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Chap 008
Chap 008
Revsine/Collins/Johnson/Mittelstaedt: Chapter 8
3. How to spot whether or not reported receivables arose from real sales.
Gross Estimated
NRV of Estimated
= amount - - returns &
receivables uncollectibles
owned allowances
A contra-revenue account
2. “Bill and hold” sales raise the possibility that some of this
disparity occurs because sales were booked too early—thus
generating receivables that won’t be collected quickly (if ever).
Overly aggressive
revenue recognition
on items “sold” to
dealers
Interest
accumulates at
10% on the
unpaid balance
Abbott would make the following entry when the note is discounted:
DR Cash $8,789.40
DR Prepaid interest 201.60
CR Note receivable $9,000.00
Yes No
DR Cash $1,000,000
CR Mortgage receivable $1,000,000
As sale As borrowing
The restructured loan can differ from the original loan in several
ways:
Scheduled interest and principal payments may be reduced or
eliminated.
The repayment schedule may be extended over a longer time period.
The customer and lender can settle the loan for cash, other assets, or
equity interests.
1
2
Present value at
10% interest from
original note
Present value at
10% interest
2. GAAP restructuring gains and losses sometimes differ from real economic
gains and losses.
3. GAAP’s use of the original loan’s effective interest rate can be questioned.
The GAAP approach is a practical solution but it also fails to fully reflect
the economic reality.