Receivables

Gross Method Example

$100 of goods at 2/10, N/30, Customers pays within 10 days: Cash 98 Sales Discounts 2 Accounts Recievable 100

Assignment of Accounts Receivable Example

$100,000 borrowed from bank, 12% note promising to pay from accounts receivable signed; $125,000 pledge as collateral, 1% loan fee: Cash 99,000 Finance Charge 1000 Notes Payable 100,00 Accounts Receivable Assigned 125,000 Accounts Receivable 125,000

Steps to Discount a Note

1) Compute maturity value = principal + interest 2) Compute the discount = maturity value x bank's discount rate x discount period (time to maturity from the discount rate) 3) Compute the proceeds = maturity value - discount 4) Compute book value of note = face value of the note + accrued interest (interest accrued to the date of the discounting) 5) Compute gain, loss, or interest = proceeds - book value

Notes Receivable with Interest Rates

An interest bearing note where the interest rate is explicitly stated

Note Discounted with Recourse

Bank can go back to the transferor and demand maturity value plus a clerical fee if the maker defaults on payment

Assignment of Accounts Receivable

Borrowing money and pledging receivables as collateral on the loan. Bank charges an initial finance fee plus interest the loan is outstanding. Company gradually collects receivables and remits the collections to the bank to pay off the loan

Cash Discount

Cash discount for early payment

Recievable

Claims against 3rd parties;

Sales of Account Receivable without Recourse Example

Company X transfer 100,000 of accounts receivable to Bank, Bank charges 2% fee and 5% for sales returns and discounts, entry: Cash 93,000 Loss of Sale of Receivables 2000 (receivables sold for 98,000 instead of 100,000) Due from Factor 5000 Account Receivable 100,000 Sales return of $2000, entry is: Sales Return 1,200 Due from Factor 1,200

Sales of Accounts Receivable: With Recourse Example

Company X transfer 100,000 of accounts receivable to Bank, Bank charges 2% fee and 5% for sales returns and discounts, three conditions not met entry: Cash 93,000 Finance Charge 2000 Due From Factor 5,000 Loan Payable to Factor 100,000 Since conditions not met, no loss recognized on sale since no sale took place. Accounts receivable not credited since company borrowed money from bank so a liability is recognized

Assignment of Accounts Receivable Example: Payment

Company collects $65,000 (70,000 less sales returns of 5000) and pays this amount plus 1 month's interest to bank: Cash 65,000 Sales Returns 5,000 Accounts Receivable Assigned 70,000 Notes Payable 65,000 Interest Expense 1000 Cash 66,000

Trade Discount

Discounts for goods and services

Trade Receivables

Due from customers for goods and services provided to them

Imputation

Estimating interest rate when fair market value of good or services is not known. Rate buyer would have to pay to obtain financing of a similar good or service from other sources. Rate used to obtain present value of note and that is true selling price

With Recourse Transfer Rules

For the transfer to be considered a sale it must meet the following conditions: 1) transferor surrenders control of the future economic benefits of the receivables 2) obligation under the recourse provision can be reasonable estimated 3) Transferee cannot require the transferor to repurchase the receivables

Note for Goods and Services

If note received with no stated interest rate, unreasonable interest rate, or face amount significantly different from fair market value of goods and services, not should be recorded at the fair market value of the goods and services. Different between fair market value and face amount of note is considered hidden interest

Discounts and Sales Returns

If there are any sales returns the cash discount is based on the amount remaining after the discount was taken not before Ex: Sale for $100, 2/10, N/30 with a return of $10, discount is 2% of $90 not $100

Note Receivable with Interest Rate Example

Lender X lends money to Borrower C and receives a 20,000 note receivable in exchange. Contract rate and market rate are both 10%, note is due in 5 years, entry for lender: Notes Receivable 20,000 Cash 20,000 Interest received each year: Cash 2000 Interest Revenue 2000 Loan repayment: Cash 20,000 Notes Receivable 20,000

Note Receivable with No Stated Interest Example

Lender lends Borrower X 6,810 no interest loan for 5 years, face value of 10,000. To find out interest need to know rate at which the present value of 6,810 will grow to 10,000. Entry at issuance: Notes Receivable 10,000 Discount on Notes Receivable 3190 Cash 6,810 Interest amortization: Discount on Notes Receivable 545 Interest Revenue 545

Determining Loan: Discount or Premium

Loan = present value of principal + present value of interest payments Discount = the discount amount is considered additional interest and will need to be amortized to interest revenue: Discount on Note Receivable XXX Interest Revenue XXX Premium = bank lent out more than the face value of the loan. Additional amount will need to be amortized down to face value and reduces interest revenue: Interest Revenue XXX Premium on Note Receivable XXX

Accounting for Bad Debt: Direct Write-off Method

Makes entry for bad debt at time it takes place: Bad Debt Expense XXX Accounts Receivable XXX Violates the matching principle

Bad Debt Expense Estimate: Percentage of Credit Sales

Method does not concern itself with any amounts already in the allowance account. For ex: Allowance for Doubtful Account has $4000 in the account, the new estimate for Bad Debt Expense for the year is $6,000, the Bad Debt Expense adjustment recorded for the year does not take into account the $4000 in Allowance for Doubtful Account so the entry would be: Bad Debt Expense 6000 Allowance for Doubtful Accounts 6000

Bad Debt Expense Estimate: Percentage of Accounts Receivable

Method does take into account balance in amounts in the allowance Account. For Ex: Allowance for Doubtful Account has $4000 in the account, the new estimate for Bad Debt Expense for the year is $6,000, the Bad Debt Expense adjustment recorded for the year DOES take into account the $4000 in Allowance for Doubtful Account so the entry would be: Bad Debt Expense 2000 Allowance for Doubtful Accounts 2000 The total bad debt expense estimated for the year would be $6000

Entry to Reverse Write Off

Mr X decides to pay amount owed reversing entry would be: Accounts Receivable XXX Allowance for Doubtful Accounts XXX Payment collected entry would be: Cash XXX Accounts Receivable XXX

Write-Off Entry

Mr X defaults on the amount he owes, entry would be: Allowance for Doubtful Accounts XXX Account Receivable (Mr. X) XXX Both the controlling account and the subsidiary account

Accounts Receivable

Oral promise to pay

Net Method Example

Payment within 10 days: Cash 98 Accounts Recievable 98 After 10 days: Cash 100 Accounts Receivable 98 Sales Discount Forfeited 2

Bad Debt

Receivables that are not collected

Accounting for Sales: Gross Method

Recorded sale at gross selling price, if customer pays early, discount is recorded in a special account Called Sales Discounts, a contra account to Sale

Accounting for Sales: Net Method

Records original sale at net amount (gross price - discount); if customer pays after discount period, extra amount goes to revenue account called Sales Discounts Forfeited; Accounting profession prefers the net method

Discounting Notes Receivable

The holder of the note gives the note to a bank and receives the maturity value of the note (principal plus interest) minus a discount. At maturity the bank collects the maturity value from the maker of the note.

Contract Rate

The rate of interest stated in the note Contract rate = market rate then loan will be equal to face value of the note Contract rate < market rate then loan will be less than face value at a discount Contract rate > market rate then loan will be more than face value at a premium

Sale of Accounts Receivable: Without Recourse

The seller is not responsible to the bank for uncollectible receivable. Seller is responsible for reduction in the collection of receivables due to sales returns and discounts. Procedure: Holder sells receivables to bank, bank charges a service fee and holds back a percentage to cover possible sales returns or discounts. The percentage for sales returns or discounts is later returned to the seller minus any returns or discounts. Bank collects receivables directly from the customers.

Sale of Accounts Receivable: With Recourse

The seller is responsible to the bank for any uncollectible receivable. Seller is responsible for reduction in the collection of receivables due to sales returns and discounts.

Notes Receivable with No or Unreasonable Interest

Transactions with either no or unreasonably low interest. The interest is considered "hidden"

Bad Debt Expense Estimates

Two ways: 1) Taking a percentage of credit sales for the year 2) Taking a percentage of the Accounts Receivable balance using an aging schedule

Accounting for Bad Debt: Allowance Method

Uses estimate to recognize bad debts before they happen and are recognized via an adjusting journal entry on Dec 31 Bad Debt Expense XXX Allowance for Doubtful Accounts XXX Allowance for Doubtful Accounts is a contra account to Accounts Receivable

Sale (Transfer) of Accounts Receivable

When receivables are sold. Also known as factoring

Note Receivable

Written promise to pay