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Accounts Receivable and
Impairments
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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! ""#$! etc%&
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Allowance method
• 'enerally re(uired )or )inancial reporting
• Record estimated bad debt e*pense and accountsreceivable contra account at sale
Bad Debt Exp. (or Sales contra) 8.4
Allow. For DA (AR contra) 8.4
• +et income e))ect at time o) sale
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• +o net income e))ect at time o) write,o))
Allowance or Doubtul Accounts !."
Accounts Receivable !."
• Reverse out entry i) later collected
Accounts Receivable !."
Allowance or DA !."
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• -atch revenue # e*penses in period o) sale
• Records net accounts receivable at e*pected
cash collection
• .iscretion in estimating bad debt e*pense
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• Ad/ust estimate at period,end i) necessary
• 0ow to estimate bad debts?
– "ercentage o) sales
– Aging o) accounts receivables
– 1)ten A% and 2% are used in combination
Allowance or DA 0.8 Bad Debt Expense 0.8
To reduce allowance based on period,end A3R
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• 1ther applications
– Sales return and cash discounts
– Inventory obsolescence
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4rom 5o6e7s 89,:
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ACCOUNTS RECEIVABLE AND
BAD DEBTS TACCOUNTS'ross& Accounts Receivable
2eg% 2al%
5redit Sales 5ollections
Write,o))s
$nding 2al%
Allowance )or .oubt)ul Accounts
2eg% 2al%
Write,o))s 2ad .ebt $*p%
$nding 2al%
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ACCOUNTS RECEIVABLE AND
BAD DEBTS TACCOUNTS'ross& Accounts Receivable
2eg% 2al%
;8!
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1ther Allowances and Reserves
• Impairment allowances
– I) ""#$ is not e*pected to return its net 2C
#$pair$ent %oss !00
&&'E (or contra) !00
– .epreciate based on remaining li)e and new boo6value
– Ta6e the 23S and I3S hit when the value drops
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"layer trading pro)its were 8%< million pounds due largely
to the trans)er o) $ngland captain .avid 2ec6ham to Real -adrid!
but were down )rom last yearDs pro)it o) 8B%= million pounds as the
club too6 a write down on the value o) Argentine mid)ielder EuanSebastian Ceron be)ore his subse(uent sale to 5helsea%
FThese are a crac6ing set o) results! but there are
a lot o) one,o))s this year and they may struggle to
match them ne*t year on a li6e,)or,li6e basis!F said
analyst Andrew Gee at .resdner :leinwort Wasserstein
G1+.1+! Sept @9 Reuters& , -anchester Hnited sought to play
down persistent ta6eover speculation surrounding the premier
league champions on Tuesday as success on and o)) the pitch boosted
annual pro)its by percent%
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• Reverse out the liability when you pay cash
Restructurin, %iabilit 40
*as+ 40
• .epreciate remaining ""#$ balance over
remaining li)e
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