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RECEIVABLE IMPAIRED BY
TROUBLED DEBT RESTRUCTURING – TERMS MODIFIED
Brillard Properties owes First Prudent Bank $30 million, under a 10% note with 2
years remaining to maturity. Due to financial difficulties of the developer, the
previous year's interest ($3 million) was not paid. First Prudent Bank agrees to:
(2) reduce the remaining two interest payments to $2 million each,
(3) reduce the principal to $25 million
ANALYSIS
Previous Value:
New Value:
Interest $2 million x 1.73554 * = $ 3,471,080
JOURNAL ENTRY
Loss on troubled debt restructuring (to balance) .. 8,867,670
Accrued interest receivable (10% x $30,000,000) ......... 3,000,000
T7-25
7-36 Intermediate Accounting, 8/e
Debt Settled at the Time of a Restructuring
First Prudent Bank is owed $30 million by Brillard Properties under a 10% note
with 2 years remaining to maturity. Due to financial difficulties of the developer,
..................................................................... ($ in millions)
Land (fair market value) ................................... ................ 20
INTERNATIONAL FINANCIAL REPORTING STANDARDS
Impairments. IFRS and U.S. GAAP generally have similar treatments of
impairments of accounts and notes receivable. In particular, both allow reversals of
impairments if circumstances change to indicate that the amount of the impairment
has decreased. Reversals increase the carrying amount of the receivable and increase
income (for example, by reducing bad debt expense and the allowance for
uncollectible accounts in the period of reversal). The amount of reversal is limited to
the amount of the original impairment.
Here are a couple of differences:
• Level of analysis:
O
Under U.S. GAAP we examine impairment of individual receivables. If
impairment isn’t indicated, we group the receivables with other receivables of
• Impairment indicators:
o
U.S. GAAP provides an illustrative list of information we might consider when
evaluating receivables for impairment, and requires measurement of potential
T7-27
7-38 Intermediate Accounting, 8/e
Suggestions for Class Activities
1. Real World Scenario
The following is an excerpt from a December 18, 2000, article on TheStreet.com entitled “Cisco
Triples Bad-Account Provision as Cash Crunch Deepens.” The article discusses an increase in bad
debts for Cisco Systems, Inc, the world’s largest networking products company.
Cisco’s deadbeat account column has more than tripled in the span of a year,
adding to evidence that some of its network equipment customers are
Suggestions:
There are a number of issues that could be discussed with the class. For example, the articles
states “Cisco moved $275 million from operating cash to cover potential nonpayments from failed
customers …” What is wrong with the terminology used in that sentence? You could have the class
Points to note:
Of course, no “cash” was moved to cover potential nonpayments from failed customers. The
correct terminology is that the company increased the allowance for uncollectible accounts to cover
2. Research Activity
In June of 2007, Frozen Food Express Industries reported that its auditors found material weaknesses
in its internal financial controls. The PCAOB’s Auditing Standard No. 2 requires that the auditor
form an opinion on the effectiveness of controls. If any deficiencies exist, they should be reporting
in writing to management and the audit committee. The existence of a material weakness requires
the issuance of an adverse opinion. There are three types of possible deficiencies.
Suggestions:
Points to note:
The three types of deficiencies are:
1. A control deficiency exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, to
prevent or detect misstatements on a timely basis.
3. Symantec Analysis
Have students, individually or in groups, go to the most recent Symantec annual report using
1. Compare the allowance for uncollectibles with the amount reported in the 2014 report located
in the annual report included with all new copies of the text. Has there been any change in the
relationship between the allowance and gross receivables? If so, how might this be
interpreted?
2. Compute the current year's average collection period and compare it to 2014. Interpret your
results in light of your findings in requirement 1 above.
3. Use EDGAR to locate the most recent annual report information for CA, Inc., Symantec’s
4. Professional Skills Development Activities
7-40 Intermediate Accounting, 8/e
The following are suggested assignments from the end-of-chapter material that will help your
students develop their communication, research, analysis and judgment skills.
Communication Skills. In addition to Communication Case 7-2, Integrating Case 7-8 can be
adapted to ask students to write a memo from a junior accountant to a controller explaining the
Research Skills. In their careers, our graduates will be required to locate and extract relevant
information from available resource material to determine the correct accounting practice,
perhaps identifying the appropriate authoritative literature to support a decision. Research
Analysis Skills. The “Broaden Your Perspective” section includes Analysis Cases that direct
students to gather, assemble, organize, process, or interpret data to provide options for making
Judgment Skills. The “Broaden Your Perspective” section includes Judgment Cases that require
students to critically analyze issues to apply concepts learned to business situations in order to
5. Ethical Dilemma
The chapter contains the following ethical dilemma:
ETHICAL DILEMMA
The management of the Auto Parts Division of the Santana Corporation receives a bonus if the
division's income achieves a specific target. For 2016 the target will be achieved by a wide
margin. Mary Beth Williams, the controller of the division, has been asked by Philip Stanton, the
head of the division's management team, to try to reduce this year's income and "bank" some of the
profits for future years. Mary Beth suggests that the division's bad debt expense as a percentage of
net credit sales for 2016 be increased from 3% to 5%. She believes that 3% is the more accurate
estimate but knows that both the corporation's internal auditors as well as the external auditors
allow some flexibility when estimates are involved. Does Mary Beth's proposal present an ethical
dilemma?
You may wish to discuss this in class. If so, discussion should include these elements.
Step 1—The Facts:
Managers of the Auto Parts Division receive bonuses for attaining division target net income.
The 2016 target net income has been achieved. The head of the management team asks Mary Beth
Step 2—The Ethical Issue and the Stakeholders:
The ethical issue or dilemma is whether the controller's obligation to the management team to
provide for future profit and the ensuing bonuses is greater than her obligation to provide
information that is not misleading to users of the financial statements.
Step 3—Values:
Values include competence, honesty, integrity, objectivity, loyalty to the company, loyalty to the
management team, and responsibility to users of financial statements.
7-42 Intermediate Accounting, 8/e
Step 4—Alternatives:
1. Follow the suggestion of Philip Stanton to defer some 2016 income to future years.
2. Refuse to defer profit to the future and record the 2016 bad debt expense at the best estimate
Step 5—Evaluation of Alternatives in Terms of Values:
1. Alternative 1 illustrates loyalty to the management team.
2,3. Alternatives 2 and 3 illustrate loyalty to the company as a whole and also incorporate the
Step 6—Consequences:
Alternative 1
Positive consequences: The controller would please the management team who would probably
receive bonuses in future years.
Negative consequences: Users of the financial statements, including corporate top management,
Alternative 2
Positive consequences: Users of financial statements would receive a more relevant and reliable
estimate of net income for 2016 and future years. Net income and bonuses in future years would be
Alternative 3
Positive consequences: The controller maintains her integrity. Users may receive a more relevant
and reliable estimate of reported income if upper management levels or the audit committee compel
Alternative 4
Positive consequences: The controller maintains her integrity and avoids conflict with division
management.
Step 7—Decision:
Assignment Chart
Learning Est. time
Questions Objective(s) Topic (min.)
7-1
—
Cash equivalents
5
7-2
1
Internal control procedures
5
7-3
1
Internal controls and Sarbanes-Oxley
5
7-4
2
Compensating balance
5
7-5
2, 10
IFRS; Bank overdrafts
5
7-6
3
Trade versus cash discounts
5
7-7
3
Cash discounts; gross versus net methods
5
7-8
4
Sales returns
5
7-9
5
Accounting treatment for uncollectible accounts
5
7-10
6
Income statement versus balance sheet
approaches of accounting for bad debts
5
7-11
6, 10
IFRS; Disclosure
5
7-12
8
Assigning of accounts receivable
5
7-13
8
Factoring with and without recourse
5
7-14
8, 10
IFRS; Transfer of receivables
5
7-15
8
Discounting a note receivable
5
7-16
9
Monitoring a company’s investment in
receivables
5
7-17
7A
Bank reconciliation [based on Appendix 7A]
5
7-18
7A
Petty cash [based on Appendix 7A]
5
7-19
7B
Debt impairment (based on Appendix 7B)
5
7-20
7B, 10
IFRS; Debt impairment (based on Appendix 7B)
5
Brief Learning Est. time
Exercises Objective(s) Topic (min.)
7-1
1
Internal control
10
7-2
2, 10
IFRS; Bank overdrafts
10
7-3
2
Cash and cash equivalents
5
7-4
3
Cash discounts; gross method
10
7-5
3
Cash discounts; net method
10
7-6
4
Sales returns
10
7-7
5, 10
IFRS; Disclosure
10
7-8
5,6
Uncollectible accounts; income statement
approach
10
7-10
5,6
Uncollectible accounts; solving for unknowns
10
7-11
5,6
Uncollectible accounts; solving for unknowns
10
7-12
7
Note receivable
10
7-13
8
Factoring of accounts receivable
10
7-14
8
Factoring of accounts receivable
10
7-15
8, 10
IFRS; Factoring an accounts receivable
10
7-16
8
Discounting a note
10
7-17
9
Receivables turnover
5
Learning Est. time
Exercises Objective(s) Topic (min.)
7-1
2
Cash and cash equivalents; restricted cash
15
7-2
2
Cash and cash equivalents
10
7-3
2,6,7
Cash equivalents, uncollectible accounts, notes,
codification
15
7-4
2,10
IFRS; Overdrafts
10
7-5
3
Trade and cash discounts; the gross method and
the net method compared
15
7-6
3
Cash discounts; the gross method
10
7-8
4
Sales returns
15
7-9
5
Disclosure, codification
15
7-10
5,6
Uncollectible accounts; allowance method vs.
direct write-off method
15
7-11
5,6
Uncollectible accounts; allowance method;
balance sheet approach
20
7-12
6
Uncollectible accounts; allowance method and
direct write-off method compared; solving for
unknowns
15
7-13
5,6
Uncollecitble accounts; allowance method;
solving for unknowns; General Mills
10
7-15
7
Noninterest-bearing note receivable
15
7-16
7
Interest-bearing note receivable; solving for
unknown rate
20
7-17
8
Assigning of specific accounts receivable
10
7-18
8
Factoring of accounts receivable without
recourse
10
7-19
8
Factoring of accounts receivable with recourse
15
7-20
8, 10
IFRS; Factoring of accounts receivable with
recourse
15
7-21
8
Discounting a note receivable
20
7-22
1,2,3,4,5,6,
7,8
Concepts; terminology
15
7-23
3,5,6,7,8
Receivables; transaction analysis
25
7-25
9
Ratio analysis; solve for unknowns
15
7-26
7A
Petty cash [based on Appendix 7A]
10
7-27
7A
Petty cash [based on Appendix 7A]
10
7-28
7A
Bank reconciliation [based on Appendix 7A]
15
7-29
7A
Bank reconciliation and adjusting entries [based
on Appendix 7A]
20
7-46 Intermediate Accounting, 8/e
7-31
7B
Troubled debt restructuring
15
CPA/CMA Learning Est. time
Exam Questions Objective(s) Topic (min.)
CPA-1
5
Uncollectible accounts; allowance method,
income statement approach
3
CPA-3
5
Uncollectible accounts; allowance method
3
CPA-4
4,5
Changes in accounts receivable
3
CPA-5
8
Factoring of accounts receivable without
recourse
3
CPA-6
5,6
Uncollectible accounts; allowance method,
balance sheet approach
3
CPA-7
5,6
Uncollectible accounts; allowance method
3
CPA-9
5,7,10
Accounts receivable classification under IFRS
3
CPA-10
7B,10
Accounting for impairments under IFRS
3
CMA-1
5,6
Uncollectible accounts; allowance method
3
CMA-2
5
Uncollectible accounts; allowance method,
balance sheet approach
3
CMA-3
5
Uncollectible accounts; allowance method,
balance sheet approach
3
Learning Est. time
Problems Objective(s) Topic (min.)
7-1
5,6
Uncollectible accounts; allowance method;
income statement and balance sheet approach
30
7-2
5
Uncollectible accounts; Amdahl
25
7-3
5
Bad debts; Cirrus Logic
25
7-4
5,6
Uncollectible accounts
40
7-5
4,5
Receivables; bad debts and returns; Symantec
40
7-6
7
Notes receivable; solving for unknowns
20
7-7
8
Factoring versus assigning of accounts receivable
25
7-8
8
Factoring of accounts receivable; with and
without recourse
15
7-10
3,4,7,8
Miscellaneous receivable transactions
30
7-11
8
Discounting a note receivable
45
7-12
5,6,7,8,9
Accounts and notes receivable; discounting a
note; receivables turnover ratio
40
7-13
7A
Bank reconciliation and adjusting entries;
determining cash and cash equivalents
25
7-15
7B
Troubled debt restructuring
Star Problems
Learning Est. time
Cases Objective(s) Topic (min.)
Judgment Case 7-1
5,6,8
Accounts and notes receivable
15
Communication Case 7-2
5
Uncollectible accounts
40
Judgment Case 7-3
3,7,8
Accounts receivable
20
Judgment Case 7-4
4
Sales returns
60
Ethics Case 7-5
5
Uncollectible accounts
20
Judgment Case 7-6
1
Internal control
30
Integrating Case 7-8
5
Change in estimate of bad debts
15
Analysis Case 7-9
8
Financing with receivables
15
Real World Case 7-10
5,8,10
IFRS; Financing with receivables
20
Research Case 7-11
8
Financing with receivables, codification
45
Analysis Case 7-12
9
Compare receivables management using ratios;
Del Monte Foods and Smithfield Foods
60
Analysis Case 7-13
2,5
Reporting cash and receivables; Dell
20
