Net Trade Receivables: Aging and the Ending Allowance

Answer D. Net trade receivables include amounts due from customers from sales, including the customer note arising from the overdue sale, less the allowance for credit losses: $420,000 + $60,000 - $24,000 = $456,000. Customer overpayments are reported as liabilities and employee advances are nontrade receivables.

Why not A: Tempting if a candidate includes only open trade accounts receivable and subtracts the allowance (420,000 - 24,000). It's wrong because the note receivable arose from a customer sale and should be included in trade receivables.

Why not B: This reflects netting customer overpayments against receivables (420,000 + 60,000 - 24,000 - 18,000). It's wrong because customer credit balances are generally classified as liabilities (refunds/credits), not deducted from trade receivables.

Why not C: This treats advances to employees as part of trade receivables (420,000 + 60,000 - 24,000 + 12,000). It's wrong because employee advances are nontrade receivables and are reported separately.

Answer D. Trade receivables are presented at net realizable value. Because the $10,000 of customer credit balances are liabilities (not offsettable against receivables), the receivable base is the $420,000 of debit balances; subtract the $15,000 allowance for uncollectible accounts to arrive at $405,000.

Why not A: This comes from netting the $10,000 credit balances against receivables and then subtracting the allowance (420,000 - 10,000 - 15,000). That's incorrect because those credit balances should be classified as liabilities rather than reducing receivables.

Why not B: This reports the gross debit balances without deducting the allowance for uncollectible accounts; trade receivables should be shown at net realizable value, so the allowance must be applied.

Why not C: This reflects netting the $10,000 customer credit balances against receivables but forgetting to subtract the allowance (420,000 - 10,000). Net receivables must reflect the allowance for uncollectible accounts.

Answer A. Atlas's post-year-end bankruptcy provides evidence about conditions that existed at 12/31/X5, so Orion should estimate and record the expected credit loss of $135,000 (180,000 less expected collection of 45,000). Beacon's plant fire occurred after year-end and does not reflect a condition existing at 12/31/X5, so it is not a basis for an additional 12/31 customer-specific allowance (though material post‑year‑end losses may require disclosure). Crest was pledged as collateral, not sold, and Orion retained collection responsibility, so the receivable remains on the balance sheet with disclosure of the assignment rather than derecognition.

Why not B: This is tempting because severe post‑year‑end collection problems often trigger concern and candidates sometimes confuse pledging with sale; it is wrong because Beacon's fire arose after year‑end (a nonrecognized event under these facts) and assigning a receivable as collateral does not remove it from the balance sheet.

Why not C: This appeals to candidates who wait for legal finality or realized losses, but under CECL expected credit losses must be estimated using information available at the reporting date; Atlas's bankruptcy shortly after year‑end is evidence of prior deterioration that requires an allowance.

Why not D: This overreacts to adverse events and misinterprets secured borrowing as derecognition; Atlas should receive an allowance for the uncollectible portion when partial recovery is expected, Beacon's loss is nonrecognized at year‑end in these facts, and assigning Crest as collateral does not reclassify it as nontrade.

Answer B. Trade receivables are presented at the net amount expected to be collected, not at the full gross amount when expected credit losses exist. Under current U.S. GAAP, expected credit losses are recognized by recording an allowance for credit losses (a contra-asset) rather than waiting until specific accounts are written off. Therefore, Redd should present net trade receivables of $420,000 − $12,000 = $408,000, with a separate allowance for expected credit losses.

Why not A: This is tempting because some candidates recall the direct write-off method or older practice that losses are recognized only when an account is specifically deemed uncollectible. However, GAAP requires an estimate of expected credit losses to be recognized in advance through an allowance, so reporting the full $420,000 would overstate receivables.

Why not C: This distractor may catch students who confuse whether an allowance increases or decreases collectible amounts. An allowance for expected credit losses is a contra-asset that reduces the carrying amount of receivables; it never increases the amount expected to be collected.

Why not D: Candidates might confuse valuation uncertainty with classification. Estimated uncollectibility affects measurement via an allowance, not whether receivables are current; they remain current unless the contractual collection period makes them noncurrent.

Answer A. Trade receivables are reported at net realizable value, which equals gross receivables less the ending allowance for credit losses. Here, gross trade receivables are $250,000 and management determines the required total allowance is $12,000 (this $12,000 already includes the identified $6,000 specific account). Therefore, net trade receivables reported are $250,000 - $12,000 = $238,000.

Why not B: This subtracts only the specifically identified $6,000 uncollectible account from gross receivables. The balance sheet should reflect the full required ending allowance of $12,000, not just the known specific account.

Why not C: This reflects not recognizing an allowance until specific accounts are written off. Under the allowance (including current expected credit loss) approach, expected credit losses are recognized before write-offs, so the receivables should be reduced by the total required allowance.

Why not D: This incorrectly subtracts both the $12,000 required allowance and the $6,000 specific account, double-counting the identified loss. The $12,000 allowance already includes the $6,000 specific account, so only $12,000 is subtracted once.

Answer A. Accounts receivable are presented net of the allowance: $600,000 - $24,000 = $576,000, and remain a current asset. The portion of the note due within 12 months ($25,000) is classified as current, with the remaining $125,000 reported as long-term. Receivables sold without recourse that were removed from the company's records are derecognized; pledged receivables remain on the balance sheet and are disclosed.

Why not B: This is tempting if a student believes pledged receivables must be removed from assets or that the full note is noncurrent. It's wrong because pledging collateral does not derecognize receivables (they remain on the balance sheet and are disclosed), and the portion of the note due within 12 months must be shown as current while only the remainder is long-term.

Why not C: This choice traps students who confuse factoring with a financing arrangement and therefore leave sold receivables on the books. It's incorrect here because the problem states the receivables were sold and removed (derecognized) when sold without recourse.

Why not D: This distractor appeals to those who mistake valuation accounts for liabilities. It's wrong because the allowance for doubtful accounts is a contra-asset presented as a reduction of accounts receivable on the face of the balance sheet, not as a liability.

Answer B. Trade receivables are reported at the amount expected to be collected, so Maple should present the debit-balance trade receivables of $420,000 less the $18,000 allowance for expected credit losses. That results in net trade receivables of $402,000. The $12,000 of customer credit balances are not receivables; they should be classified separately as liabilities rather than netted into trade receivables.

Why not A: This is tempting because it subtracts both the $12,000 customer credit balances and the $18,000 expected credit losses from $420,000. However, customer credit balances are not deducted from trade receivables to arrive at net receivables; they are reclassified to a liability account. Only the allowance for expected credit losses reduces the trade receivables balance shown as net receivables.

Why not C: This choice is tempting if the candidate focuses on removing the $12,000 customer credit balances from the receivables section but forgets the allowance. The balance sheet should report trade receivables net of expected credit losses, so Maple must also subtract the $18,000 allowance. Reclassifying the credit balances alone does not produce the correct net receivables amount.

Why not D: This answer is tempting if the candidate remembers that the $12,000 customer credit balances should not be netted against receivables and stops there. But trade receivables are still presented net of the allowance for expected credit losses. Ignoring the $18,000 allowance overstates the receivables reported on the balance sheet.

Answer C. Trade receivables are presented at net realizable value, which is the gross customer debit balances less the allowance for credit losses. Net receivables equal $480,000 − $22,000 = $458,000. The $14,000 of customer credit balances are separate current liabilities and should not be netted against receivables.

Why not A: This is the gross customer debit balances only. It ignores the allowance for credit losses; under U.S. GAAP receivables are shown net of the allowance, so reporting the gross amount is incorrect.

Why not B: This equals $480,000 less the $14,000 customer overpayments (480 − 14 = 466). It's chosen if a candidate incorrectly nets customer credit balances against receivables instead of classifying them as liabilities and also ignores the $22,000 allowance. The correct treatment is to present the $14,000 as liabilities and reduce receivables by the allowance.

Why not D: This subtracts both the $22,000 allowance and the $14,000 customer credit balances from the debit balances (480 − 22 − 14 = 444). That double-netting is incorrect because the $14,000 overpayments are presented as liabilities, not deducted from gross trade receivables.