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)
• Net income effect at time of sale
8.4
• 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 Coke’s 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
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
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