CASE WEEK 7 WORKING CAPITAL Ch 8 Cases SCHROEDER TEXT for ACCT 632 Modified Cases 8-4 & 8-9 : Valuing Accounts Receivable using the Bad Debt Allowance The theoretical valuation of receivables could be the present value of expected future cash flows. However, trade receivables are not discounted owing to materiality and current timing, so the net realizable value is the practical approximation for the theoretical valuation. For an example, consider the publicly-traded Anth Company. Anth has significant trade receivables levels, running about $200 million net receivables last year for annual sales of $600 million. Some specific accounts were written off as uncollectible, about $20 million, while some previous write-off’s of $10 million were collected. Anth applies the allowance approach with a typical balance of about $15 million. Required: Prepare a brief report in good essay form, about 300 to 400 words, explaining the appropriate handling of these issues. Where alternatives are available, discuss the options and the basis for their selection. Cite the Code (ASC) section(s) that apply. Diction and grammar will be considered. a) Define the net realizable value as the concept or construct applies to the trade receivables. b) Address the approaches to calculating or determining the allowance for bad debt, considering the advantages and disadvantages of the balance sheet method versus the income statement approach. Your discussion should include: a. The approach providing the best measure of liquidity and why it is. b. The approach most closely delivering a net realizable value, already highlighted as the most practical method for proper valuation. Why is it? c. The approach most consistent with the matching principle and why it is. d. The approach that seems more consistent with the OCI (Other Comprehensive Income) approach to accounting for income and why it is so. c) How should Anth handle the bad debts allowance and highlighted events? a. How often should Anth update the allowance this year and why? Sales rose 5% this year, to $630 million, and Receivables are up 10% to $220 million. b. What trigger events should signal Anth to recalculate and adjust the allowance? Calculate and discuss metrics that reflect the trend of current vs. prior year using the ending balances of Receivables (so ignoring year over year averages). c. Prepare the journal entries for recording i. The new write-off’s, and ii. The old write-off’s now collected. iii. The current year allowance for bad debts. ISSUED BY JEF GARNER, ACCOUNTING INSTRUCTOR updated 2/25/2016 pg. 1
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