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bj3451
Feb 26, 2007, 10:41 AM
Nowadays, it is common to be able to purchase a Big Screen HDTV
And be able to take it home without paying any cash -- instead, one has
An obligation to pay in full, let us say $3000 after 3 years.

How does the retailer (BestBuy, or BigScreenStore) and the manufacturer (Sony, Samsung) account for this transaction?

CaptainForest
Feb 28, 2007, 01:49 AM
Nowadays, it is common to be able to purchase a Big Screen HDTV
and be able to take it home without paying any cash -- instead, one has
an obligation to pay in full, let us say $3000 after 3 years.

Really?

When I bought my big screen TV I paid for it with all cash. Well a credit card, but I then paid the bill off when I got it.




$3000 after 3 years.

How does the retailer (BestBuy, or BigScreenStore) and the manufacturer (Sony, Samsung) account for this transaction?

On to your question…

First, we need to clarify the players here.

Sony, the manufacturer sells the TV (for lets say 1,000) to BestBuy.

Sony records the transaction as Dr. Cash 1,000 and Cr. Sales 1,000.
Sony is now out of the picture.

BestBuy record the transaction as:
Dr. Inventory/Purchases 1,000
Cr. Cash 1,000

Now, when BestBuy sells the TV to you for 3,000, their JE would be:
Dr. AR 3,000
Cr. Sales 3,000

Also, BestBuy has some options. They can record an allowance for doubtful accounts (AFDA) since they know some of the AR will not be collected by people in 3 years.

But what they most likely do (I know Leon’s does this), is that they most likely just turn around and sell the Accounts Receivable to a collection agency.

For example, BestBuy would sell the AR to George’s Collection Company (GCC). GCC would get the rights to collect 3,000 from you in 3 years, but only have to pay BestBuy let’s say 2,200 today in cash.

bj3451
Feb 28, 2007, 08:46 AM
Thank you for your kind reply.

But won't that mean that if the program is successful
The retailer and/or the manufacturer will have massive
Accounts Receivable -- a definite NO NO as far as
Financial analysts are concerned.

Is there the exchanging of A.R. for some sort of
Debt instrument such as a note receivable by means
Of a financing subsidiary.

Thanks.

CaptainForest
Feb 28, 2007, 08:29 PM
But won't that mean that if the program is successful
the retailer and/or the manufacturer will have massive
Accounts Receivable

This program does NOT affect the manufacturer (Sony) at all.

Sony sells the TV to the retailer (BestBuy) and gets paid right away (or within 30 days).

This program is done through the retailer BestBuy.

And yes, you are right, BestBuy would have a huge AR balance. But they don’t keep it.

Since they turn around and get rid of the AR balance for Cash. BestBuy sells the AR to a company whose sole purpose is to collect on AR accounts.

Best Buy will sell the entire $3,000 AR to a collection company, for let’s say 2,200 and write the rest off as a cost of business. Therefore, at the end of the day, BestBuy has $0 in AR.