RECEIVABLES

• 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

 Tradereceivables 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

 Examples of nontrade receivables

1. Advances to or receivables from

shareholders, directors, officers or
employees.
2. Advances to affiliates
3. Advances to supplier
4. Subscriptions receivable
5. Creditors’ accounts debit balance
6. Special deposits on contract bids
7. Accrued income
8. 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.

Ex. Customer A
Sales Collection
800 400
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
 openaccounts 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. allowance for freight charge
b. allowance for sales return
c. allowance for sales discount
d. allowance for 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.
 Accounts
Receivable
Ex. 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, 1. Sale of merchandise for P200,000,
terms 5/10, n/30. terms 5/10, n/30.

Accounts receivable 200,000 Accounts receivable 190,000

Sales Sales
200,000 190,000
2. Collection within the discount 2. Collection within the discount
period. period.

Cash 190,000 Cash 190,000

Sales discount 10,000 Accounts receivable
Accounts receivable 190,000
200,000
3. Collection is made beyond the 3. Collection is made beyond the
discount period. discount period.

Cash 200,000 Cash 200,000

Accounts receivable Accounts receivable
200,000 190,000
Sales discount forfeited
 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 of accounting for bad debts:

1. Allowance method- recognition of bad
debts loss if the accounts are doubtful of
collection.
2. 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
journal entries:
Receivable
Allowance method Direct writeoff method
Accounts are considered to be Accounts are considered to be
doubtful of collection: doubtful of collection:
-
Doubtful accounts xxx -
Allow. for doubtful accounts
xxx
Accounts are subsequently Accounts are proved to be worthless:
discovered to be worthless:
Bad debts xxx
Allow. for doubtful accounts xxx Accounts receivable
Accounts receivable xxx
xxx
Accounts are unexpectedly recovered Accounts are unexpectedly recovered
or collected: or collected:

Accounts receivable xxx Accounts receivable xxx

Allow. For doubtful accounts Bad debts
xxx xxx

Cash Cash xxx

xxx Accounts receivable
Accounts receivable 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. Compute for required allowance and doubtful accounts

expense.
2. 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. Compute for required allowance and doubtful

accounts expense.
2. 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. Compute for doubtful accounts expense.

2. 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. Individually significant accounts receivable

should be considered for impairment
separately and if impaired, the impairment
loss is recognized.
b. Accounts receivable not individually
significant should be collectively assessed
for impairment.
c. 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 year-

end:
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 Face value -
notes receivable
Interest bearing Face value = Present Amortized cost =initial
long-term notes value upon issuance measurement minus principal
receivable 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 Present value = Amortized cost = present
bearing long- discounted value of future value plus amortization of the
term notes cash flows using the discount, or the face value
receivable effective interest rate 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
borrower’s 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 500,000

Dec. 31, 2020 1,000,000
Dec. 31, 2021 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 borrower’s 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* xxx
Accounts receivable xxx

*Factor’s 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.