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Return due to nonpayment

Accounting For Bad DebtWe have a customer that has not been paying an invoice. We recognized the revenue at point of sales (after meeting the 4 criteria, at that time we thought they would have no issue paying invoices). Since then we have reserved the amount as bad debt and put them through collection agency. Recently the customer asked whether they can just return the product, in return, ask for forgiveness of the invoice. If we pick up the product, does it raise an alarm that the prior revenue was not recognized correctly?

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

If you get the product back do the following:

Reverse the transaction for bad debt (since you already wrote it off to bad debt)
Create a credit for the original transaction
Record whatever the collection fee might be as [fill-in].

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

Anon
I don't think an alarm has to be raised based on what you say. There is always a risk of a non collectible AR, so use reserves to create a buffer for things like this.

Assuming your company is open to taking the equipment back, consider the following as part of your negotiation with them:
1-how long ago did you ship the equipment? Where did they keep it-in a warehouse, install it to use, etc?
2- Did they use/attempt to use it and does that mean you are now taking back a second hand asset that may have a lower net realizable value? What is the book loss on the lower asset value now?
3-Can you negotiate that they pay you a sum for the use of the equipment/loss in value that is at least equal to your collection fee liability and costs of shipping it back to you?
4-Make sure you inspect the asset before committing to any settlement. If the asset needs repair, they owe you for that.

Regards
Len

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