Is this truly bad debt?


B

Beverly

There is a vendor to whom we pre-paid for goods. They were unable to
fulfill the order. Without going into some massive detail, they
were/are unable to refund the money in its entirety and have been
sending small amounts which, if continued in this manner, will take
years to pay off.

While it may be prudent to sue for the return of our money and I have
advised to do so, this is not the course of action the president
wishes to take at this time.

The president wants this somehow expensed and the easiest way would be
to write it off to bad debt; HOWEVER, in order to most accurately
depict what is going on, I am wondering if I should use some
intermediary accounts in order to do so... since they are paying,
albeit slowly. The intermediary accounts I am thinking of would be a
refunds receivable and an allowance contra account on that receivable.

I am probably being too picky, but the amount in question is material.
Recipients of audited financials would not see this in numbers, but it
should probably have a note associated with it. Recipients of
unaudited financials WOULD see it (i.e. our banker).

I have been unable to find anything specific enough in GAAP, but I do
know that financials should most accurately reflect the true financial
picture. This is not bad debt, but could become so quite quickly if
they ever stop paying.

Please advise.
Beverly
 
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B

~^ beancounter ~^

If you know it will be eved. paid back, I would
set up a long term note ( > one year) rec.....And
book the change/pmts each year to w/offs, down
in the income statement.....in effect, slowly "paying
back" the loss on bad debit taken today.....
 
J

John

Beverly said:
There is a vendor to whom we pre-paid for goods. They were unable to
fulfill the order. Without going into some massive detail, they
were/are unable to refund the money in its entirety and have been
sending small amounts which, if continued in this manner, will take
years to pay off.

While it may be prudent to sue for the return of our money and I have
advised to do so, this is not the course of action the president
wishes to take at this time.

The president wants this somehow expensed and the easiest way would be
to write it off to bad debt; HOWEVER, in order to most accurately
depict what is going on, I am wondering if I should use some
intermediary accounts in order to do so... since they are paying,
albeit slowly. The intermediary accounts I am thinking of would be a
refunds receivable and an allowance contra account on that receivable.

I am probably being too picky, but the amount in question is material.
Recipients of audited financials would not see this in numbers, but it
should probably have a note associated with it. Recipients of
unaudited financials WOULD see it (i.e. our banker).

I have been unable to find anything specific enough in GAAP, but I do
know that financials should most accurately reflect the true financial
picture. This is not bad debt, but could become so quite quickly if
they ever stop paying.

Please advise.
Beverly
It is bad debt even though the vendor is paying something on the
orginal balance. You should write if off to "allowance for bad debts"
(contra account- receivables) on the balance sheet. Since the amount
is material you need to bring the balance of the allowance to a normal
reserve (% of receivables) by debiting bad debt expense and crediting
the allowance.
 
R

Rusty

Beverly said:
There is a vendor to whom we pre-paid for goods. They were unable to
fulfill the order. Without going into some massive detail, they
were/are unable to refund the money in its entirety and have been
sending small amounts which, if continued in this manner, will take
years to pay off.

While it may be prudent to sue for the return of our money and I have
advised to do so, this is not the course of action the president
wishes to take at this time.

The president wants this somehow expensed and the easiest way would be
to write it off to bad debt; HOWEVER, in order to most accurately
depict what is going on, I am wondering if I should use some
intermediary accounts in order to do so... since they are paying,
albeit slowly. The intermediary accounts I am thinking of would be a
refunds receivable and an allowance contra account on that receivable.

I am probably being too picky, but the amount in question is material.
Recipients of audited financials would not see this in numbers, but it
should probably have a note associated with it. Recipients of
unaudited financials WOULD see it (i.e. our banker).

I have been unable to find anything specific enough in GAAP, but I do
know that financials should most accurately reflect the true financial
picture. This is not bad debt, but could become so quite quickly if
they ever stop paying.

Please advise.
Beverly
Hi Beverly,

Write it off to Bad Debt Expense and Credit Provision for Bad Debts. When
and if payments are received you would do the exact opposite; Credit Bad
Debt Expense and Debit the Provision account.

The tax treatment will depend on your local taxation regulations.

Cheers,
Rusty
 
P

Paul Thomas, CPA

Beverly said:
There is a vendor to whom we pre-paid for goods. They were unable to
fulfill the order. Without going into some massive detail, they
were/are unable to refund the money in its entirety and have been
sending small amounts which, if continued in this manner, will take
years to pay off.

While it may be prudent to sue for the return of our money and I have
advised to do so, this is not the course of action the president
wishes to take at this time.

The president wants this somehow expensed and the easiest way would be
to write it off to bad debt; HOWEVER, in order to most accurately
depict what is going on, I am wondering if I should use some
intermediary accounts in order to do so... since they are paying,
albeit slowly. The intermediary accounts I am thinking of would be a
refunds receivable and an allowance contra account on that receivable.

I am probably being too picky, but the amount in question is material.
Recipients of audited financials would not see this in numbers, but it
should probably have a note associated with it. Recipients of
unaudited financials WOULD see it (i.e. our banker).

I have been unable to find anything specific enough in GAAP, but I do
know that financials should most accurately reflect the true financial
picture. This is not bad debt, but could become so quite quickly if
they ever stop paying.


Well, I would suspect that the prepayment for goods goes down as an asset
(prepaid expense?), but not as a receivable (as in a sales receivable), so
be careful of the advice to debit "bad debt" and credit A/R, cause that
doesn't make sense. You would however, credit whatever account (prepaid
expense?) you booked earlier.

If you follow the progression of the transactions, if they went through (ie:
you got delivery) where would the expense have gone to? That's probably
where I'd book the expense to, and that's where I'd credit the receipts to
(if /when) as you receive them.

So, if the boss wants the transaction expensed, book it where the expense
would have gone in the first place.
 
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R

Rusty

Paul Thomas said:
Well, I would suspect that the prepayment for goods goes down as an asset
(prepaid expense?), but not as a receivable (as in a sales receivable), so
be careful of the advice to debit "bad debt" and credit A/R, cause that
doesn't make sense. You would however, credit whatever account (prepaid
expense?) you booked earlier.

If you follow the progression of the transactions, if they went through
(ie: you got delivery) where would the expense have gone to? That's
probably where I'd book the expense to, and that's where I'd credit the
receipts to (if /when) as you receive them.

So, if the boss wants the transaction expensed, book it where the expense
would have gone in the first place.
OOPS! Sorry, I misread the question. Of course Paul is absolutely correct
it has nothing to do with A/R or bad debts provision.

I must be getting rusty after six years of retirement :)

Cheers,
Rusty
 

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