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Accounts Receivable and Impairments

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Same issue with other assets that may be worth less than carrying value (inventory, PP&E, etc. ... to the transfer of England captain David Beckham to Real Madrid, ... – PowerPoint PPT presentation

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Title: Accounts Receivable and Impairments


1
Accounts Receivable and Impairments
2
Review of Accounting for Accounts Receivable
  • Typically recognize sales revenue at sale
  • Accounts Receivable 840
  • Sales Revenue 840
  • What about estimated uncollectibles?
  • Same issue with other assets that may be worth
    less than carrying value (inventory, PPE, etc.)

3
Allowance method
  • Generally required for financial reporting
  • Record estimated bad debt expense and accounts
    receivable contra account at sale
  • Bad Debt Exp. (or Sales contra) 8.4
  • Allow. For DA (AR contra) 8.4
  • Net income effect at time of sale

4
  • No net income effect at time of write-off
  • Allowance for Doubtful Accounts 1.2
  • Accounts Receivable 1.2
  • Reverse out entry if later collected
  • Accounts Receivable 1.2
  • Allowance for DA 1.2

5
  • Match revenue expenses in period of sale
  • Records net accounts receivable at expected cash
    collection
  • Discretion in estimating bad debt expense

6
  • Adjust estimate at period-end if necessary
  • How to estimate bad debts?
  • Percentage of sales
  • Aging of accounts receivables
  • Often A. and B. are used in combination
  • Allowance for DA 0.8
  • Bad Debt Expense 0.8
  • To reduce allowance based on period-end A/R

7
  • Other applications
  • Sales return and cash discounts
  • Inventory obsolescence

8
From Cokes 10-K
9
ACCOUNTS RECEIVABLE AND BAD DEBTS T-ACCOUNTS
  • (Gross) Accounts Receivable
  • Beg. Bal.
  • Credit Sales Collections
  • Write-offs
  • Ending Bal.
  • Allowance for Doubtful Accounts
  • Beg. Bal.
  • Write-offs Bad Debt Exp.
  • Ending Bal.

10
ACCOUNTS RECEIVABLE AND BAD DEBTS T-ACCOUNTS
  • (Gross) Accounts Receivable
  • Beg. Bal.
  • 1,941(B/S)
  • Credit Sales Collections
  • 19,564 (I/S) 19,322 (Plug)
  • Write-offs
  • 31(10-K)
  • Ending Bal.
  • 2,152 (B/S)
  • Allowance for Doubtful Accounts
  • Beg. Bal.
  • 59 (B/S)
  • Write-offs Bad Debt Exp.
  • 31 (10-K) 27 (10-K)
  • Ending Bal.
  • 55 (10-K)

11
Other Allowances and Reserves
  • Impairment allowances
  • If PPE is not expected to return its net BV
  • Impairment Loss 100
  • PPE (or contra) 100
  • Depreciate based on remaining life and new book
    value
  • Take the B/S and I/S hit when the value drops

12
LONDON, Sept 30 (Reuters) - Manchester United
sought to play down persistent takeover speculat
ion surrounding the premier league champions on
Tuesday as success on and off the pitch boosted
annual profits by 22 percent.
"These are a cracking set of results, but there
are a lot of one-offs this year and they may str
uggle to match them next year on a like-for-like
basis," said analyst Andrew Lee at Dresdner Kle
inwort Wasserstein
Player trading profits were 12.9 million pounds
due largely to the transfer of England captain D
avid Beckham to Real Madrid, but were down from
last year's profit of 17.4 million pounds as the
club took a write down on the value of Argentine
midfielder Juan Sebastian Veron before his subs
equent sale to Chelsea.
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16
Warrantee Allowance
  • Set up allowance for expected liability when you
    sell the product
  • Warrantee Expense 40
  • Warrantee Liability 40
  • When you pay to fix it or replace it
  • Warrantee Liability 40
  • Cash (or Inventory) 40

17
Restructuring Reserves
  • Set up a reserve for unavoidable costs and
    impairments when you begin a restructuring
  • Loss on Restructuring 100
  • Restructuring Liability 40
  • PPE (or contra) 60

18
  • Reverse out the liability when you pay cash
  • Restructuring Liability 40
  • Cash 40
  • Depreciate remaining PPE balance over remaining
    life

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