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BA 114.1 (D. Salazar/K.

Dela Cruz)
Receivables

Problem 1: Classifying Receivables


Classify each of the following items as: (a) Accounts Receivable, (b) Notes Receivable; (c) Trade
Receivables; (d) Non-trade Receivables, or (e) Other (indicate nature of items). Indicate also whether the
item would normally be reported as a current or non-current asset assuming a 6-month operating cycle.

1. Overpayment to supplier for inventory purchased on account


2. Overpayment by customer of an account receivable
3. Claim for a tax refund from last year
4. Advance to sales manager
5. Insurance claim on automobile accident
6. Interest due on 10-year note from company president, interest payable annually
7. Acceptance of 2-year note on sale of land held as investment
8. Acceptance of 6-month note for past-due account arising from the sale of inventory
9. Prepaid insurance – four months remaining in the policy period

Problem 2: Accounting for Receivables – Journal Entries


The following transactions affecting the accounts receivable of Lava Corporation took place during the year
ended March 31, 2017:

Sales (cash and credit) ₱ 531,945


Cash received from credit customers, all of whom took advantage of the discount
feature of the corporation’s credit terms 4/10, n/30 273,420
Cash received from cash customers 189,243
Accounts receivable written off as worthless 4,725
Credit memo issued to credit customers for sales returns and allowances 57,420
Cash refunds given to cash customers for sales returns and allowances 11,986
Recoveries on accounts receivable written off as uncollectible in prior periods
(not included in cash amount stated above) 7,461

The following two balances were taken from the March 31, 2016 balance sheet:

Accounts Receivable ₱ 86,258


Allowance for Bad Debts (credit balance) 8,766

The corporation provides for its net uncollectible account losses by crediting Allowance for Bad Debts for
2% of net credit sales for the fiscal period.

Requirements:
1. Prepare the journal entries to record the transactions for the period ended March 31, 2017.
2. Prepare the adjusting journal entry for estimated uncollectible accounts on March 31, 2017.
3. How should the receivables section be presented in the statement of financial position as at March 31,
2017?

Problem 3: Accounting for Cash Discounts


Red Merchandising Inc. sold goods on account with a sales price of ₱ 350,000 on September 17. The terms
of the sale were 2/10, n/30.

Requirements:
1. Record the sale using the gross method of accounting for cash discount.
2. Record the sale using the net method of accounting for cash discount.
3. Assume that the payment is received on September 25, record the receipt of the payment using both
the gross method and the net method.
4. Assume that the payment is received October 15, record the receipt of the payment using both the gross
method and the net method. How is the account used in the net method classified – asset, liability,
revenue or expense?
5. Which method makes more theoretical sense – the gross method or the net method? Why?

Problem 4: Estimating Bad Debt Expense (Sales Method vs Receivables Method)


During 2017, Graham Company had gross sales of ₱1,482,000. At the end of 2017, Graham had accounts
receivable of ₱498,000 and a credit balance of ₱33,600 in Allowance for Doubtful Accounts. Graham has
used the percentage-of-sales method to estimate bad debt expense. For the past several years, the amount
estimated to be uncollectible has been 3%.

Requirements:
1. Using the percentage-of-gross-sales method, estimate the bad debt expense and make the necessary
adjusting entries.
2. Assuming that 12% of receivables are estimated to be uncollectible and that Graham decides to use the
percentage-of-receivables method to estimate the bad debt expense, estimate the bad debt expense
and make the necessary adjusting entries.
3. Which of the two methods more accurately reflects the net realizable value of receivables? Explain.

Problem 5: Estimating Bad Debt Expense (Aging of Receivables)


Barnie Ltd operates in an industry that has a high rate of bad debts. Before any year-end adjustments, the
balance in Barnie’s Accounts Receivable was ₱1,387,500 and Allowance for Bad Debts had a credit balance
of ₱100,000. The year-end balance reported in the balance sheet for Allowance for Bad Debt will be based
on the aging schedule shown below:

Days Account Probability of


Amount
Outstanding Collection
Less than 16 days ₱ 750,000 0.98
16-30 days 250,000 0.90
31-45 days 200,000 0.85
46-60 days 100,000 0.80
61-75 days 50,000 0.55
Over 75 days 37,500 0.00

Requirements:
1. What is the appropriate balance for Allowance for Bad Debts at year-end?
2. Show how accounts receivable would be presented on the balance sheet.
3. What is the dollar effect of the year-end bad debt adjustment on the before-income tax?

Problem 6: Foreign Currency Receivable

Date Forex rate


December 15, 2017 ₱50.3980
December 31, 2017 49.9230
January 31, 2018 51.4210
July 15, 2018 53.4700
July 31, 2018 53.2630
August 15, 2018 53.4510

On July 15, 2018, ABC Company sold items with selling price of $100,000 to DEF Inc. DEF paid ABC
Company on August 15, 2018. ABC’s fiscal year ends July 31.

Requirements:
1. Prepare the journal entries for July 15, 2018, July 31, 2018 and August 15, 2018.
2. Determine the foreign exchange gain or loss for the period-ended July 31, 2018 and period-ended July
31, 2019. Identify whether the foreign exchange gain or loss is realized or unrealized.

Problem 7: Note Receivable – Journal Entries


On December 31, 2018, Omega Company rendered services to Mammoth Group at an agreed price of
₱306,147, accepting ₱120,000 down and agreeing to accept the balance in four equal installments of
₱60,000 receivable each December 31. An assumed interest rate of 11% is imputed.

Requirements: Prepare the journal entries that would be recorded by Omega Company on the following
dates. (Assume that the effective interest method is used for amortization purposes.)
1. December 31, 2018
2. December 31, 2019
3. December 31, 2020
4. December 31, 2021
5. December 31, 2022

Problem 8: Accounting for a Non-Interest Bearing Note


On January 1, 2017, Aurora Realty sold a tract of land to two dentists as an investment. The land, purchased
12 years ago, was carried on Aurora’s books at a value of ₱462,000. Aurora received a non-interest bearing
note for ₱605,000 from the dentists. The note is due December 31, 2018. There is no readily available
market value for the land but the current market rate of interest for comparable notes is 11%.

Requirements:
1. Give the journal entry to record the sale of land on Aurora Realty’s books.
2. Prepare a schedule of discount amortization for the note with amounts rounded to the nearest whole
numbers.
3. Give the adjusting entries to be made at the end of 2017 and 2018 to record the effective interest
earned.

Problem 9: Note with Below-Market Interest Rate


On January 1, 2018, Haywood Ltd sold land that originally cost ₱320,000 to Gallerie Inc. As payment,
Gallerie gave Haywood a ₱480,000 note. The note bears an interest rate of 4% and is to be repaid in three
annual installments of ₱160,000 (plus interest on the outstanding balance). The first payment is due on
December 31, 2018. The market price of the land is not reliably determinable. The prevailing rate of interest
for notes of this type is 14%.

Requirement: Prepare the entries required on Haywood’s books to record the land sale and the receipt of
each of the three payments. Use the effective interest method of amortizing any premium or discount on
the note.

Problem 10: Comprehensive Receivable Problem


Paras Company had the following long-term receivable account balances at December 31, 2017:

Note receivable from sale of division ₱1,200,000


Note receivable from officer 320,000

Transactions during 2018 and other information relating to Paras Company’s long-term receivables were
as follows:

a. The ₱1,200,000 note receivable is dated May 1, 2017, bears interest at 9%, and represents the balance
of the consideration received from the sale of Paras’ mechanical division a company located in the state
of Washington. Principal payments of ₱400,000 plus appropriate interest are due on May 1, 2018, 2019
and 2020. The first principal and interest payment was made on May 1, 2018. Collection of the note
installments is reasonably assured.
b. The ₱320,000 note receivable is dated December 31, 2017, bears interest at 8%, and is due on
December 31, 2020. The note is due from Mary Grace Limpo, president of Paras Company and is
collateralized by 8,000 of Paras Company’s ordinary shares. Interest is payable annually on December
31 and all interest payments were paid on their due dates through December 31, 2018. The quoted
market price of Paras’s ordinary shares was ₱36 per share on December 31, 2018.
c. On April 1, 2018, Paras sold a patent to Georgia Corporation in exchange for a ₱80,000 zero-interest
bearing note due on April 1, 2020. There was not established exchange price for the patent and the
note had no ready market. The prevailing rate of interest for a note of this type at April 1, 2018 was
12%. The present value of ₱1 for two periods at 12% is 0.797 (use this factor). The patent had a
carrying value of ₱32,000 at January 1, 2018 and the amortization for the year ended December 31,
2018 would have been ₱6,400. The collection of the note receivable from Georgia is reasonably
assured.
d. On July 1, 2018, Paras sold a parcel of land to Lego Company for ₱200,000 under an installment sale
contract. Lego made a ₱60,000 cash down payment on July 1, 2018 and signed a 4-year 11% note for
the ₱140,000 balance. The equal annual payments of principal and interest on the note will be ₱45,125
payable on July 1, 2019 through July 1, 2022. The land could have been sold at an established price of
₱200,000. The cost of the land to Paras was ₱150,000. Circumstances are such that the collection of the
installments on the note is reasonably assured.

Requirements:
1. Prepare the long-term receivables section of Paras Company statement of financial position at
December 31, 2018.
2. Prepare a schedule showing the current portion of the long-term receivables and accrued interest
receivable that would appear in Paras’ statement of financial position at December 31, 2018.
3. Prepare a schedule showing interest revenue from the long-term receivables that would appear on
Paras’ income statement for the year ended December 31, 2018.

Problem 11: Accounting for Assignment of Accounts Receivable


On July 1, 2017, Ferrer Company used receivables totaling ₱90,000 as collateral on a ₱60,000, 15% note
from Aura Bank. The transaction is not structured such that receivables are being sold. Ferrer will continue
to collect the assigned receivables. In addition to the interest on the note, Aura Bank also receives a 2.5%
finance charge, deducted in advance on the ₱60,000 value of the note. Additional information for Ferrer
Company is as follows:

a. July collections amounted to ₱54,600, less cash discounts of ₱345.


b. On August 1, paid bank the amount owed for July collections plus accrued interest on note to August 1.
c. Ferrer collected the remaining accounts during August except for ₱255 written off as uncollectible.
d. On September 1, paid bank the remaining amount owed plus accrued interest.

Requirement: Prepare the journal entries to record the preceding transactions on the books of both Ferrer
Company and Aura Bank.

Problem 12: Assigning and Factoring Accounts Receivable


During its third year of operations, Estanilao Ltd found itself in financial difficulties. Estanilao decided to
use its accounts receivable as a means of obtaining cash to continue operations. On July 1, 2017, Estanilao
sold ₱45,000 of accounts receivable for cash proceeds of ₱41,700. No bad debt allowance was associated
with these accounts. On December 17, 2017, Estanilao assigned the remainder of its accounts receivable,
₱150,000 as of that date, as collateral on a ₱75,000, 12% annual interest rate loan from Lorenzo Finance
Company. Estanilao received ₱75,000 less a 2% finance charge. Additional information is as follows:

Allowance for Doubtful Accounts, 12/31/17 (credit balance) ₱1,920


Estimated Uncollectibles as a percentage of receivables, 12/31/17 3%
Accounts Receivable (not including factored and assigned accounts),
12/31/17 ₱30,000

None of the assigned accounts has been collected by the end of the year.
Requirements:
1. Prepare the journal entries to record the receipt of cash from the sale and assignment of the accounts
receivable.
2. Prepare the journal entry necessary to record the adjustment to Allowance for Doubtful Accounts.
3. Prepare the Accounts Receivable section of Estanilao’s balance sheet as it would appear after the above
transactions.
4. What entry would be made on Estanilao’s book when the sold accounts have been collected?

Problem 13: Selling Receivables


Fernando Finance Company provides financing to other companies by purchasing their accounts receivable
on a non-recourse basis. Fernando charges its clients a commission of 15% of all receivables factored. In
addition, Fernando withholds 10% receivables factored as protection against sales returns or other
adjustments. Fernando credits the 10% withheld to Client Retainer and makes payments to clients at the
end of each month so that the balance in the retainer is equal to 10% of unpaid receivables at the end of the
month. Fernando recognizes its 15% commissions as revenue at the time the receivables are factored.
Experience also has led Fernando to establish an Allowance for Bad Debts of 4% of all receivables
purchased.

On January 5, 2018, Fernando purchased receivables from Thet Company totaling ₱900,000. Thet Company
had previously established an Allowance for Bad Debts for these receivables of ₱21,000. By January 31,
Fernando had collected ₱720,000 on these receivables.

Requirements:
1. Prepare the entries necessary on Fernando’s Finance Company’s books to record the preceding
information. Fernando makes adjusting entries at the end of every month.
2. Prepare the entries on Thet Company’s books to record the preceding information.