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BA

123 (Velasco / Dela Cruz)


Receivables – Financial Accounting & Reporting

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

Required:
a. Record the sale using gross method of accounting for cash discount.
b. Record the sale using net method of accounting for cash discount.
c. Assuming that the payment was received on September 25, record the receipt of payment using both
gross method and net method.
d. Assuming that the payment was received on October 15, record the receipt of payment using both
gross method and net method.

2. The following information was abstracted from the records of Hooper Corporation for the year ended
December 31, 2005:
Accounts receivable ₱590,000
Allowance for doubtful accounts (cebit balance) 18,000
Sales 2,180,000
Sales discount 18,000
Sales return 27,000

Required:
1. Prepare the adjusting entry for doubtful accounts expense under each of the following assumptions:
a. 3 percent of outstanding accounts receivable are uncollectible
b. 1.5 percent of 2005 net sales are uncollectible
c. An aging schedule of the accounts shows that ₱21,400 of the accounts are worthless

3. From inception of operations to December 31, 2004, Harris Corporation provided for uncollectible accounts
receivable under the allowance method. Provisions were made monthly at 2 percent of credit sales. Bad debts
written off were charged to the allowance method account. Recoveries of bad debts previously written off were
credited to the allowance account. No year-end adjustment to the allowance account was made. Harris’ usual
credit terms are net 30 days.

The credit balance in the allowance for doubtful accounts was ₱260,000 at January 1, 2005. During 2005, credit
sales totaled ₱18,000,000; interim provisions for doubtful accounts were made at 2 percent of credit sales;
₱180,000 of bad debts were written-off; and recoveries of accounts previously written-off amounted to
₱30,000. Harris installed a computer system in November 2005, and an aging of accounts receivable was
prepared for the first time as of December 31, 2005. A summary of the aging is as follows:
Month of Sale Balance Percentage Deemed Uncollectible
November to December 2005 ₱2,280,000 2%
July to October 2005 1,200,000 15%
January to June 2005 800,000 25%
Prior to January 1, 2005 260,000 80%

Based on the review of collectability of the account balances in the “prior to January 1, 2005” category,
additional receivables totaling ₱120,000 were written-off as of December 31, 2005. Effective with the year
ended December 31, 2005, Harris adopted a new accounting method for estimating the allowance for doubtful
accounts at the moment indicated by the year-end aging analysis of accounts receivable.

Required:
1. Prepare a schedule analyzing the changes in the allowance for doubtful accounts for the year ended
December 31, 2005. Show supporting computations in good form.
2. Prepare the journal entry for the year-end adjustment to the allowance for doubtful accounts balance
as of December 31, 2005.

4. On July 15, 2018, ABC Company sold items with selling price of $100,000 to DEF, Inc. DEF, Inc. paid ABC
Company on August 15, 2018. ABC Company’s fiscal year ends July 31. Relevant data are as follows:
Date Foreign Exchange 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

Required:
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 July 31, 2019.

5. 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, which bears an interest of 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 of each year. The first principal and interest payments were made on May 1, 2018. Collection
of the note installments is reasonably assured. Assume adjusting entries were made at the end of 2017.
b. The ₱320,000 note receivable is dated December 31, 2017, which bears interest at 8% and is due on
December 31, 2020. The note is due from Mary Grace Limpo, President of Paras Company. The note 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’ ordinary shares was ₱36 per share on December 31, 2018.
c. On Apriil 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 no 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 patent had a carrying value of ₱32,000, 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 downpayment 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.

Required:
1. Prepare the long-term receivables section of Paras Company’s 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. Compute for the interest revenue from the long-term receivables that would appear on Paras’ income
statement for the year ended December 31, 2018.

6. XYZ Company borrowed ₱1,000,000 from HRA Bank. XYZ Company pledged ₱1,500,000 of receivables as
collateral for the loan. The bank also assessed 1% of accounts receivable as finance charge netted off against
the proceeds of the loan. The 3-year loan incurs 10% interest payable every December 31. The whole principal
is payable at the end of the 3rd year.

Required: Prepare the necessary journal entries to record the pledging of accounts receivable.

7. 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 note 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 received 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, Ferrer Company paid Aura Bank the amount owed for July collections plus accrued
interest;
c. Ferrer collected the remaining accounts during August except for ₱255, which was written-off as
uncollectible; and
d. On September 1, Ferrer Company paid Aura Bank the remaining amount owed plus accrued interest.

Required: Prepare journal entries to record the preceding transactions.

8. During its third year of operations, Estanilao Ltd. found itself in financial difficulties. Estanilao Ltd. decided
to use its accounts receivables as a means of obtaining cash to continue operations. On July 1, 2017, Estanilao
Ltd. sold ₱45,000 of accounts receivable for cash proceeds of ₱41,700. No bad debt allowance was associate
with these accounts. On December 17, 2017, the company assigned the remainder of its accounts receivable,
amounting to ₱150,000 as of that date, as collateral on a ₱75,000, 12% loan from Lorenzo Finance Company.
Estanilao received ₱75,000 less 2% finance charge. Additional information as of December 31, 2017 is as
follows:
Allowance for doubtful accounts (credit balance) ₱1,920
Estimated uncollectibles 3% of accounts receivable
Accounts receivable (excluding factored and assigned accounts) ₱30,000

None of the assigned accounts have been collected by the end of the year.

Required:
1. Prepare all necessary journal entries to account for the aforementioned transactions.
2. What is the valuation of Estanilao Ltd.’s accounts receivable as of December 31, 2017?
3. What entry would be made on Estanilao Ltd.’s book when the accounts previously sold have been
collected?

9. Mining Corporation received a 3-month ₱500,000 note at 10% from a customer on September 1, 2017 to
settle a past due accounts receivable. One month later, the note was discounted at a rate of 15%.

Required:
1. Assuming the note was discounted without recourse:
a. What is the carrying value of the note?
b. What is the net effect of discounting the note in the company’s income statement?
2. Assuming the note was discounted with recourse:
a. Prepare the necessary journal entries suppose the note was honored by the issuer.
b. Prepare the necessary journal entries suppose the note was dishonored by the issuer.
c. What is the net effect of discounting the note in the company’s income statement?