USA Bankruptcy of customer/lien question

[JoJoCPA123]

Would love to bounce this off of someone... I'm trying to figure out the best way to account for a transaction that has me scratching my head a bit. We had a customer that we were providing fulfillment services to last year. For simplicity, last year, we charged them $100 for warehouse/fulfillment services for computer hardware. We recognized the revenue in December. The customer went bankrupt in February, and we initiated a lien against the inventory we still held, valued at $300. We've just gotten the green light that we can liquidate the inventory and keep the proceeds to pay for the outstanding debt of $100. My initial thoughts were to write off the entire $100 in the previous year and recognize the proceeds of any liquidation sale to be a gain. But since we have better information now and we can reasonably expect to recoup most if not all the money from the liquidation, can we not leave the $100 receivable as is in the previous year, and apply the proceeds of the liquidation sale to the receivables in the current year? Any excess in liquidation sales over the receivables totals would be recorded as a gain of course. The actual dollars are material, i just used small dollar amounts as an example. Thanks

 

[Werner Reisacher]

The best advice I can give you is to take a step back and look at the timeline of the events that took place since last year until the moment you realized that you are dealing with a delinquent customer.
Irrespective of the customer's financial situation, as long as you provided fulfilment services, the billing department had to invoice and book these services as sales on a monthly basis and charge his receivable account.
At the end of each month, the Accountant has to make a judgement call as to the validity of each outstanding accounts receivable balance. If this customer was always up to date with his monthly payments, there was no reason to set up a bad debt provision as a precaution in view of a potential credit problem. Consequently, the entire impact of the situation needs to be realized when it actually occurs.
Looking back, the question is - was there any reason based on the knowledge you had back at year-end, that the customer must be considered a "contingent liability" and an appropriate "doubtful account" reserve should have been set up at that time.
So, I suggest - be guided by making decisions based on the information you knew at that time and do not take your today's knowledge and make retroactive decisions hat should have been taken if these facts would have already been known back at year-end closing.
As an entirely different issue, somebody should also take this opportunity to look at some possible loopholes in your internal control systems. Carrying out fulfilment services for customers requires a very close relationship between people on the operations level, and in the shipping department. Words about the credit situation of the customer cannot have been a secrete. Was there any feedback between the Accountant and the operations about the problems this customer is facing?

 

[kirby]

Hi Jojo

Give ASC 855-10-20 a read to determine the accounting. If the customer's accounts at year end were in doubt of collection, then I think your proposal to write off in the prior year is in line with the ASC.

As for keeping $300 of proceeds while the debt was only $100 and recording a gain. Not so fast. Better talk to your legal counsel as typically the Bankruptcy Trustee should be vigilant to ensure you give back the excess. The excess doesn't belong to you.

 

[Werner Reisacher]

Kirby, you must still be under the spill of Friar Luca. Absolutely correct on the treatment of the difference between the amount of the estimated lien and the amount of money collected from the sale of the confiscated goods. Irrespective of accounting rules, collecting funds in excess of existing debits is illegal. It is your duty to find out who the legal owner of the funds is.
Reading ASC 855 did bring some old memories back when I struggled with fine-tuning the wording of the quarterly 10Q's filings, and the auditor's investigating questions prior to release - what did you know and when did you know it.
Thank you.

 

[kirby]

Don't need to "find the legal owner of the funds" cause that person is the customer that you were providing fulfillment services to. But I would make payment to the Bankruptcy Trustee as that is safer for you.

 

[Werner Reisacher]

Sorry Kirby but English is only one of my languages. Was my way to say - check whether the customer's assets are frozen or seized before returning funds directly.

 

[kirby]

If customer's assets were seized then original poster would not have them and so could not be thinking about selling those assets. Also if assets were frozen, bankruptcy trustee would have that information and would not have given original poster the approval for sale.