- I would like to record about the key points of the US CPA exam content.
- The representative methods for estimating the allowance for doubtful accounts receivable
- the write-off based on the allowance method of recognizing uncollectible accounts is used.
- the inability to collect on certain receivables
- the factoring of accounts receivable
- Example of adjusting the accounts receivable balance
- Discount on note receivable
I would like to record about the key points of the US CPA exam content.
<Create and note the points based on mainly Becker’s workbook>
The representative methods for estimating the allowance for doubtful accounts receivable
- Balance Sheet Approach (Percentage of Receivables Method): A fixed percentage of the total receivables is set aside as an allowance for doubtful accounts. This percentage is typically based on past experience or industry averages. It focuses on the balance sheet and emphasizes the valuation of assets. It results in a good matching of revenue and expense.
- Aging Approach (Aging of Receivables Method): Receivables are categorized based on the elapsed time since their inception, and a loss rate corresponding to each category is applied. Higher loss rates are used for older receivables, reflecting increased difficulty in collection over time.
- Specific Identification Method: Individual receivables are assessed individually for credit risk. This method is particularly used for significant customers or those with evident credit risks, where loss estimates are based on specific customer information.
- Historical Loss Rate Method: Current receivables are subjected to a loss rate calculated from historical data. An average loss rate derived from past bad debt experiences over a defined period is applied to the present accounts receivable.
- Loss Rate Method: Loss rates are determined considering overall economic conditions or specific industry circumstances and applied across all receivables. This method is especially effective when there are significant changes in economic environments.
the write-off based on the allowance method of recognizing uncollectible accounts is used.
(DR) Allowance for uncollectible account / (CR) Accounts receivable
the inability to collect on certain receivables
(DR) Cash / (CR) Allowance for Doubtful Accounts
the factoring of accounts receivable
<Seller>
(DR) Cash 700 (CR) Allowance for Doubtful Accounts 1,000
(DR) Due from factor 200
(DR) Loss on Sale of Receivables 100
<Buyer>
(DR) Trade receivable 50,000 (CR) Gain on purchase of trade receivables 10,000
(DR) Credit loss expense 3,500 (CR) Cash 40,000
(CR) Allowance for credit losses 3,500
It appears the transfer of receivables is without recourse and the company assumes the risk of any losses on uncollectible receivables. In a transfer of receivables, the factor records the gross amount of receivables purchased and records the fee as a gain.
Example of adjusting the accounts receivable balance
- Although sales and receivables had been recorded, due to FOB destination terms, it is correct to record as deferred revenue instead of receivables, and a correction is needed.
- Cash has already been collected, but the elimination of the receivable has not been done.
- Receivables had been recorded based on FOB shipping point, but due to a change in terms causing delays in shipping a certain amount until the end of the period, a correction of the recorded receivable amount is necessary.
- It has been confirmed that the customer went bankrupt by the end of the period, and the receivables are uncollectible, necessitating a correction.
- A correction of receivables is needed due to errors in the assumptions (price, quantity) used when recording them as receivables.
Discount on note receivable
(DR) Note receivable 60, Note receivable 90
(CR) Revenue 60, Discount on note receivable 18, Unearned revenue 72 (PV)
