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Is this truly bad debt?

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

Reply to
Beverly
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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.....

Reply to
~^ beancounter ~^

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.

Reply to
John

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

Reply to
Rusty

"Beverly" wrote

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.

Reply to
Paul Thomas, CPA

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

Reply to
Rusty

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