AKM - TA

- Sales Returns and Allowances = guaranteed goods can be returned if not satisfied. It is a counter account of sales
revenue (reduces sales revenue) - If there is an additional estimated return, it is adjusted by crediting Allowance for Sales
Return and Allowances (counter AR account)

- Time Value of Money = ideally recording the PV of receivables. Examples of receivables are expected to be paid at xxx in 4
months. So ideally the company records 4 months' PV at a certain rate of xxx.

Uncollectible method

- direct write off method: immediate write off, but not accurate unless they are immaterial, not matching the concept (when
the receivables are written off, when are they written off).

Bad debt expense xxx

AR xxx

- Allowance method: record cash receivable, amount of cash that can be retained

1. Estimated amount

Bad debt expense xxx

- Estimating allowance method is based on 2 things:

Allowance for bad debt xxx

• Percentage of receivables = use composite rate

2. Writing off
or aging schedule (based on past rate on the
Allowance for bad debt xxx
period of receivables, % estimated based on
AR xxx
historical loss rates)

3. Amount are recovered

• Percentage of sales on sale

AR xxx

Allowance for bad debt xxx

Cash xxx

AR xxx

NOTES RECEIVABLES — uses promissory note (written). Classified as interest bearing note and zero-interest-bearing notes.
A long-term notes receivable still is fairly liquid because it is easy to convert to cash

Recognition: PV of cash estimated to be retained

- notes issued at FV (market rate = stated interest rate)

- FV notes = PV principal + PV-OA interest

- Notes receivable a

Cash a (PV notes)

- Cash a x %

Interest Revenue a x %

- Zero-interest-bearing notes (cash paid to the issuer = PV of notes; FV notes = stated amount of notes without interest, use
PV single sum)

- Notes - PV = issued at discount, interest is recognized using effective interest method

- Notes receivable b

Cash b (PV note)

- Notes receivable b x%

Interest revenue b x% (effective rate)

- Interest-bearing notes

- Stated rate ≠ effective rate

- Discount = FV notes - PV notes

- PV notes = PV principal + PV-OA

- Notes receivable c

Cash c (PV note)

- Cash d (annual interest = FV note x %stated rate)

Notes Receivable (e-d)

Interest revenue e (c x % effective rate)

- notes received for property, goods, or services (notes bought using goods/ services)

- No stated interest rate/ face amount differs from the selling price of similar item or FV debt instrument (3rd level FV)

- Recorded without the interest rate

- choice of interest rate (if it is not possible to determine FV, use the available market price, use imputed interest rate
(approx. interest rate)

- Valuation — cash realizable value (notes receivable - bad debt/allowance)

OTHER ISSUES
Derecognition — cash flow contract stops or devaluated

- transfers of receivable (objective: increase speed of retaining cash, access to credit normally not available or too
expensive)

- Sales of receivables

1. Sale without guarantee (seller recognizes finance charge as loss on sale, the buyer recognize as interest revenue;
recognize amount retained as adjustment, seller = due from factor, buyer = due to customer)