the bank until after the cutoff date 2. deduct checks outstanding: these represent checks written and recorded by the company as credits to cash that have not yet been processed by the bank before the cutoff date 3. bank errors: either increases or decreases depending on the nature of the error

When a receivable is written off, which of the following occurs? (Select all that apply.)

Accounts receivable is reduced. The allowance for uncollectible accounts is reduced.

In a bank reconciliation, which items will require journal entries by the company?

Adjustments to the balance per books for items discovered on the bank reconciliation that were not yet recorded on the books.

When a specific account receivable is determined to be uncollectible, which of the following occur?

Allowance account is reduced Account receivable is reduced

When an accounts receivable is written off, which account is impacted?

Allowance for uncollectible accounts

sales of receivables securitization

Another popular arrangement used to sell receivables is securitization. In a typical accounts receivable securitization, the company creates a "special purpose entity" (SPE), usually a trust or a subsidiary. The SPE buys a pool of trade receivables, credit card receivables, or loans from the company, and then sells related securities, typically debt such as bonds or commercial paper, that are backed (collateralized) by the receivables. Securitizing receivables using an SPE can provide significant economic advantages, allowing companies to reach a large pool of investors and to obtain more favorable financing terms.

what is the journal entry for the assignment of accounts receivable

Cash (difference) finance charge expense liability-financing arrangement (CR) (amount of loan)

CECL (current expected credit loss) model

Estimates should consider all receivables and be based on all relevant information, including historical experience, current conditions, and reasonable and supportable forecasts. This method is required starting 2020. •Analyzing each customer account •Applying an estimate of the percentage of bad debts to the entire outstanding receivable balance •Applying different percentages to accounts receivable balances depending on the length of time outstanding

discounting a note receivable steps and journal entries

STEP 1: Accrue interest earned on the note receivable prior to its being discounted interest receivable interest revenue (CR) STEP 2: Add interest to maturity to calculate maturity value fact amount interest to maturity = maturity value - discount = cash proceeds STEP 3: Deduct discount to calculate cash proceeds

Under which approach to financing with receivables does the borrower act like it borrowed money from the lender, with the receivables remaining on the borrowers balance sheet and serving as collateral?

Secured borrowing

what is involved in separations of duties

Step 1: Employee A opens the mail each day and prepares a multicopy listing of all checks including the amount and payor's name Step 2: Employee B takes the checks, along with one copy of the listing, to the person responsible for depositing the checks in the company's bank account Step 3: A second copy of the check listing is sent to the accounting department where Employee C enters receipts into the accounting records

At what amount are accounts receivable initially recorded?

The exchange price agreed on by the buyer and seller.

Which approach for estimating bad debts uses a percentage of each period's net credit sales?

The income statement approach

Which of the following is an example of separation of duties in a good system of internal control? The individual who evaluates the employees may not hire employees. The individual who hires the employees may not manage the employees. The individual who receives the inventory does not have access to the accounting records. The individual who receives the inventory cannot count the inventory.

The individual who receives the inventory does not have access to the accounting records.

Which of the following are reasons why a transferor prefers the sale approach over the secured borrowing approach of transferring receivables?

The transferor seems more profitable The transferor seems more liquid The transferor seems less leveraged

Which of the following indicate surrender of control over the assets transferred? (Select all that apply.)

The transferor will have no continuing involvement. Receivables are sold without recourse.

Which method of estimating bad debts is required by GAAP when the amount of bad debt is material?

allowance method

journal entry to account for uncollectable accounts

bad debt expense allowance for uncollectible accounts (CR)

what is the first journal entry to record new troubled debt restructuring

bad debt expense (to balance)( amount of loss interest receivable (CR) allowance for uncollectible accounts (CR) (original value of the principle - present value of the receivable)

what are the 2 approaches for estimated allowance for uncollectible accounts

balance sheet approach CECL That estimate should consider all receivables and be based on all relevant information, including historical experience, current conditions, and reasonable and supportable forecasts. Estimation could be done by analyzing each customer account, by applying an estimate of the percentage of bad debts to the entire outstanding receivable balance, or by applying different percentages to accounts receivable balances depending on the length of time outstanding. This latter approach employs an accounts receivable aging schedule, and is very common in practice.

how to find the effective interest rate

interest for 12 months / sales price

Coins, balances in checking accounts, checks received from customers and money orders received are all included in the ____________ account on the balance sheet

cash

journal entry to record the receipt of principal interest on note collected directly by bank

cash note receivable(CR) interest revenue(CR)

how to record the recieving of a notes receivable

cash interest rev (CR) note receivable (CR)

gross method journal entry not on time for the discount payment

cash A/R

net method journal entry to record payment on time for discount

cash A/R

journal accounts receivable factored with recourse

cash loss on sale of receivables receivable from factor recourse liability (CR) accounts receivable (book value sold) (CR)

gross method journal entry for an on time for the discount payment

cash (actual amount you pay) sales discounts A/R (CR)

Short-term investments that can be readily converted to cash and have a maturity date of less than three months from date of purchase are called

cash equivalents

Short-term, highly liquid investments such as money market funds or treasury bills are classified as

cash equivalents.

sale of receivables-factoring arrangement steps

company sells accounts receivables to a financial institution who is then responsible for billing and collecting - the financial institution changes a service fee

______________ balance is a cash restriction in connection with a loan that creates a higher effective interest rate on that loan.

compensating

A cash restriction imposed by a bank wherein the debtor must leave a certain amount of funds such as 5% of the original loan in the low-interest or noninterest-bearing account is a

compensating balance.

The transfer of a note to a financial institution is referred to as

discounting

The transfer of a note receivable to a financial institution for an amount less than the face amount of the note is referred to as

discounting a note receivable.

in a(n) ________ arrangement, the company sells its accounts receivable to a financial institution and the financial institution handles the billing and collections

factoring

The two methods used for recording sales discounts are the

gross method. net method.

A company's plans to adhere to policies and procedures, promote operational efficiency, minimize errors and theft, and enhance the reliability and accuracy of accounting data are referred to as

internal controls

what does a company do if it anticipates bad debts on short-term notes

it uses an allowance account to reduce the receivable to the appropriate carrying value.

Management should hold the minimum amount of cash to (Select all that apply.) Multiple select question. meet its obligations. take advantage of opportunities. conduct business operations. pay off all liabilities.

meet its obligations. take advantage of opportunities. conduct business operations.

journal entry To record credits to cash revealed by the bank reconciliation

miscellaneous expense (bank service charges) accounts receivable (NSF checks) accounts payable (error in check to supplier) cash(CR)

The income statement approach for estimating bad debts uses a percentage of

net credit sales.

in a(n) ________ bearing note, interest is deducted from the face amount of the loan to determine the cash proceeds available to the borrower at the time of loan.

noninterest

non-interest-bearing note journal entry

note receivable (face amount) discount on note receivable (CR) sales revenue (CR)

Management can influence credit and collections by

offering cash discounts. extending payment terms.

journal entry for sales returns

sales returns cash (CR) inventory COGS(CR)

journal entry to record estimated returns at year end

sales returns refund liability (CR) inventory-est. returns COGS(CR)

what are the 2 types of financing with receivables

secured borrowing sale of receivables

A troubled debt restructuring occurs when

the creditor changes the terms of the agreement to make it easier for the debtor to pay.

In a sale of receivables, the _________ includes the receivables as assets in its balance sheet.

transferee

True or false: Both interest bearing and noninterest bearing notes bear interest.

true

Sarbanes Oxley act requires (in regard to internal controls)

•A company to document its internal controls and assess their adequacy •Auditors to express an opinion on management's assessment

cash equivalents are classified as

•Short-term, highly liquid investments, readily convertible to cash with little risk of loss •Have a maturity date no longer than three months from the date of purchase •Examples: Money market funds, treasury bills, and commercial paper

accounting for a troubled debt restructuring

•Sometimes a creditor changes the original terms of a debt agreement in response to the debtor's financial difficulties •The creditor makes concessions to the debtor that make it easier for the debtor to pay, with the goal of maximizing the amount of cash that the creditor can collect •In that case, the new arrangement is referred to as a troubled debt restructuring.

what is accounting for a troubled debt restructuring

•Sometimes a creditor changes the original terms of a debt agreement in response to the debtor's financial difficulties •The creditor makes concessions to the debtor that make it easier for the debtor to pay, with the goal of maximizing the amount of cash that the creditor can collect •In that case, the new arrangement is referred to as a troubled debt restructuring.

Tom Company offers Jane Company discount terms of 5/15, n/45. What does this mean?

Jane Company must pay the full amount if payment is made after day 15.

Which of the following give rise to a note receivable? (Select all that apply.) Multiple select question. Borrowing money from an affiliated company. Loaning money to stockholders. A formal, written extension of the credit period to trade customers. Loaning money to an affiliated company. Extension of credit to customers in normal operations with no written agreement.

Loaning money to stockholders. A formal, written extension of the credit period to trade customers. Loaning money to an affiliated company.

The required accounting treatment for transfer of receivables as a sale includes which of the following? (Select all that apply.)

Recognize gain or loss Remove receivables Record proceeds

(Face amount x annual rate x fraction of the annual period) is the formula for

interest on a note.

year-end adjusting journal entry to record accrued interest

interest receivable interest revenue

internal control procedures-cash disbursements objective and important elements

objective •To prevent unauthorized payments •To ensure that disbursements are recorded properly important elements •All disbursements made by check or electronic transfer •All expenditures properly authorized •Checks should be signed only by authorized individuals •Sign-on, approval limits, etc on electronic transfers!!! •Strong password policies!!!

________ cash account is used to pay for low cost items so checks do not have to be processed

petty

petty cash journal entry

petty cash cash (CR)

how to find the new value (based on estimated flows to be received)

present value of accrued interest + present value of future interest + present value of estimated principal (the new value) = present value of the receivable

The Blank______ approach to transfer receivables is preferred by the transferor.

sale

why is it bad to recognize returns in the period the return occurs - what to do to avoid this

would recognize too much profit in one period and then too much loss in another To avoid overstating revenue and net assets in 2021, the seller should reduce revenue for all returns of current-period sales, including those that occur in the current period as well as those the seller estimates will occur eventually. We accomplish this by debiting a contra revenue account, sales returns, which reduces sales revenue indirectly. This way, the income statement will report net sales revenue (sales revenue minus actual and estimated sales returns).

trade discounts

•A percentage reduction from the list price •Quantity discounts to large customers

what is classified as cash

•Amounts readily available to pay off debt or to use in operations •Examples: Currency and coins, balances in checking accounts

restricted cash -what is it and what is its purpose

•Cash that is restricted in some way and not available for current use For future plant expansion

accounts receivable

•Created when sellers recognize revenue associated with a credit sale -Performance obligation is satisfied at the point of delivery -Revenue and the related receivable are recognized at that time •Most businesses provide credit to their customers -Accounts receivable are informal credit arrangements supported by an invoice and normally are due in 30 to 60 days after the sale -Classified as current assets because their normal collection period is part of the operating cycle of the business

sales without recourse

•If a factoring arrangement is made without recourse, the buyer can't ask the seller for more money if the receivables prove to be uncollectible

transfers of notes receivable- discounting

Companies can obtain immediate cash from a financial institution either by pledging a note as collateral for a loan or by selling the note company gives note to financial institution cash = maturity value of note-discount (financing fee) We handle transfers of notes receivable in the same manner as transfers of accounts receivable. A note receivable can be used to obtain immediate cash from a financial institution either by pledging the note as collateral for a loan or by selling the note. Notes also can be securitized. The transfer of a note to a financial institution is referred to as discounting. The financial institution accepts the note and gives the seller cash equal to the maturity value of the note reduced by a discount. The discount is computed by applying a discount rate to the maturity value and represents the financing fee the financial institution charges for the transaction.

The formula for calculating interest multiplies which of the following?

Fraction of the annual period Face amount of the note Annual interest rate

Checks received from customers that have not been deposited yet are included where on a company's balance sheet?

In the current asset "cash" account.

Which of the following are costs of extending credit terms to customers? (Select all that apply.)

Increased investment in receivables. Increase in uncollectible accounts.

Which of the following will require a journal entry in a bank reconciliation? (Select all that apply.)

NSF Checks Notes collected by the bank

bank reconciliation

One of the most important tools used in the control of cash is the bank reconciliation. •Since all cash receipts are deposited into the bank account and cash disbursements are made by check, the bank account provides a separate record of cash. It's desirable to periodically compare the bank balance with the balance in the company's own records and reconcile any differences. •Differences between the cash book and bank balance occur due to differences in -Timing of recognition of certain transactions -Errors

True or false: Management can influence the collection of receivables based on the terms they offer.

True

Financing with receivables is accomplished through

a secured borrowing or a sale of receivables.

A company's claims to the future collection of cash, other assets, or services is called a Blank______.

receivable

key issues involving measuring and reporting receivable

recognition: depends on revenue recognition for most credit sales, revenue and the related receivables are recognized at the point of delivery initial valuation: initially recorded at the amount of consideration the seller is entitled to receive. affected by cash discounts and variable consideration such as sales discounts and sales returns subsequent valuation: initial valuation reduced by allowance for uncollectible accounts so accounts receivable are shown at the amount of cash the seller expects to receive classification: almost always classified as a current asset

Financing receivables can be done by

sale of receivables. secured borrowing.

secured borrowing- assigning

•Alternatively, companies can assign particular receivables to serve as collateral for loans -Example: mortgage on a home •The lender typically lends an amount of money that is less than the amount of receivables assigned by the borrower -The difference provides some protection for the lender to allow for possible uncollectible accounts •The lender usually charges the borrower an up-front finance charge in addition to stated interest on the loan •The receivables might be collected either by the lender or the borrower, depending on the details of the arrangement

sale of receivables

•Can be sold at a gain or a loss like other assets •Accounting treatment is similar to that of the sale of other assets

compensating balances

•An amount that compensates the bank for granting the loan or extending the line of credit •Under this arrangement: -Borrower is asked to maintain a specified balance in a low interest or noninterest-bearing account at the bank -Required balance equals some percentage of the committed amount -Borrower pays effective interest rate higher than the stated rate on the debt

CECL Model for notes receivable

•As with accounts receivable, under the CECL model, companies consider all relevant information when assessing credit losses, including reasonable and supportable forecasts about the future •Companies can use a variety of approaches to estimate uncollectible notes receivable, including accounts receivable aging •Often companies use discounted cash flow techniques, estimating the amount of necessary allowance by comparing the balance in the note receivable to the present value of the cash flows expected to be received, discounted at the interest rate that was effective when each note was initially recognized

balance sheet approach

•Base bad debt expense on the appropriate carrying value of accounts receivable •Company estimates what the ending balance of the allowance for uncollectible accounts should be, and then records the amount of bad debt expense necessary to adjust the allowance to that desired balance

Subsequent Valuation of Accounts Receivable

•Being entitled to receive payment doesn't mean the seller will be paid •Credit losses (bad debts) are an inherent cost of granting credit •How should we account for the fact that not every account receivable is likely to be collected? -Direct Write-Off Method (NOT GAAP) -Allowance Method (GAAP)

in a troubled debt restructuring what are some things a creditor will do

•In a troubled debt restructuring, it's likely that the creditor allows the receivable to continue but with the terms of the debt agreement modified to make it easier for the debtor to comply •The creditor might agree to - Reduce or delay the scheduled interest payments -Reduce or delay the maturity amount -A combination of the above

bad debt expense for the allowance method

•Is not recognized when specific accounts are written off •Is recognized earlier, when accounts are estimated to be uncollectible and the allowance is created •Later, when a specific account receivable is deemed actually uncollectible, both the allowance and the specific account receivable are reduced to write off the receivable

sales returns

•Merchandise is returned for a refund or for credit to be applied to other purchases •Special price reduction, called an allowance, may be given as an incentive for the customer to keep the merchandise rather than returning it •Accrue sales returns and allowances at the time of sale -Otherwise, recognizing sales returns when they occur could result in overstated income in the period of sale and understated income in the return period

petty cash

•Most companies keep a small amount of cash on hand to pay for low-cost items such as postage, office supplies, delivery charges, and entertainment expenses. •It would be inconvenient, time-consuming, and costly to process a check each time these small payments are made. •A petty cash fund provides a more efficient way to handle these payments. •A petty cash fund is established by writing a check to the custodian for an amount that should approximate expenditures for a short period of time (such as a week or a month).

short term noninterest-bearing notes

•Noninterest-bearing notes really do have interest associated with them •Interest is discounted from the face amount to determine the cash proceeds made available to the borrower at the outset •The discount on note receivable: -Represents future interest revenue that will be recognized over time -Is a contra account to the note receivable account

secured borrowing

•Pledge accounts receivable as collateral for a loan •Entire receivables balance serves as collateral •Responsibility for collection of the receivables remains solely with the company •The arrangement should be described in a disclosure note - No special accounting treatment is needed

sales discounts

•Reductions in the amount to be paid by a credit customer if paid within a specified period of time •Intended to provide incentive for quick payment

initial valuation of accounts receivable

•Remember how we account for revenue: -Sellers recognize an amount of revenue equal to the amount they are entitled to receive in exchange for satisfying a performance obligation -Sellers allocate the transaction price to the various performance obligations in a contract and then recognize revenue when performance obligations are satisfied •Potential complexities: -Time value of money -Variable consideration

allowance method

•Required by GAAP whenever the amount of bad debts is material •Companies use a contra-asset account, the allowance for uncollectible accounts, to reduce the carrying value of accounts receivable to the amount of cash they expect to collect •Both the carrying value and the amount of the allowance typically are shown on the face of the balance sheet GAAP requires use of the allowance method whenever the amount of bad debts is material. Under the allowance method, companies use a contra-asset account, the allowance for uncollectible accounts, to reduce the carrying value of accounts receivable to the amount of cash they expect to collect. Both the carrying value and the amount of the allowance typically are shown on the face of the balance sheet. For example, here we see how Johnson & Johnson, the large pharmaceutical company, reported accounts receivable in its comparative balance sheets for 2017 and 2016.

bank reconciliation steps

•STEP 1: Adjust the bank balance to the corrected cash balance -Bank reconciliations include adjustments to the balance per bank for timing differences involving transactions already reflected in the company's accounting records that have not yet been processed by the bank. •STEP 2: Adjust the book balance to the corrected cash balance -The balance per books is similarly adjusted for timing differences involving transactions already reflected by the bank of which the company is unaware until the bank statement is received.

which gross or net method is more accurate for companies

•Sales revenue and the corresponding accounts receivable should be stated at the amount of consideration the seller expects to be entitled to receive -The net method typically better reflects that amount, because the discount is a savings that prudent customers are unwilling to forgo

secured borrowing -pledging

•Sometimes companies pledge accounts receivable as collateral for a loan. -No particular receivables are associated with the loan. Rather, the entire receivables balance serves as collateral. -The responsibility for collection of the receivables remains solely with the company. -No special accounting treatment is needed, but arrangement should be described in a disclosure note.

Current Expected Credit Loss (CECL) Model for Accounts Receivable

•Starting in 2020, companies will be required to use the CECL ("Current Expected Credit Loss") model to account for bad debts •Designed to give a more accurate and forward-looking estimate of bad debt expense •Uses the allowance method and the same journal entries, but it differs from current GAAP in two important ways: 1.The "probable" threshold for identifying bad debts is removed 2.While current practice tends to focus on events that already have occurred when considering the potential for bad debts, the CECL model explicitly requires creditors to also consider additional information such as reasonable and supportable forecasts about the future

Information that transferors must provide in disclosures includes:

•The transfer •Any continuing involvement with the transferred assets •Any ongoing risks to the transferor •How fair values were estimated when recording the transaction •Any cash flows occurring between the transferor and the transferee •How any continuing involvement in the transferred assets will be accounted for on an ongoing basis


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