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FINANCIAL ACCOUNTING AND REPORTING

RECEIVABLES
➢ A receivable is the right to receive cash, another asset (goods) or services

➢ Receivables may be current or noncurrent and trade or nontrade

➢ Trade receivables arise from the sale of goods or services to customers and in the form of
accounts receivable or notes receivable while nontrade receivables are receivables from all
other types of transactions like advances to officers and employees and advances to other
entities.

➢ Trade receivables are current assets if collectible (realizable) within 12 months after the end
of the reporting period or normal operating cycle, whichever is longer.

➢ Nontrade receivables are current assets if collectible within 12 months after the reporting
period. The normal operating cycle is not considered in classifying nontrade receivables as
current assets.

Accounts receivable arise from credit sales. The amount to be recorded as accounts
receivable from sales on account shall be the “Invoice Price” which is the amount after deducting
trade discounts from the List Selling Price. Take note that trade discounts are not accounted for
and are ignored for recording purposes.

Example: An item is sold to a credit customer under terms of 2/15 and net 30, FOB shipping point
terms with a list selling price of P2,000,000 with trade discounts of 20% and 10%. The Invoice
price is computed as follows:

List selling price 2,000,000

Less: 20% trade discount 400,000
Net 1,600,000
Less: 10% trade discount 160,000
Invoice price 1,440,000

As mentioned the entry will not include the total trade discount of P560,000 (400,000 + 160,000)
but instead only the P1,440,000 amount will be recorded as follows:

Accounts Receivable 1,440,000

Sales 1,440,000

The following transactions affect accounts receivable in computing for the ending balance:

ACCOUNTS RECEIVABLE
+ Credit Sales (-) Sales returns and allowances
+ Recovery of accounts written off (-) Sales discounts
(-) Collections including recovery
(-) Write off
(-) Factored accounts

The write off for accounts receivable under the allowance method is recorded by:

Allowance for doubtful accounts xx

Accounts Receivable xx

So therefore, the recovery or the collection on an accounts receivable that already has been
written off cannot be recorded by simply debiting cash and crediting accounts receivable. The
entry for the write off must be reversed and before recording the collection with the following two
entries:
Accounts Receivable xx
Allowance for doubtful accounts xx
Cash xx
Accounts Receivable xx

Dec. 9, 2017
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Combining the two entries will be more efficient by:

Cash xx
Allowance for doubtful accounts xx

Sample Problem - Determination of AR Balance

P1. The following data were taken from the records of Lala Company for the year ended December
31, 2018 its first year of operations:

Sales on account 20,000,000

Collections from customers (excluding collections from recoveries) 16,000,000
Doubtful accounts expense 500,000
Accounts written off 400,000
Selling price of merchandise returned by customers 300,000
Discounts taken by customers 200,000
Collections on accounts written off 100,000

What is the balance of accounts receivable on December 31, 2018?

Accounts Receivable balance is (20M – 16M – 400 – 300 – 200) 3,100,000

The collection on the recovery of the accounts receivable written off may be ignored. If the
recovery is added back to the receivable balance, the total collections to be deducted shall be
16.1M (16M + 100k).

The ending balance of accounts receivable shall be presented as part of current assets under
the heading of “trade and other receivables” at the Net Realizable Value (expected cash value) or
“amortized cost”

The net realizable shall be computed after deducting an allowance for the following:

➢ Sales returns – Value of merchandise expected to be returned by customers as a result in

error of deliveries and defects

➢ Sales discounts – Value of price savings to customers expected to pay within the discount
period and take advantage of the cash discount.

➢ Freight charges – Amount of freight charges collected by the shipper from the buyer even
though the shipment was under FOB destination terms. This amount shall not be remitted
by the buyer hence deducted from the receivable.

➢ Doubtful accounts – Allowance for expected uncollectability that is an inherent risk from
selling on credit.

Sample Problems - Determination of NRV

P2. Sarah Company had the following information relating to its accounts receivable for the year
2018:

Accounts receivable – January 1 5,000,000

Credit sales 20,000,000
Collection from customers, excluding the recovery of accounts written off 18,000,000
Accounts written off as worthless 200,000
Sales returns 500,000
Recovery of accounts written off 100,000
Estimated future sales returns on December 31 150,000
Estimated uncollectible accounts on December 31, per aging 300,000

What is the net realizable value of accounts receivable on December 31, 2018?

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AR Balance (5M + 20M – 18M – 200 – 500) 5,300,000
Less: Allowance for sales returns 150,000
Allowance for uncollectible accounts 300,000 450,000
Net realizable value or Amortized cost 5,850,000

Once again, the recovery was ignored in computing for the ending balance. Net realizable
value simply means the expected value of the receivables. Therefore, as of the balance sheet
date, 450,000 is the amount expected not to be collectible because of future sales return and
the risk of customers not paying their accounts.

P3. Emily Company uses the net price method of accounting for cash discounts. In one of its
transactions on December 15, 2018, Emily sold merchandise with a list price of P4,000,000 to
a client who was given a trade discount of 20% and 10%. Credit terms given by Emily were
5/10, n/30. The goods were shipped FOB destination, freight collect. Total freight charge paid
by the client was P100,000. On December 20, 2018, the client returned damaged goods
originally billed at P400,000. What is the net realizable value of this account receivable on
December 31, 2018?

Invoice price (4M x 80% x 90%) 2,880,000

Less: Total sales discount (2,880,000 x 5%) 144,000
Amount recorded as accounts receivable 2,736,000
Less: Sales return* (400,000 x 95%) 380,000
Accounts receivable balance at NET 2,356,000
Add: Discounts forfeited by customers** (2,356,000 / .95 x 5%) 124,000
Gross accounts receivable 2,480,000
Less: Allowance for freight charge 100,000
Net realizable value 2,380,000

The invoice price of 2,880,000 shall be recorded in the books of the seller net of the total 5%
discount available at 2,736,000.

*The 400,000 sales return is the invoice price; however, it was recorded net of the 5% discount.

**Under the net method, if the discount period (10 days) has expired, the accounts receivable
shall be “grossed up” with a corresponding income account to be recorded.

The shipping terms is FOB destination, meaning the freight cost is an expense of the seller.
However, since the buyer paid for the shipping cost (freight collect) on behalf of the seller.
Instead of reimbursing the buyer for the 100,000, the buyer will not remit the 100,000 upon final
payment of the purchase.

ACCOUNTING FOR DOUBTFUL ACCOUNTS

Allowance Method vs. Direct Write-off Method

Allowance Direct Write-off

Application Generally Accepted Non-GAAP

Expense and Increase
Accounts considered doubtful Not accounted for
the Allowance
Debit expense and
Write-off Debit Allowance and Credit AR
Credit AR
Debit AR and
Recovery Debit AR and credit Allowance
credit expense

Dec. 9, 2017
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The computation for the doubtful accounts expense which is an adjusting entry and the allowance
for doubtful accounts will be as follows:

Beginning balance X
Write off (X)
Recovery X
Balance before adjustment X
Doubtful accounts expense X
Ending balance X

There are 3 methods in estimating doubtful accounts:

1) The percentage of net credit sales method which will provide the amount of doubtful
accounts expense for the year and therefore is a method that emphasizes proper matching
of doubtful accounts against sales. This amount will then be added to the balance before
adjustment, the total of the two will then be the amount of allowance at yearend or after
adjustment.

2) The percentage of accounts receivable method will provide the amount of required
allowance for doubtful accounts and just like its counterpart the “Aging Method”. The
amount of doubtful accounts expense will be worked back as an adjustment to the
amount of required allowance.

3) The Aging of accounts receivable method that is arguably the most accurate of all three
methods since an analysis is made and each classification of accounts receivable is
multiplied by a specific rate of the estimate of uncollectability. Naturally older accounts
receivable is more likely to be uncollectible compared to newer or more recent sales.

Sample Problems - Doubtful Account Expense under Aging Method

P4. Sammy Company determined that the net realizable value if its accounts receivable at
December 31, 2018 based on an aging of accounts receivable was P6,300,000. Additional
information for the year 2018 is as follows:

Allowance for uncollectible accounts – 1/1 500,000

Uncollectible accounts written off during the year 400,000
Uncollectible accounts recovered during the year 100,000
Accounts receivable – December 31 7,000,000

What should be the uncollectible accounts expense for 2018?

Gross AR 7,000,000
Less: NRV 6,300,000
Required Allowance 12/31 700,000

Allow. Beg. 500,000

Write-off (400,000)
Recovery 100,000
Balance before adjustment 200,000

Required allowance 700,000

Less: Balance before adjustment 200,000
Provision or Doubtful accounts expense 500,000

Under the aging method, as well as percentage of accounts receivable which focuses on asset
valuation. The balance before adjustment determines the amount of doubtful accounts to be
recognize in order to meet or get the balance of the required allowance or the balance of
allowance for doubtful accounts at year-end.

Dec. 9, 2017
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P5. Effective with the year ended December 31, 2018, Jelly Company adopted the aging of
accounts receivable method instead of the old percentage of sales method. The following data
are available:

Allowance for doubtful accounts, January 1, 2018 2,000,000

*Provisions for doubtful accounts recorded (5% of credit sales) 5,000,000
Accounts written off 1,500,000
Estimated uncollectible accounts per aging December 31, 2018 7,500,000
Accounts written off but recovered 500,000

What is the 2018 yearend adjustment to doubtful accounts expense?

Allow. Beg. 2,000,000

Write-off (1,500,000)
Recovery 500,000
Doubtful accounts expense charged 5,000,000
Balance before adjustment 6,000,000

Required allowance 7,500,000

Less: Balance before adjustment 6,000,000
Year-end adjustment to doubtful accounts expense 1,500,000

If interim provisions are applied by an entity under the percentage off credit sales, the amount of
doubtful accounts expense to be recorded on December 31 shall be lower. There can also be
instances where the balance before adjustment may exceed the required allowance and the
entity will need to make a debit adjustment to the allowance and credit doubtful accounts
expense.

Note that the total doubtful accounts expense recorded by Jelly is 7,500,000 (5M + 1.5M)

Doubtful Account Expense under Percentage of Credit Sales

P6. The following accounts were abstracted from Jinee Company’s unadjusted trial balance at
December 31, 2018:

Debit Credit
Accounts receivable 5,000,000
Allowance for doubtful accounts 150,000
Net credit sales 20,000,000

Q1.Jinee estimates that 5% of credit sales will become uncollectible. What is the allowance for
doubtful accounts for the year ended December 31, 2018?

Q2.If Jinee uses the percentage of account receivable method by applying the same rate of 5%
to ending accounts receivable, what is the doubtful accounts expense?

Balance before adjustment - DEBIT ( 150,000)

Doubtful accounts charged (5% x 20M) 1,000,000
Allowance for doubtful accounts - END 850,000

Under the percentage of sales, doubtful accounts is simply charged with no regard to the
balance before adjustment. It is actually the ending balance that is computed for rather than
the expense.

Required allowance (5% x 5,000,000) 250,000

Add: Balance before adjustment – Debit 150,000
Doubtful accounts expense 400,000

In contrast, under the percentage of accounts receivable or aging method, the balance
before adjustment is the determining factor to compute for doubtful accounts expense. Since
the required allowance is 250,000, the debit balance of 150,000 shall be first written off thus
requiring 400,000 to be charged.

Dec. 9, 2017
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RECEIVABLE FINANCING
Accelerating the collection of receivables either by using accounts receivable as a loan collateral,
selling the receivables without recourse and discounting of notes receivable.

The use of receivables as a loan collateral can either be designated as a pledging of accounts
receivable or an assignment of accounts receivables.

Pledging
➢ Total or all of the accounts receivable is
used.
➢ A disclosure is made of the fact that
receivables have been pledged.
➢ The accounts receivable is accounted
for normally but are not reclassified.
➢ Accounting for the loan shall be made
with respect to the proceeds, recording
of interest and payment of the principal.
Assignment
➢ A specific portion or specific accounts
receivable are used a collateral. Not all
of the accounts receivable balance.
➢ A reclassification is made on the
assigned accounts.
➢ Disclosure on the “equity on the
assigned accounts or of the
assignor” is disclosed in the notes.
➢ The equity in the assigned accounts is
the difference between the balance of
the assigned accounts and the balance
of the loan.

Sample Problems

P1. Celine Company obtained a one-year loan of P5,000,000 from a bank on October 1, 2018. The
loan was discounted at 12%. The company signed a note and pledged its accounts
receivable of P5,000,000 as collateral for the loan. What is the note payable to be reported by
Celine in its December 31, 2018 statement of financial position?

Face value 5,000,000

Less: Interest deducted in advance or discounted interest (12% x 5M) 600,000
Initial carrying amount and proceeds 4,400,000
Add: 3-month amortization (600,000 / 12 x 3) 150,000
12/31/18 Carrying amount 4,550,000

P2. On December 1, 2018 Cecile Company assigned on a non-notification basis accounts

receivable of P10,000,000 to a bank in consideration for a loan of 80% of the accounts less a
5% service fee on the accounts assigned. Cecile signed a note for the bank loan. On
December 31, 2018, Cecile collected assigned accounts of P6,000,000 less discount of
P300,000. Cecile remitted the collections 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. What amount should Cecile report as note payable as a
current liability in its December 31, 2018 statement of financial position?

Face value of loan (10M x 80%) 8,000,000

Less: Principal payment made
Total (6M – 300k) 5,700,000
Less: Interest (8M x 1%) 80,000 5,620,000
Note payable balance 12/31/18 2,380,000

AR Balance (10M – 6M) 4,000,000

Less: Note Payable Balance 2,380,000
Equity in Assigned Accounts Receivable 1,620,000

Dec. 9, 2017
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The absolute sale of receivables is known as factoring and can be either a “casual factoring”
transaction or “factoring as a continuing agreement”.

Casual factoring is a sale of the receivables at a discount. This is similar to any type of sale of an
asset in order to generate cash quickly. However, the sale is always made below the carrying
amount or the net realizable value of the accounts receivable and therefore a loss shall be
recognized as follows:

Face value of AR X
Less: Service fee or commissions X
Selling price X
Less: Accounts receivable X
Allowances X X
Loss on factoring X

Factoring as a continuing agreement involves the sale of accounts receivable to a financing

entity on a long-term basis and where the buyer is committed to buy the receivables before the
actual goods are sold to the customers on credit. In other words, the collection and credit
responsibilities are surrendered to the buyer as soon as goods are delivered to the customers.
The following items shall be deducted from the face value of the receivables:

Face value of AR X
Less: Service fee or commissions X
Interest charges X
Factor’s holdback X X
Proceeds from factoring X

Both the service fee and interest shall be recognized as an expense, meanwhile the factor’s
holdback is a receivable and a value where the factor shall deduct the sales discounts and sales
returns taken by the seller’s customers before finally remitting to the seller the balance when all of
the accounts receivable is collected.

Sample Problems

P3. On January 1, 2018, Chem Corporation needed cash to meet current operating needs. Stella
factored some P5,000,000 of accounts receivable to HSBC. Stella maintains an allowance for
doubtful accounts of 300,000 of this receivable balance. The bank withheld 10% of the
purchase price as protection against sales returns and allowances and charged a 15% service
fee. What is the loss on this casual factoring transaction that Stella will recognize in its income
statement?

Face value 5,000,000

Less: Service fee (5M x 15%) 750,000
Selling price 4,250,000
Less: NRV (5M – 300k) 4,700,000
Loss on sale ( 450,000)

P4. Carrie Corporation factored P5,000,000 of accounts receivable to Golden Corporation on

October 1, 2018. Control was surrendered by Carrie. Golden accepted the receivables on a
non-recourse basis. Golden assessed a fee of 3% and retains a holdback equal to 5% of the
accounts receivable. In addition, Golden charged 12% interest on the carrying amount of the
receivables on a weighted-average time to maturity of the receivables of 30 days. Answer
the following requirements in relation to the factoring of Carrie’s accounts receivable on
October 1, 2018.

1. What are the proceeds from the factoring?

2. What is the total cost of factoring or “loss” that Carrie incurred?

Dec. 9, 2017
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Face value 5,000,000
Service fee (3% x 5M) ( 150,000)
Holdback (5% x 5M) ( 250,000)
Interest (12% x 5M x 30/365*) ( 49,315)
Proceeds 4,550,685

Service fee 150,000

Interest 49,315
Total cost or loss to be recognized 199,315

*Interest computed on a weighted average time to maturity means 365 days shall be used as a
denominator. Also, the holdback shall be debited to “Receivable from Factor” and therefore an
asset rather as an expense.

Discounting of notes receivable that is with recourse and on a notification basis shall involve the
following computation:

Face value or principal X

Interest on maturity X
Maturity value X
Less: Discount (MV x DR x remaining term) X
Proceeds from discounting X

The discount rate shall be determined by the bank buying the note, however if there is no
discount rate provided, the same rate on the note shall be used as the discount rate. The
remaining term is also known as the “discount period”.
The total receivable shall also be computed on the date of the discounting which is the face value
plus the accrued interest from the date of the note. This amount shall then be compared with the
proceeds of the discounting and a “loss” shall be recognized for the difference.
The entry for the discounting shall be as follows:

Cash Xx
Loss on discounting Xx
Notes receivable discounted xx
Interest income or interest receivable xx

The note receivable discounted account is credited rather than writing off the notes receivable
account because of the contingent liability feature of the discounting transaction. However, this
account shall be a contra-asset account and deducted from the total notes receivable to be
presented in the statement of financial position.

Sample Problems

P5. Cherry Company accepted from a customer P5,000,000 face amount, six-month, 12% note
dated August 1, 2018. On October 1, 2018 or after 2 months, Cherry discounted the note at
Citibank Bank at a 15% discount rate.

1. What amount will Cherry receive from Citibank on October 1, 2018?

2. What is the loss on discounting that Cherry will recognize on the transaction?

Face value 5,000,000

Interest at maturity (5M x 12% x 6/12) 300,000
Maturity value 5,300,000
Less: Discount (5.3M x 15% x 4/12) 265,000
Proceeds from discounting 5,035,000
Less: Face value 5,000,000
2-month interest income (5M x 12% x 2/12) 100,000 5,100,000
Loss on discounting ( 65,000)

If the transaction is accounted for as a secured borrowing rather than a sale, instead of a
loss, the 65,000 shall be recorded as “interest expense”.

Dec. 9, 2017
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P6. Choy Company received from a customer on January 1, 2018 from a customer a 6-month,
P5,000,000 note bearing an annual interest rate of 10%. The principal and the interest is
payable on June 30, 2018. To obtain cash quickly, Choy discounted the note with Metro Bank
on March 1, 2018. The bank charged a discount rate of 12%. The customer dishonored the
note to the bank on June 30, 2018 and the bank automatically filed a protest and incurred a fee
of P100,000. Choy then paid the bank the total amount on July 1, 2018.

1. What is the total amount paid by Choy to the bank as a result of the dishonor of the note?
2. Choy charged interest of 15% to the maker of the note and collected on December 31,
2018. What was the total amount collected from the maker?

Face value 5,000,000

Interest at maturity (5M x 10% x 6/12) 250,000
Maturity value 5,250,000
Protest fee 100,000
Total amount paid to bank and receivable from maker 5,350,000
6-month interest charged to maker (5,350,000 x 15% x 6/12) 401,250
Amount collected on December 31, 2018 5,751,250

Valuation or the Carrying Amount of Notes Receivable

➢ Notes receivable shall be presented at its present value or the discounted value of its
cash flows.
➢ As a rule, if the note is interest bearing and the interest rate is a realistic interest rate, the
face value of the note shall be its present value. An exception to this rule is that noninterest
bearing notes shall not be discounted if they are short term. Although there is still a
difference between the face value and the present value, the discount is deemed to be
immaterial and therefore computing for the present value shall not be necessary.
➢ Therefore, if the note is noninterest bearing and long-term, it will be necessary to
discount the cash flows in order to present the notes at their present value. The same
principle shall be applied if a note is interest bearing but the interest rate is unreasonably
low. In substance this is still a noninterest bearing note and it will be necessary to compute
for the present value of the cash flows which will include the future interest computed
on the low interest rate.
➢ If the note if a term note, the present value of 1 concept shall be applied, if the note is an
installment note and the installments and intervals are equal (known as annuities), the
present value of an ordinary annuity shall be used.
➢ The 12-month collection period shall also be applied to determine if it’s a current asset or
non-current asset. However, the present value shall be the amount to be presented, hence
the related discount shall be deducted from the face value of the note representing the cash
flow.

Sample Problems

P1. Jake Company is a dealer in equipment. On January 1, 2018, Darryl Company sold an
equipment with a cost of P3,500,000 in exchange for a noninterest bearing note of P5,000,000
requiring a lump sum payment at the end of 5 years. The market interest for similar notes was
8%. The relevant present value factors are:

PV of 1 at 8% for 5 periods 0.68

PV of an ordinary annuity of 1 at 8% for 5 periods 3.99
PV of an annuity due of 1 at 8% for 5 periods 4.31

1. What is the carrying amount of this note on January 1, 2018?

2. What is the interest income to be recognized for the year ended December 31, 2018?
3. What is the carrying amount on December 31, 2018?
4. What is the interest income recognized in 2019?

Dec. 9, 2017
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Carrying amount 1/1/18 (5M x .68) 3,400,000

2018 Amortization or interest income (3,400,000 x 8%) 272,000
Carrying amount 12/31/18 3,672,000
2019 Amortization or interest income (3,672,000 x 8%) 293,760
Carrying amount 12/31/19 3,965,760

• A loss on the sale of the equipment shall also be recognized at 100,000 (3.4M – 3.5M).
The selling price shall be the present value of the note of 3,400,000 since the face value is
inflated because it includes the imputed interest to earned of the period of financing of 5
years.

P2. Darlene Company sold one of its machines on December 31, 2018 to Maggie Company in
exchange for a noninterest bearing note requiring five annual payments of P500,000 or a total
of P2,500,000. The machine had a carrying amount of P1,750,000 in Darlene’s books. The
first payment is due on December 31, 2019. The market interest for similar notes was 10% and
the relevant present value factors are:

PV of a single payment at 10% for 5 periods .621

PV of an ordinary annuity of 1 at 10% for 5 periods 3.791
PV of an annuity due of 1 at 10% for 5 periods 4.170

1. In its December 31, 2018 statement of financial position, what should Darlene report as
notes receivable?
2. In its December 31, 2018 statement of financial position, how much is the current notes
receivable?
3. What is the 2019 interest income?
4. What is the total carrying amount of the notes receivable on December 31, 2019?

Carrying amount 1/1/18 (500 x 3.791) 1,895,500

2019 Amortization or interest income (1,895,500 x 10%) 189,550
Carrying amount after amortization before installment 2,085,050
Less: Installment 500,000
Total carrying amount 12/31/19 1,585,050

Current installment as of 12/31/18 500,000

Less: Interest amortization or current discount 189,550
Current notes receivable at present value 310,450

Loan Impairment Loss – Both PFRS 9 and US GAAP requires the assessment of the
collectability of a loan receivable.

Whenever circumstances and present information and events indicate that it will be probable that
any portion of the principal and interest agreed upon will not be collected, an allowance for the
present value of cash flows that will not be collected shall be recognized.

The difference between the present value of expected cash flows discounted using the original
effective rate and the total carrying amount of the receivable associated with the loan that includes
accrued interest shall be recognized in profit or loss.

The computation corresponding entry shall be as follows:

PV of expected cash flows XX

Less: Face value XX
Accrued interest XX XX
Loan impairment loss (XX)

Loan impairment loss xx

Interest receivable xx
Allowance for loan impairment xx

Dec. 9, 2017
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The interest receivable shall be written off if interest income already recognized shall not be
realized. Meanwhile, the allowance shall be deducted from the current balance of the notes
receivable.

Sample Problems

P1. Metro Bank loaned P5,000,000 to Daffy Company on January 1, 2015. The terms of the loan
require the principal payment of P5,000,000 to be made after 5 years on December 31, 2019
and interest at 12% to be paid annually on December 31. The first interest payment is due on
December 31, 2015. Daffy Company made the required interest payment during 2015.
However, during 2016 Daffy Company began to experience financial difficulties, which led to
the default of the 2016 required interest payment. This caused Metro to reassess the
collectibility of the loan. On December 31, 2017, Metro did not continue to accrue interest and
determined that the remaining principal payment will be collected but it is probable that the
accrued interest further interest cannot be collected. The probable timing and amount of
collections is determined as follows:

December 31, 2018 500,000

December 31, 2019 1,000,000
December 31, 2020 1,500,000
December 31, 2021 2,000,000

The present value at 12% is as follows

For one period 0.89

For two periods 0.80
For three periods 0.71
For four periods 0.64

1. What is the loan impairment loss on December 31, 2017?

2. What is the interest revenue to be recognized in 2018?
3. What is the carrying amount of this loan on December 31, 2018?

Face value 5,000,000

2016 Accrued interest not paid (5M x 12%) 600,000
Total 5,600,000

Present value of remaining cash flows:

2018 (500,000 x .89) 445,000
2019 (1,000,000 x .80) 800,000
2020 (1,500,000 x .71) 1,065,000
2021 (2,000,000 x .64) 1,280,000 3,590,000
Less: Total receivable 5,600,000
Loan Impairment Loss (2,010,000)

Carrying amount 12/31/17 3,590,000

2018 Amortization or interest income (3,590,000 x 12%) 430,800
Carrying amount after amortization before installment 4,020,800
Less: Installment 500,000
Total carrying amount 12/31/18 3,520,800

Dec. 9, 2017
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INVENTORIES
Key Terms and Definitions

➢ Inventories are assets:

(a) Held for sale in the ordinary course of business;

(b) In the process of production for such sale; or
(c) In the form of materials or supplies to be consumed in the production process or
in the rendering of services.

➢ Net realizable value is the estimated selling price in the ordinary course of business less
the estimated costs of completion and the estimated costs necessary to make the sale.

➢ Fair value is the amount for which an asset could be exchanged, or a liability settled,
between knowledgeable, willing parties in an arm’s length transaction.

Cost of Inventories

➢ Costs of purchase
➢ Costs of conversion
➢ Other costs incurred in bringing the inventories to their present location and condition.

Costs of Purchase

➢ The costs of purchase of inventories comprise the purchase price, import duties and other
non recoverable taxes and transport, handling and other costs directly attributable to the
acquisition of finished goods, materials and services. Trade discounts, rebates and other
similar items are deducted in determining the costs of purchase.

Costs of Conversion

➢ Direct labor
➢ Variable production overhead is allocated to each unit using the actual use of production
facilities.
➢ Fix production overhead allocated using the normal operating capacity of production
facilities.

Other Costs

➢ Other costs are included in the cost of inventories only to the extent that they are incurred in
bringing the inventories to their present location and condition. For example, it may be
appropriate to include non-production overheads or the costs of designing products for
specific customers in the cost of inventories.

Inventory cost should exclude:

• Abnormal waste
• Storage costs
• Administrative overheads unrelated to production
• Selling costs
• Foreign exchange differences arising directly on the recent acquisition of inventories
invoiced in a foreign currency
• Interest cost when inventories are purchased with deferred settlement terms.

Cost Formulas

➢ The cost of inventories of items that are not ordinarily interchangeable and goods or
services produced and segregated for specific projects shall be assigned by using
specific identification of their individual costs.

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➢ The cost of inventories, other than those that are not ordinarily interchangeable, shall be
assigned by using the first-in, first-out (FIFO) or weighted average cost formula. An
entity shall use the same cost formula for all inventories having a similar nature and use to
the entity. For inventories with a different nature or use, different cost formulas may be
justified.

FIFO Perpetual and Periodic Illustrated

Units Unit Cost Total Cost

Jan. 1 Beginning balance 8,000 70.00 560,000
6 Purchase 3,000 81.00 243,000
Feb. 5 Sale 10,000
Mar. 5 Purchase 11,000 73.50 808,500
Mar. 8 Purchase return 800 73.50 58,800
Apr. 10 Sale 7,000
Apr. 30 Sale return 300

➢ If periodic FIFO is used, the ending inventory will be unit cost from the March 8
purchase and will be deducted from the accumulation of the beginning inventory and
net purchase, known as the total goods available for sale.

Beginning balance (8,000 x 70) 560,000

Feb. 5 Purchase (3,000 x 81) 243,000
Mar. 5 Net Purchase (10,200 x 73.50) 749,700
Total goods available for sale 1,552,700
Less: Ending Inventory* (4,500 x 73.50) 330,750
Cost of goods sold 1,221,950

*Ending inventory in units (21,200 – 16,700) 4,500

➢ COGS computation under perpetual

Feb. 5 Costs of goods sold:

Jan. 1 Inventory (8,000 x 70) 560,000

Jan. 6 Inventory (2,000 x 81) 162,000
Total 722,000

April 10 Net Costs of goods sold:

Jan.6 Inventory (1,000 x 81) 81,000

Mar. 5 Inventory (5,700 x 73.50) 418,950
Total 499,950

Jan. 1 Inventory 560,000

6 Purchase 243,000
Total 803,000
Feb. 5 COGS (722,000)
Balance 81,000
Mar. 5 Net Purchase 749,700
Total 830,700
Apr. 10 Net COGS (499,950)
Apr. 30 Inventory balance 330,750

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➢ Periodic Average or Weighted Average

Beginning balance (8,000 x 70) 560,000

Feb. 5 Purchase (3,000 x 81) 243,000
Mar. 5 Net Purchase (10,200 x 73.50) 749,700
Total goods available for sale 1,552,700
Less: Ending Inventory* (4,500 x 73.24**) 329,580
Cost of goods sold 1,223,120

Total cost 1,552,700

Divide by total number of units 21,200
**Weighted average cost per unit 73.24

➢ Perpetual Average or Moving Average

Jan. 1 Inventory 560,000

6 Purchase 243,000
Total 803,000
Feb. 5 COGS (10,000 x 73.00***) (730,000)
Balance 73,000
Mar. 5 Net Purchase 749,700
Total 822,700
Apr. 10 Net COGS (6,700 * 73.46****) (492,182)
Apr. 30 Inventory balance 330,518

*** Feb 5. Average cost (803,000 / 11,000) 73.00

**** April 10 Average cost (822,700 / 11,200) 73.46

Measurement of Inventories
➢ Inventories are required to be stated at the lower of cost and net realizable value (NRV).
Inventories are usually written down to net realizable value item by item. In some
circumstances, however, it may be appropriate to group similar or related items.

EXAMPLE:

Cost NRV LCNRV

Product A 200,000 180,000 180,000
Product B 300,000 250,000 250,000
Product C 100,000 130,000 100,000
Total 600,000 560,000 530,000

➢ The total carrying amount of inventories shall be 530,000, which is the most conservative
amount by applying the LCNRV approach.

Write-Down to Net Realizable Value

➢ If the ending inventory is recorded outright at 530,000, the writedown shall be immediately
recognized in cost of goods sold. This is the direct or cost of sales method.
➢ If the ending inventory is recorded first at the cost of 600,000, a loss of 70,000 with a
corresponding credit to an allowance account shall be recognized. This is the
loss/allowance method.
➢ Any write-down to NRV should be recognized as an expense in the period in which the
write-down occurs.
➢ Any reversal should be recognized in the income statement in the period in which the
reversal occurs.

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Recognition as an Expense
➢ When inventories are sold, the carrying amount of those inventories shall be recognized as
an expense in the period in which the related revenue is recognized.
➢ The amount of any write-down of inventories to net realizable value and all losses of
inventories shall be recognized as an expense in the period the write-down or loss occurs.
➢ The amount of any reversal of any write-down of inventories, arising from an increase in net
realizable value, shall be recognized as a reduction in the amount of inventories recognized
as an expense in the period in which the reversal occurs.
➢ Some inventories may be allocated to other asset accounts, for example, inventory used as
a component of self-constructed property, plant or equipment. Inventories allocated to
another asset in this way are recognized as an expense during the useful life of that asset.
Required disclosures:
• Accounting policy for inventories.
• Carrying amount, generally classified as merchandise, supplies, materials, work in
progress, and finished goods. The classifications depend on what is appropriate for the
enterprise.
• Carrying amount of any inventories carried at fair value less costs to sell.
• Amount of any write-down of inventories recognized as an expense in the period.
• Amount of any reversal of a writedown to NRV and the circumstances that led to such
reversal.
• Carrying amount of inventories pledged as security for liabilities.
• Cost of inventories recognized as expense (cost of goods sold).

Inventory Estimation Techniques

➢ Gross Profit Method – Based on the assumption that the gross profit applied by an entity
to its products remains approximately the same from period to period and therefore the
relationship between cost of goods sold and sales is constant.

Goods available for sale X

Less: Estimated cost of goods sold
Net sales* X
Less: Gross profit X X
Estimated ending inventory X

The cost of goods sold can also be computed if the net sale is multiplied by 1 less the GP
rate if the gross profit rate based on sales or net sales divided by 1 plus the gross profit rate
if the gross profit rate is based on cost.

*Net sales shall be gross sales less “sales returns and allowance” or “sales returns” only in
order for the estimate in ending inventory not to be overstated.

➢ Retail Method – Employed by retailers dealing with numerous different items for sale with
varying markup percentages to keep track unit cost.

Goods available for sale at retail X

Less: Net sales X
Employee discounts X
Normal losses X X
Estimated ending inventory X
Multiplied by the cost ratio %
Estimated ending inventory at cost X

➢ Conservative Cost Ratio = GAS at cost divided by GAS at retail before net markdown
➢ Average Cost Ratio = GAS at cost divided by GAS at retail (after net markdown)
➢ FIFO Cost Ratio = Purchases at cost divided by Purchases at retail after net markdown
➢ Net sales similar to the “gross profit method” of estimation is computed by ignoring the
sales discount and sales allowance if it is separated from sales returns.

END

Dec. 9, 2017