AboutArthur Naman Expertise General accounting and bookkeeping questions. How to do monthly bookkeeping, how to prepare financial reports. How to reconcile accounts.
I cannot answer questions pertaining to pension or retirement planning.
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Experience 30 years' experience doing tax and accounting work
Education/Credentials MPA from Univ. of Texas at Austin, MBA Golden Gate Univ, San Francisco CA
Question QUESTION: Let's say company A receives some cash from a settlement with company B. If Company A believes that Company B will file for bankruptcy within the next 90 days (within the voidable preference period in other words), must Company A take a reserve against the cash received? Or could/should it? Thank you.
ANSWER: Your question is a little confusing. If you have received the cash settlement, then what difference does it make if company B goes into bankruptcy; you've been paid.
So, assuming there is unpaid cash due to your company A, at some point the receivable should be written off. The question is when.
The answer is when a decision is made that the settlement will more likely than not be paid. That may simply be when company B goes into bankruptcy unless you have information to the contrary.
If a decision is made to write off the receivable, then I do not think a "reserve" is needed.
Does my response make sense to you?
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QUESTION: I think there is one piece of information missing here. If you receive money from someone and they go bankrupt within 90 days of them giving you the money, that will be a voidable preference that will be reclaimed by the trustee. You would then have to give the money back to the company that gave it to you and you would become a regular creditor like everyone else. If the company files for bankruptcy on the 91st day after giving you the settlement money, this would not be the case. That is why I am asking about whether to take a reserve in this interim 90 day period.
Answer Thanks for your additional information. I understand that the payment received may have to be returned.
I would expect that during the period in which the funds received might have to be returned, a reserved would be called for.
I think that those funds should be recorded in a way to show the limitation on their use until such time as they are not subject to being returned.
So I agree with your conclusion as to the need for a reserve.
If company A is issuing financial statements, please seek the advice of the CPA who will be signing those statements.
