Chat with AIExam 6: Cash, Receivables, and the Time Value of Money
Abitibi Ltd is trying to obtain a loan from the bank to help finance its growing sales.After meeting with the bank, the sole owner of Abitibi, Abby Thibault, has come to you for help."The bank said it will lend up to 75% of all receivables less than 60 days and has asked to see my aging schedule, whatever that is.They also wanted to know how I estimate bad debts and I told them 'I don't have to estimate, when I stop trying to collect, I just reverse the sale.' The bank told me to get some advice and to come back next week.I am not sure what they want or what I did wrong."
Required:
A) Explain to Abby what the bank wants.
B) Why would the bank care how she records bad debts?
C) What is wrong with her current method of recording bad debt expenses? D) What other methods are there of recording bad debts?
E) What would you recommend she do?
(36) 
VerifiedA) The bank is willing to lend you money, but they want to use your accounts receivables as collateral.If you default on the loan they will try to collect the accounts receivable to pay the interest and principal outstanding.They only want to accept as collateral the receivables that are relatively current (not too far overdue).The longer a receivable is overdue the greater the risk that it will never be collected.The bank does not want to assume too great a risk.The bank wants you to prepare a list of all accounts that are outstanding and categorize them by how long they have been outstanding.That is an aging schedule.That way they can clearly see how quickly you collect your accounts receivable and how risky they are.
B) As a private company you do not have to follow GAAP, and your method of recording bad debts by reversing the sale made have made sense to you, but it is not the usual way of doing it.The bank will prefer you to use a more generally acceptable method of recording bad debts so it can compare your account to others.
C).Bad debts should be estimated in the period the sale is made, that is, better matching of the cost of offering credit to the sales the credit generates.It should also be recorded as an expense and not as a reversal of a sale.If you reverse the sale it would distort your cost of goods sold or gross margin ratio and it does not reflect your economic activity of the period.You did make the sale, you just didn't collect it.The cost should be reflected as an expense, a cost of offering credit.
D) There are two methods of estimating bad debts, the percentage of credit sales method and the percentage of receivables method.The percentage of credit sales method estimates the expense as a percentage of your credit sales and provides for good matching of the expense and revenue.The percentage of receivables method looks at the balance in the accounts receivable account and estimates how much of those you don't think you will collect, based on how long they have been outstanding.It focuses more on reporting the receivables at their net realizable value on the balance sheet.
E) You should use the percentage of the receivables method.The bank is going to require you to prepare an aging schedule and that is the basis of the method.It would be simplest and more consistent to use that for your estimates.
A company is using the percentage-of- credit- sales method to estimate their bad debts and has noticed that over the past few years there has been a build-up of a debit balance in the Allowance for uncollectible accounts.Which of the following is a possible cause?
(36) VerifiedA
Mrs.Bertucci wants to give her new granddaughter $40,000 on her 21st birthday.If she can invest the money at 4%, the amount she needs to set aside when her granddaughter is born is closest to:
(33) VerifiedB
Which of the following is the average collection period of accounts receivable?
(39) A) Explain how management can use the estimate for the allowance for uncollectibles to create a hidden reserve.
B) Why would management want to create a hidden reserve?
C) Why is it difficult for users to detect hidden reserves?
(45) Which of the following statements concerning the estimation of bad debt expense using the percentage-of-credit-sales method is correct?
(36) Which of the following is normally used by Canadian companies as a unit of measure for financial reporting?
(38) If a shareholder has borrowed money from a company and is expected to pay it back within 9 months, how would the amount be reported on the balance sheet?
(44) The current ratio and quick ratio for the food retailing industry are typically the lowest ratios when compared to the same ratios of other industries.Does this mean the food retailing industry is illiquid? What factors could lead to the low ratios? (Be specific to the industry.)
(37) You have invested $50,000 in the start-up of your friend's biotech business.He has offered you the following three repayment options.Interest rates are currently at 8%.Which one do you prefer? Support your answer.Are there any other factors you would like to consider?
A) A $75,000 lump sum payment in 5 years.B) 10 years of monthly payments of $725.
C) Monthly payments of $500 for 20 years and a final single payment of your full $50,000.
(35) The sales returns account does not provide information to management about:
(40) At what amount are accounts receivable shown on the balance sheet?
(43) On January 1, 2014, Classic Bedding Limited's balances in the Accounts receivable account and the Allowance for uncollectible accounts were $833,000 DR and $125,000 CR, respectively.On February 1, 2014, the company gave up trying to collect from a customer and wrote off an account receivable of $3,000.What were the net carrying values of the accounts receivable before and after the writeoff?
Before After A. \ 833,000 \ 830,000 B. \ 708,000 \ 705,000 C. \ 708,000 \ 711,000 D. \ 708,000 \ 708,000
(41) The accounts receivable clerk had prepared the following aging of Northumberland Corp's accounts receivable.The current balance in the allowance for uncollectibles is $9,800 DR.What is the bad debt expense for the year? Age since due Amount \% uncollectible 0-30 days \ 500,000 1\% 30-60 days 200,000 4\% over 60 days 100,000 10\% Total \ 800,000 5\% (average)
(38) Which of the following methods of calculating bad debt expense is known as the income statement approach?
(44) Which of the following methods of calculating bad debt expense is known as the balance sheet approach?
(32) Who is responsible for ensuring the reliability and completeness of the financial statements?
(34) Which of the following measurement conventions primarily supports the use of the allowance for uncollectible accounts?
(36) 
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