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RECEIVAB

LES

Accounts receivable
Notes receivable
Loans receivable
Receivable financing

Receivables
financial

assets that represent a


contractual right to receive cash or
another financial asset from another
entity.

Trade receivables- claims arising from


sale of merchandise or services in the
ordinary course of business.
Nontrade receivables- claims arising from
sources other than sale of merchandise or
services in the ordinary course of business.

Receivables
Trade

receivables which are expected to


be realized in cash within the normal
operating cycle or one year, whichever is
longer, are classified as current assets.

Nontrade

receivables which are expected


to be realized in cash within one year, the
length of the operating cycle
notwithstanding, are classified as current
assets.
If collectible beyond one year, nontrade
receivables are classified as noncurrent
assets.

Receivables

Trade and nontrade receivables which are currently


collectible shall be presented on the face of
statement of financial position as one line item
called trade and other receivables.

Details to be disclosed in the notes to fs.


Ex.
Accounts receivable xxx
Allowance for doubtful accountsxxx
Notes receivable xxx
Accrued interest on note receivablexxx
Advance to officers and employees xxx
Total trade and other receivables xxx

Receivables

1.

2.
3.
4.
5.
6.
7.
8.

Examples of nontrade receivables


Advances to or receivables from
shareholders, directors, officers or
employees.
Advances to affiliates
Advances to supplier
Subscriptions receivable
Creditors accounts debit balance
Special deposits on contract bids
Accrued income
Claims receivable

Receivables

Customers credit balances- credit balances in


accounts receivable resulting from overpayments,
returns and allowances, and advance payments from
customers. These are classified as current liabilities.
Customer A

Ex.
Sales
800

Collection
400
Debit
Customer
B balance
400
Sales
Collection
500
400
Credit balance
Returns
50
150
Adjustment may be made only for worksheet purposes,
meaning, not formally journalized and posted to the ledger:
Accounts receivable
50
Customers credit balances
50

Accounts
Receivable
open

accounts arising from sale of


merchandise or services in the ordinary
course of business.

Initial measurement at face value.


Subsequent measurement at net realizable
value.
deductions made in estimating the net
relizable value of trade accounts receivable.
a.
b.
c.
d.

allowance
allowance
allowance
allowance

for
for
for
for

freight charge
sales return
sales discount
doubtful accounts

Accounts
Receivable
a. Allowance for freight charge
Terms:
FOB destination- means that ownership of the
goods purchased is vested in the buyer upon receipt
thereof.
FOB shipping point- means that ownership of the
goods purchased is vested in the buyer upon
shipment thereof.
Freight collect- means that freight charge on the
goods shipped is not yet paid. The common carrier
shall collect the same from the buyer.
Freight prepaid- means that freight charge on the
goods shipped is already paid by the seller.

Ex.

Accounts
Receivable

An entity has an accounts receivable of


P50,000 at the end of accounting period. Terms are
2/10, n/30, FOB destination and freight collect.
Customer paid freight charge of P2,000.
To record the sale:
Accounts receivable
50,000
Freight out
2,000
Sales
50,000
Allowance for freight charge 2,000
To record the collection within the discount period:
Cash
47,000
Sales discount
1,000
Allowance for freight charge 2,000
Accounts receivable
50,000

Accounts
Receivable
b. Allowance for sales return
Ex. An amount of P100,000 of the total
accounts receivable at year-end represents
selling price of goods that will probably be
returned.
Journal entry to recognize the probable
return:
Sales return
100,000
Allowance for sales return
100,000

Accounts
Receivable
c. Allowance for sales discount

Cash discount- a reduction from an invoice price


by reason of prompt payment. It is known as sales
discount on the part of the seller and purchase
discount on the part of the buyer.

Methods of recording credit sales


1.
Gross method- accounts receivable and sales
are recorded at gross amount of the invoice.
common and widely used method.
2.
Net method- accounts receivable and sales are
recorded at net amount of the invoice, meaning
invoice price minus the cash discount.

Accounts
Receivable
journal entries:
Gross method

Net method

1. Sale of merchandise for P200,000,


terms 5/10, n/30.

1. Sale of merchandise for P200,000,


terms 5/10, n/30.

Accounts receivable 200,000


Sales
200,000

Accounts receivable 190,000


Sales
190,000

2. Collection within the discount


period.

2. Collection within the discount


period.

Cash
Sales discount
Accounts receivable
200,000

Cash
Accounts receivable
190,000

190,000
10,000

190,000

3. Collection is made beyond the


discount period.

3. Collection is made beyond the


discount period.

Cash
Accounts receivable
200,000

Cash
200,000
Accounts receivable
190,000
Sales discount forfeited

200,000

Accounts
Receivable

If customers are granted cash discounts for prompt


payment, then, conceptually estimates of cash
discounts on open accounts at the end of the period
based on past experience shall be made.

Ex. Of the accounts receivable of P500,000 at the end


of the period, it is reliably estimated that discounts to
be taken will amount to P10,000.
adjustment:
Sales discount 10,000
Allowance for sales discount 10,000
Adjustment may be reversed at the beginning of the
next period in order that discounts can then be
charged normally to sales discount account.

Accounts
Receivable
d. Allowance for bad debts
Methods
1.

2.

of accounting for bad debts:


Allowance method- recognition of bad
debts loss if the accounts are doubtful of
collection.
Direct writeoff method- recognition of a
bad debt loss only when the accounts
proved to be worthless or uncollectible.

Generally accepted accounting principles require


the use of the allowance method because it
conforms with the matching principle.

Accounts
Receivable

journal entries:
Allowance method

Direct writeoff method

Accounts are considered to be


doubtful of collection:

Accounts are considered to be


doubtful of collection:
-

Doubtful accounts
Allow. for doubtful accounts
xxx

xxx

Accounts are subsequently


discovered to be worthless:
Allow. for doubtful accounts
Accounts receivable
xxx

Accounts are proved to be worthless:


xxx

Bad debts
Accounts receivable
xxx

xxx

Accounts are unexpectedly recovered


or collected:

Accounts are unexpectedly recovered


or collected:

Accounts receivable
Allow. For doubtful accounts
xxx

Accounts receivable
Bad debts
xxx

Cash
xxx
Accounts receivable
xxx

xxx

Cash
Accounts receivable
xxx

xxx

xxx

Accounts Receivable
Problem 1:
The following T-account summarizes the
transaction affecting the accounts receivable.

Compute the correct amount of accounts receivable.

Accounts
Receivable
Methods

of estimating doubtful

accounts
1. Aging of accounts receivable- involves an
analysis where the accounts are classified into not
due or past due. (not due, 1 to 30 days past due, 31
to 60 days past due, etc.)

Allowance is determined by multiplying the total of


each classification by the rate or percentage of loss
experienced by the entity for each category.
(Required allowance for doubtful accounts at the
end of period.)

Accounts
Receivable
Problem 2:
The following data are summarized in the aging of
accounts receivable at the end of the period:
Balance
Experience rate
Not due
600,000
1%
1-30 days past due 400,000
3%
31-60 days past due
150,000
4%
61-90 days past due
80,000
5%
Over 90 days past due
30,000
10%
Allowance for doubtful accounts has a credit balance of
10,000 before adjustment.
1.
2.

Compute for required allowance and doubtful accounts


expense.
Journal entry to record the doubtful accounts expense.

Accounts
Receivable
2. Percent of accounts receivable- a certain rate
is multiplied by the open accounts at the end of the
period in order to get the required allowance
balance.
Problem 3:
The balance of accounts receivable is
P3,000,000 and the credit balance in the
allowance for doubtful accounts is P15,000.
Doubtful accounts are estimated at 3% of
accounts receivable.
1.
2.

Compute for required allowance and doubtful


accounts expense.
Journal entry to record the doubtful accounts
expense.

Accounts
Receivable
3. Percent of sales- amount of sales for the year is
multiplied by a certain rate to get the doubtful accounts
expense. The rate may be applied on credit sales or total
sales.
Problem 4:
Accounts receivable
1,000,000
Sales
5,000,000
Sales return
50,000
Allowance for doubtful accounts

20,000

Doubtful accounts are estimated at 1% of net


sales.
1.
2.

Compute for doubtful accounts expense.


Journal entry to record the doubtful accounts expense.

Accounts
Receivable

Impairment of accounts receivable

PAS 39 paragraph 59 provides that a financial


asset or group of financial assets is impaired if
there is objective evidence of impairment as a
result of one or more loss events having an
impact on the estimated cash flows of the financial
asset that can be measured reliably.

Significant financial difficulty of customer, Breach


of contract, Restructuring of accounts receivable,
Measurable decrease in the estimated cash flows
from a group of accounts receivable.

Accounts
Receivable

Impairment assessment
PAS 39,paragraph 64, provides the following
detailed guideline in assessing whether accounts
receivable should be considered impaired:
a.

b.

c.

Individually significant accounts receivable


should be considered for impairment
separately and if impaired, the impairment
loss is recognized.
Accounts receivable not individually
significant should be collectively assessed
for impairment.
Accounts receivable not considered impaired
should be included with other accounts
receivable with similar credit-risk characteristics
and collectively assessed for impairment.

Accounts
Receivable
Problem 5:
An entity had the following accounts receivable at yearend:
Customer A
1,000,000
Customer B
1,500,000
Customer C
3,000,000
Customer D
2,000,000
Other customers accounts
5,000,000
The entity has determined the impairment loss of 750,000
from Customer B, 1,500,000 from Customer C, and the
accounts of Customer A and D not impaired.
I t is also reliably determined that a composite rate of 5% is
appropriate to measure impairment on all other accounts
receivable.
Compute for the impairment loss.

Notes Receivable

Claims supported by formal promises to pay usually in


the form of notes.

A promissory note is a written contract in which one


person, known as the maker, promises to pay another
person, known as the payee, a definite sum of money.
The term notes receivable represents only claims arising
from sale of merchandise or services in the ordinary
course of business.

Dishonored notes- a promissory note that matures


and is not paid.
Shall be removed from the notes receivable account
and transferred to accounts receivable at an
amount to include any interest and other charges.

Notes Receivable

Measurement
Initial measurement

Subsequent measurement

Short-term
notes receivable

Face value

Interest bearing
long-term notes
receivable

Face value = Present


value upon issuance

Amortized cost =initial


measurement minus principal
repayment, plus or minus the
cumulative amortization of
any difference between the
initial carrying amount and
the principal maturity amount
minus reduction for
impairment or uncollectibility.

Noninterest
bearing longterm notes
receivable

Present value =
discounted value of future
cash flows using the
effective interest rate

Amortized cost = present


value plus amortization of the
discount, or the face value
minus the unamortized
unearned interest income.

Notes Receivable
Problem 1: Interest bearing note
Hoping Company sold to another entity a
tract of land costing P5,000,000 for
P7,000,000 on Jan. 1, 2016. The buyer paid
P1,000,000 down and signed a two-year
promissory note for the remainder of the
purchase price plus 12% interest
compounded annually. Note matures on Jan.
1, 2018.
Journal entries for 2016, 2017, 2018.

Notes Receivable
Problem 2: Noninterest bearing note
An entity sold an equipment costing
P700,000 for P1,000,000 on Jan. 1, 2016. The
buyer paid P100,000 down and signed a
P900,000 noninterest bearing note payable in
three equal instalments every Dec. 31.
Prevailing interest rate is 12%
PV of an ordinary annuity of 1 for 3 periods is
2.4018
Journal entries for 2016.

Loans Receivable
A

financial asset arising from loan granted


by a bank or other financial institutions to
a borrower or client.

Initial measurement- fair value plus


transaction costs that are directly
attributable to the acquisition of the financial
asset.
Transaction costs include direct origination
costs.
Direct origination costs should be included
in the initial measurement of loan receivable.
However, indirect origination costs
should be treated as outright expense.

Loans Receivable

Subsequent measurement- amortized


cost using the effective interest method.
Amortized cost- the amount at which the
loan receivable is measured initially minus
principal repayment, plus or minus the
cumulative amortization of any difference
between the initial amount recognized and
the principal maturity amount, minus
reduction for impairment or uncollectibility.
Origination fees- include compensation
for activities such as evaluating the
borrowers financial condition, evaluating
guarantees, collateral and other security,
negotiating the term of loan, preparing and
processing documents and closing the loan
transaction.

Loans Receivable

Origination fees received from the borrower


are recognized as unearned interest income
and amortized over the term of the loan.

Origination fees not chargeable against the


borrower are known as direct origination
costs. They are deferred and also amortized
over the term of the loan.

Origination fees - direct origination cost = unearned interest


income (amortization will increase interest income)
Direct origination costs origination fees = direct origination
cost (amortization will decrease interest income)

Loans Receivable
Problem 1:
A bank granted a loan to a borrower on Jan.
1, 2016. The interest on the loan is 8% payable
annually starting Dec. 31, 2016. The loan
matures in three years. Data related to the loan
are:
Principal amount
3,000,000
Origination fees charged against the borrower
100,000
Direct origination cost incurred
260,300
The effective rate on the loan is 6%.
Prepare journal entrie for 2016, 2017 and 2018

Loans Receivable
Impairment

of loan

Objective evidence of impairment under PAS


39, paragraph 59:

1. Significant financial difficulty of the issuer.


2. Breach of contract
3. Debt restructuring
4. Probability that the borrower will enter bankruptcy
or other financial reorganization.
5. Disappearance of an active market for the
financial asset because of financial difficulty.
6. Decrease in the estimated future cash flow from a
group of financial assets since the initial recognition.

Loans Receivable
Measurement

of Impairment

If there is evidence that an impairment loss


on loan receivable carried at amortized cost
has been incurred, the amount of the loss is
measured as the difference between the
carrying amount of the loan and the present
value of estimated future cash flows
discounted at the original effective rate of
the loan.
Amount of loss shall be recognized in profit
or loss.

Loans Receivable
Problem 2:
Urban Bank loaned P5,000,000 to Rural Bank on
Jan 1, 2016. The terms of the loan require principal
payment of P1,000,000 each year for 5 years plus
interest at 10%.
First principal and interest payment is due on
Dec. 31, 2016. Rural Bank made the required
payments on Dec. 31, 2016 and Dec. 31, 2017.
Rural Bank began to experience financial
difficulties and was unable to make the required
payments on Dec. 31, 2018.
The same date, Urban Bank assessed the
collectibility of the loan and has determined that
remaining principal payments will be collected but
the collection of interest in unlikely.

Loans Receivable
The loan receivable has carrying amount of
P3,300,000 including the accrued interest f
P300,000 on Dec. 31, 2018. Projected cash
flows from the loan on Dec. 31, 2018 as
follows:
Dec. 31, 2019
Dec. 31, 2020
Dec. 31, 2021

500,000
1,000,000
1,500,000

PV of 1 is .9091 for one period, .8264 for two


periods and .7513 for three periods.
Present value of cash flows?
Impairment loss?
Carrying amount of loan on Dec. 31, 2018?

Receivable
Financing
The

financial flexibility or capability of an


entity to raise money out of its receivables.
a. Pledge of accounts receivable
b. Assignment of accounts receivable
c. Factoring of accounts receivable
d. Discounting of notes receivable

Receivable
Financing

Pledge of accounts receivable- accounts


receivable are pledged as collateral security for the
payment of the loan.

Recording of loan:
Cash
xxx
Discount on notes payable*
xxx
Note payable
xxx
*if loan is discounted
Subsequent payment of loan:
Note payable
xxx
Cash
xxx

Receivable
Financing

Assignment of accounts receivable- a


borrower called the assignor transfers its rights in
some of its accounts receivable to a lender called
the assignee in consideration for a loan.
Features of assignment:
1. Nonnotification basis- customer are not
informed
that their accounts have been assigned.
Notification basis- customer are notified to make
their payments directly to the assignee.
2. The assignee, usually a bank or finance entity,
analyzes the borrowers accounts receivable. The
assignee usually lends a certain percentage of the face
value of the accounts assigned.
3. The assignee usually charges interest for the loan
that it makes and required a service or financing charge
or commission for the assignment agreement.

Receivable
Financing
Factoring-

a sale of accounts receivable


on without recourse, notification basis.

Transfer of ownership of accounts receivable


to the factor, a bank or finance entity.

Casual factoring
Cash
xxx
Allow. For DA
xxx
Loss on factoring
xxx
Accounts receivable
xxx

Receivable
Financing
Factoring as continuing agreement
Cash
xxx
Sales discount
xxx
Commission
xxx
Receivable from factor*
Accounts receivable

xxx
xxx

*Factors holdback- amount as protection


from customer returns and allowances and
other special adjustments.

Receivable
Financing

Discounting of note receivable

Net proceeds- discounted value of note received


Net proceeds= Maturity value minus discount
Maturity value- amount due at the date of maturity
Maturity value= Principal plus interest
Maturity date- date on which note should be paid
Principal- amount appearing on face of the note
Interest- amount of interest for full term
Principal x rate x time

Receivable
Financing
Interest rate- rate appearing on the face of the note
Time- full term of the note
Discount- amount of interest deducted by bank in
advance
Maturity value x discount rate x discount period
Discount rate- rate used by bank in computing discount
Discount period- period of time from date of
discounting to maturity date, unexpired term of the note

Receivable
Financing
Problem 1:
On February 1,2012, Pink Company factored
receivables with carrying amount of P300,000 to
Black Company. Black company assesses a finance
charge of 3% of the receivable and retains 5% of the
receivables. Relative to this transaction, you are to
determine the amount of loss on sale to be reported
in the income statement of Pink company for
February.
Assume that Pink Company factors receivables on
without recourse basis. The loss to be reported is?
Assume that Pink Company factors receivables on
with recourse basis. The recourse obligation has a fair
value of P1,500. The loss to be reported is?

Receivable
Financing
Problem 2:
On December 1,2014, Jana company assigned on a
notification basis accounts receivable of P5,000,000 to
a bank in consideration for a loan of 80% of the
accounts less service fee of 5%. The entity signed a
note for the bank loan. On December 31,2014 ,the
entity collected assigned accounts of P2,000,000 less
discount of P200,000. The entity remitted the
collection to the bank in partial payment for the loan.
The bank applied first the collection to the interest and
the balance to the principal. The agreed interest is 1%
per month on the loan balance. The entity accepted
sales return of P100,000 on the assigned accounts and
wrote off assigned accounts totalling P300,000. What is
the balance of accounts receivable assigned on
December 31, 2014 ?

Receivable
Financing
Problem 3:
On July 31,2011, Glade Company
discounted notes at the bank a
customer's P600,000, 6 months, 10%
note receivable dated May 31,2011.
The bank discounted the notes at 12%.
How much is the proceeds Glade
received from this discounted notes?

Theory questions
1. If receivable is hypothecated against borrowings, the amount of
receivable involved should be
A. Disclosed in the notes
B. Excluded from total receivable with disclosure
C. Excluded from total receivable without disclosure
D. Excluded from the total receivable and a gain or loss is recognized
between the face value and the amount of borrowings.
2. Which of the following is used to account for probable sales discount,
sales return, sales allowances in relation to factoring of accounts receivable
A. Factor's holdback
B. Recourse liability
C. Both factor's holdback and recourse liability
D. Neither factor's holdback nor recourse liability
3. Notes receivable discounted with recourse should be
A. Included in total receivable with disclosure of contingent liability
B. Included in total receivable without disclosure of contingent liability
C. Excluded in total receivable with disclosure of contingent liability
D. Included in total receivable without disclosure of contingent liability

Theory questions
4. A note receivable bearing a reasonable interest rate is sold to bank
with recourse. At thr date of discounting transaction, the note receivable
discounted account should be
A. Decreased by the proceeds from the discounting transaction
B. Increase by the proceeds from the discounting transaction
C. Increase by the face amount of the note
D. Decreased by the face amount of the note
5. What is imputed interest?
A. Interest based on the stated rate
B. Interest based on the implicit interest rate
C. Interest based on average interest rate
D. Interest based on bank prime rate.
6. All of the following are required when classifying receivables, except
A. Indicate the receivables classified as current and noncurrent.
B. Disclose any receivables pledge as a collateral.
C. Disclose all insignificant concentration of credit risk from the
receivables.
D. All of the choices are required when classifying receivables .

Theory questions
7. An entity uses the allowance method for
recognizing doubtful accounts. The entry to record the
writeoff of a specific uncollectible account
A. Affect neither net income nor working capital
B. Affect neither net income nor accounts receivable
C. Decreases both net income nor working capital
D. Decreases both net income nor account receivable.
8. Which of the following methods of determining bad
debts expense best achieve the matching concept
A. Percentage of sale
B. Percentage of ending accounts receivable
C. Percentage of average accounts
D. Direct writeoff

Theory questions
9. Which method of recording uncollectible accounts
expense is consistent with accrual accounting
A. Allowance method only
B. Direct writeoff method only
C. Both allowance method and direct writeoff method
D. Neither allowance method nor direct writeoff method
10. A debit balance in the allowance for doubtful accounts
A. Should never occur
B. Is always result if management not providing a large
enough allowance in order to manage earnings
C. May occur before year-end adjustment of uncollectible
accounts.
D. May occur after year-end adjustment of uncollectible
accounts.