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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
0.8
Bad Debt Expense 0.8
To reduce allowance based on period-end A/R

Other applications
Sales return and cash discounts
Inventory obsolescence

From Cokes 10-K

ACCOUNTS RECEIVABLE AND


BAD DEBTS T-ACCOUNTS
(Gross) Accounts Receivable

Allowance for Doubtful Accounts

Beg. Bal.
Credit Sales

Beg. Bal.
Collections

Write-offs

Bad Debt Exp.

Write-offs
Ending Bal.

Ending Bal.

ACCOUNTS RECEIVABLE AND


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

Ending Bal.
$55 (10-K)

Other Allowances and Reserves


Impairment allowances
If PP&E is not expected to return its net BV
Impairment Loss
100
PP&E (or contra) 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
Warrantee Liability
40
When you pay to fix it or replace it
Warrantee Liability
40
Cash (or Inventory)
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