Accounts Receivable and Impairments

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Transcript Accounts Receivable and Impairments

Accounts Receivable and Impairments

Review of Accounting for Accounts Receivable

• Typically recognize sales revenue at sale

Accounts Receivable Sales Revenue 840 840

• What about estimated uncollectibles?

– Same issue with other assets that may be worth less than carrying value (inventory, PP&E, etc.)

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

• 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

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

• 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 Bad Debt Expense 0.8


To reduce allowance based on period-end A/R

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

From Coke’s 10-K


(Gross) Accounts Receivable Allowance for Doubtful Accounts Beg. Bal.

Beg. Bal.

Write-offs Bad Debt Exp.

Credit Sales Collections Write-offs Ending Bal.

Ending Bal.


(Gross) Accounts Receivable Beg. Bal.

$1,941(B/S) Credit Sales Collections $19,564 (I/S) $19,322 (Plug) Allowance for Doubtful Accounts Beg. Bal.

$59 (B/S) Write-offs Bad Debt Exp.

$31 (10-K) $27 (10-K) Ending Bal.

$2,152 (B/S) Write-offs $31(10-K) Ending Bal.

$55 (10-K)

Other Allowances and Reserves

• Impairment allowances – If PP&E is not expected to return its net BV

Impairment Loss PP&E (or contra) 100 100

– Depreciate based on remaining life and new book value – Take the B/S and I/S hit when the value drops

LONDON, Sept 30 (Reuters) - Manchester United sought to play down persistent takeover speculation 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 struggle to match them next year on a like-for-like basis," said analyst Andrew Lee at Dresdner Kleinwort Wasserstein Player trading profits were 12.9 million pounds due largely to the transfer of England captain David 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 subsequent sale to Chelsea.

Warrantee Allowance

• Set up allowance for expected liability when you sell the product

Warrantee Expense 40 40 Warrantee Liability

• When you pay to fix it or replace it

Warrantee Liability Cash (or Inventory) 40 40

Restructuring Reserves

• Set up a reserve for unavoidable costs and impairments when you begin a restructuring

Loss on Restructuring Restructuring Liability PP&E (or contra) 100 40 60

• Reverse out the liability when you pay cash

Restructuring Liability 40 Cash 40

• Depreciate remaining PP&E balance over remaining life