SUMMARIZED NOTES

NOTE_02: LOANS AND RECEIVABLES

LET’S GO!
LOANS AND RECEIVABLES:
• Divided into four (4) sub-topics:
(1) Trade Receivables and Related Allowances
i. Computation of Accounts Receivable – Trade
ii. Computation of Allowance for Bad debts
iii. Computation of Bad debt expense
iv. Computation of NRV of Accounts Receivable
v. Classification of Accounts Receivable
(2) Notes Receivables
i. Computation of sales if the consideration received is a note
ii. Computation of gain or loss from sale of non operating asset if the consideration received is a note
iii. Computation of carrying amount of the note
iv. Computation of interest receivable of from the note
v. Computation of current and noncurrent portion of the note
(3) Loans Receivables and Impairment Losses
i. Computation of initial measurement of loan, (1) origination cost direct or indirect (2) origination fee
ii. Computation of impairment loss and subsequent reversal of impairment
iii. Computation of carrying amount
iv. Computation of interest income
v. Accounting for the impairment using (1) direct method; (2) allowance method
(4) Receivable Financing
i. Accounting for pledged receivable
ii. Accounting for assigned receivable
ü Computation of equity of assigned AR
ü Computation of net proceeds
ü Computation of ending balance of accounts receivable – assigned
ü Computation of ending balance of loans receivable
iii. Accounting for factored receivable
ü Computation of cost/loss of factoring
ü Computation of net proceeds
iv. Accounting for discounted note receivable
ü Computation of net proceeds
ü Computation of gain or loss from discounting

COMPUTATION OF TRADE RECEIVABLE

• If the given accounts receivable is beginning, use the following to compute for the ending balance.
Trade Receivable
Beginning balance
(a) Sale on account (a) Collection of accounts receivable
(b) Recovery of written of receivables (b) Collection of recovery
(c) Freight FOB shipping point, prepaid (c) Write off of accounts receivable
(d) Discount taken by customers
(e) Sales actually returned
(f) Other form of payment
Ending balance
• If the given accounts receivable is ending (it is unadjusted), use the following to compute for the ending balance.
Unadjusted Accounts Receivable at December 31 xxxx
Usual adjustments:
a) Reversal of NSF / Stale / Postdated xxxx
b) Unrecorded sales return (xxxx)
c) “Netted” debit balance of other customer xxxx
d) Adjustment of goods shipped “still in transit”
Valid sale – FOB shipping point / Seller / CIF / FAS / FOB place of shipper
No valid sale – FOB destination / Buyer / Ex-ship / FOB place of buyer xxxx / (xxxx)
e) Other adjustments xxxx / (xxxx)
Adjusted Accounts receivable at December 31 xxxx
COMPUTATION OF ALLOWANCE FOR BAD DEBT
Allowance for Doubtful Accounts
Beginning balance
(a) Write off of accounts receivable (a) Bad debt expense / provision
(b) Recovery of write off
Ending balance

1. Allowance based on ending receivable (method 1)

Adjusted Accounts receivable at December 31 xxxx
Percentage of uncollectability x%
Ending balance of Allowance for Doubtful Accounts xxxx

2. Allowance based on sales (method 2)

Net Sales (use gross sales only if stated by the problem) xxxx
Percentage of uncollectability x%
Bad debt expense / provision for bad debt xxxx

3. Based on Aging of Receivable (method 3)

AR Age Category 1 AR Age Category 2 AR Age Category 3 Total
Accounts Receivable Bal. xxxx xxxx xxxx
Percentage per category x% x% x%
Allowance per category xxxx xxxx xxxx xxxx*
*Ending balance of Allowance for Doubtful Accounts

COMPUTATION OF BAD DEBT PERCENTAGE

(total write off over the period minus total recovery over the period)
net sales over the period
=Uncollectibility%
COMPUTATION OF BAD DEBT EXPENSE
1. Using method 1 & 3
Allowance for Doubtful Accounts
Beginning balance
(a) Write off of accounts receivable squeeze (a) Bad debt expense / provision
(b) Recovery of write off
Ending balance

• If the company made an interim provision for bad debt expense based on sales:
Bad debt expense based on the squeezed amount in the ledger xxxx
Interim provision made xxxx
Net adjustment to bad debt expense at year-end xxxx

SALES DISCOUNT
List price xxxx
Trade discount (xxxx)
Invoice price xxxx
Sales discount (xxxx)
Net selling price xxxx

COMPUTATION OF NRV / AMORTIZED COST / AR TO BE PRESENTED IN THE SPF

• The question “how much is the balance of accounts receivable?” – Accounts receivable only do not deduct allowances
• The question “how much is the NRV of accounts receivable?” – Accounts receivable minus allowances.

Accounts receivable at December 31 xxxx

(a) Allowance for doubtful accounts (xxxx)
(b) Allowance for estimated sales discount to be taken (xxxx)
(c) Allowance for estimated sales to be returned (xxxx)
(d) Allowance for freight (sold FOB destination, freight collect) (xxxx)
NRV of Accounts receivable at December 31 xxxx

JSC.NOTE_02: LOANS & RECEIVABLES PAGE 2 OF 7
CLASSIFICATION (CURRENT OR NONCURRENT)
• Trade receivable should be classified as current, even if collectible beyond 12 months, still current.
• Non trade receivable should be classified as current, unless collectible beyond 12 months, it will be noncurrent.
• Trade receivable arises from sale on account of goods or services from customers in the ordinary course of business.
• Expected to be realized in cash within one year or within normal operating cycle, whichever is longer.
• Classification of receivable if the problem is silent, follow the table below:
Current Noncurrent
(a) Trade receivable less allowances (1) Advances to affiliates
(b) Note receivable less note discounted (2) Advances to associates
(c) Accrued income (3) Advances to subsidiary
i. Rent receivable
ii. Interest receivable
iii. Commission receivable
iv. Dividend receivable
(d) Postdated / NSF / Stale checks (4) Advances to officers
(e) IOUs (5) Advances to shareholders
(f) Loans receivable
(g) Advances to employees
(h) Advances to personnel
(i) Advances to suppliers
(j) Accounts receivable – assigned
(k) Accounts receivable – pledged
(l) Claims from insurance
(m) Claims from common carrier
(n) Suppliers’ debit balance
• Subscription receivable
ü Contra-equity – if silent, or collectible beyond 12 months.
ü Current receivable – if collectible within 12 months.

NOTE RECEIVABLE
• As accounting rule, all receivable and payable should me measured at present value initially and subsequently.
• Theoretically short term notes should be measured at present value, but practically / usually / generally it is measured at
face value since the discounting of less than one year is considered immaterial.
• According to PFRS 9, note receivable should initially measured at fair value plus transaction cost but notes do not
incurred transaction cost therefore the fair value is the initial measurement
• Fair value is equal to the present value.

1. What is the sales / revenue if the company received a note as a consideration?

Answer: Fair value of the note (also equal to present value)

2. What is the gain or loss on sale if the company received a note as a consideration?
Answer: Carrying amount of the non-operating asset sold = xxxx
Fair value of the note received + downpayment = (xxxx)
Gain or loss on sale = xxxx

COMPUTATION OF:
1. Fair value
2. Carrying amount
3. Interest revenue
4. Interest receivable
5. Current portion
6. Noncurrent portion

JSC.NOTE_02: LOANS & RECEIVABLES PAGE 3 OF 7
SUMMARIZED NOTES
NOTE_02: LOANS AND RECEIVABLES

Category Classification Fair value* Interest revenue Interest receivable Carrying amount Current portion Noncurrent portion
1 Interest bearing Face amount / Principal Nominal interest Nominal interest Remaining unpaid Principal amount that Principal amount that
principal / face amount will be paid within 12 will be paid beyond 12
unpaid months months.
Unpaid principal
x nominal interest Note – you will
Unpaid principal x # of mos. from last separate the note into
x nominal interest interest payment up to original principal current and non current
interest revenue December 31 / 12 mo less : principal payment only if it is a serial note
interest receivable unpaid principal or note were the
principal is payable on
installment.
2 Non-interest Present value of the Effective interest None Amortized cost Carrying amount, end Carrying amount, end
bearing principal less: noncurrent portion x effective interest + 1
current portion less: any principal pay.
Carrying amount at beg forever zero Fair value / beg CA noncurrent portion
Principal x PVF x effective interest x effective interest + 1
interest revenue less: any principal payment Note – it is easier if you Note – you will
use the effective interest in carrying amount at end compute first the separate the note into
getting the PVF noncurrent portion then current and non
the residual is the current only if it is a
current portion serial note or note
were the principal is
payable on
installment.
3 Interest bearing Present value of the Effective interest Nominal interest Amortized cost Carrying amount, end Carrying amount, end
with unrealistic principal plus present value less: noncurrent portion x effective interest + 1
nominal interest of nominal interest. current portion less: nominal interest
Carrying amount at beg Unpaid principal Fair value / beg CA less: any principal pay.
Principal x PVF x effective interest x nominal interest x effective interest + 1 Note – it is easier if you noncurrent portion
in case nominal + interest revenue x # of mos. from last less: nominal interest compute first the
is not equal to Principal x nominal x PVF interest payment up to less: any principal payment noncurrent portion then Note – separate only if
effective December 31 / 12 mo carrying amount at end the residual is the serial note or note on
use the effective interest in interest receivable current portion installment
getting the PVF

*fair value is the amount that will be used in computing the sales revenue and gain or loss on sale of non operating assets.
SUMMARIZED NOTES
NOTE_02: LOANS AND RECEIVABLES

IMPORTANT NOTES:
1. If the interest is payable semi-annually:
ü effective interest is divided into half
ü the period is doubled
ü the basis of interest income is more than one, update the carrying amount at interest payment date
2. if the note is serial note with equal principal payment:
ü the principal is payable in equal periodic payment, use PV of annuity then.
ü the interest is payable in unequal periodic payment (since it is based on decreasing principal) use PV of 1 then.
ü nominal is based on the unpaid principal
3. If the note is serial note with unequal principal payment:
ü the principal is payable in unequal periodic payment, use PV of 1 then.
ü the interest is payable in unequal periodic payment (since it is based on decreasing principal) use PV of 1 then.
ü nominal is based on the unpaid principal
4. If the cash price is given, the present value (fair value) of the note is equal to: Cash price minus downpayment.
ü If the cash price minus downpayment is not equal to the face value of the note, it is category 2 or 3 note.
ü If it is category 2 or 3 then the effective is not give, you can solve for the effective interest by trial and error and
interpolation is necessary.

LOANS RECEIVABLES
• Notes receivable are receivables supported by promissory note, loans receivable are receivables supported by
promissory note as well, the main difference is that the note receivables are receivables by a non-financial institution
arising from sale of inventory / service / non operating assets. While loans receivables are receivables by a financial
institution arising from lending activities in the ordinary course of business.
• Loans receivable is a financial asset and it is initially measured at fair value plus transaction cost.
• Fair value is usually equal to the face amount / principal of the loan.
Face amount of the loan xxxx
Net transaction cost origination cost – origination fee (xxxx)
Initial measurement xxxx
Alternative Computation
Face amount of the loan xxxx
Origination cost xxxx
Origination fee (xxxx)
Initial measurement xxxx
• Indirect origination cost should be recognized as outright expense.
• If the transaction incurred a origination cost or origination fee, it means the nominal interest is different from the
effective.
ü Incurred origination cost / origination fee = account same as note category 3.
ü No origination cost / origination fee = account same as note category 1.

IMPAIRMENT LOSS
Carrying amount of the loan at impairment date + accrued interest receivable (a) xxxx
Present value of the new cash flow:
New principal amount x PVF (b) xxxx
New principal amount x new nominal interest x PVF xxxx (xxxx)
Impairment loss xxxx

IMPORTANT NOTE
(a) – if the problem states the company did not accrue the interest, then exclude it in the computation. If the company
accrue or recorded the interest receivable or if the problem is silent, then include it in the computation.
(b) – use the original effective interest (interest at the date of loan). Also note that if the problem is silent as to the
effective interest at the date of loan assume the nominal interest is the effective interest.
(c) – the present value of the new cash flow is your new carrying amount, it will be the basis of the subsequent interest
income.
REVERSAL OF IMPAIRMENT LOSS
Amortized cost or CA of new loan at the date of reversal xxxx
Present value of the new cash flow: after reversal
New principal amount x PVF xxxx
New principal amount x new nominal interest x PVF xxxx
or (choose the LOWER)
Amortized cost of the loan as if no impairment happened xxxx xxxx
Reversal of impairment loss xxxx
ACCOUNTING FOR THE IMPAIRMENT LOSS
• we can use two methods to account impairment: (1) allowance method; (2) direct method
Journal entry to record impairment:
Direct method Allowance method
dr. Impairment loss xxxx dr. Impairment loss xxxx
cr. Interest receivable xxxx cr. Interest receivable xxxx
cr. Loan receivable xxxx cr. Allowance for impairment xxxx
Journal entry to record interest revenue:
Direct method Allowance method
dr. Loan receivable xxxx dr. Allowance for impairment xxxx
cr. Interest income xxxx cr. Interest income xxxx

Direct method Allowance method

Loan receivable at amortized cost xxxx Loan receivable at new principal amount xxxx
Allowance for impairment 0 Allowance for impairment (xxxx)
Carrying amount to be presented in FS xxxx Carrying amount to be presented in FS xxxx
RECEIVABLE FINANCING
• to generate cash prior to the scheduled collection of receivable by either (1) using as a collateral from a loan; or (2)
sold the receivable to a financial institution.
• refer to the table below:
Used as a collateral Sold the receivable
1. Receivable is not derecognized 1) Receivable is derecognized
2. Liability is recognized 2) Liability is not recognized
3. No gain or loss 3) With gain or loss
4. Transactions: 4) Transactions:
i. Pledge a) Factoring – without recourse
ii. Assignment – notification b) Factoring – with recourse
iii. Assignment – non notification c) Discounting – without recourse
iv. Discounting – with recourse, conditional sale
v. Discounting – with recourse, secured borrowing
PLEDGING
• Usually no accounting problem in this situation.
• Included in the total receivable, requires note disclosure.

ASSIGNMENT
• Computation of net proceeds from the loan and assignment transaction.
Amount of loan granted (usually a portion of the assigned receivable) xxxx
Service / assessment / commission charge (xxxx)
Net proceeds xxxx
• Service / assessment / commission charge is may be charged on (1) accounts receivable assigned or (2) loans payable.
• Computation of ending balance of Accounts receivable assigned and loans payable.
Accounts receivable assigned Loans payable
Balance xxxx Balance Xxxx
Collected (xxxx) Interest expense Xxxx
Sales discounts (xxxx) Remittances (xxxx)
Sales returns (xxxx) Ending balance Xxxx
Write off (xxxx)
Ending balance xxxx
• Computation of equity portion of receivable assigned.
Ending balance of accounts receivable assigned Xxxx
Ending balance of loans payable (xxxx)
Equity balance – disclosures to financial statement Xxxx
• Whether notification or non notification basis, the answer is same.
• Interest is not deducted in advance from the amount of loan.


JSC.NOTE_02: LOANS & RECEIVABLES PAGE 6 OF 7
FACTORING
• Computation of net proceeds from factoring:
Amount factored Xxxx
Service / commission / assessment / finance fee (xxxx)
Factor’s holdback (xxxx)
Interest charged ( i% x days / 365), if any (xxxx)
Net proceeds Xxxx
• With and without recourse:
With recourse Without recourse
ü Derecognize receivable ü Derecognize receivable
ü Recognize liability for recourse obligation ü No recognition of recourse obligation
ü Recognize loss on recourse obligation ü No recognition of loss on recourse obligation
• Computation of cost of factoring:
Service / commission / assessment / finance fee xxxx
Interest charged ( i% x days / 365), if any xxxx
Loss on recourse obligation (fair value of the recourse obligation) only if with recourse xxxx
Total cost of factoring xxxx

DISCOUNTING
• Computation of net proceeds from discounting:
Maturity value (face value x nominal interest x months from date of the note up to maturity Xxxx
date / 12 months)
Discount charge by the bank (maturity value x discount rate x months date sold to bank up to (xxxx)
maturity / 12 months)
Net proceeds from note discounting Xxxx

• Computation of gain or loss from discounting:

Net proceeds from note discounting Xxxx
Total receivable sold (face amount + accrued interest / interest income*) (xxxx)
Gain or loss Xxxx
*face amount x nominal interest x months from date of the note up to date the note was sold to the bank.

• Journal entry; without recourse; with recourse conditional sale; with recourse secured borrowing:
To record discounting of the note to a bank:
Without recourse Conditional sale Secured borrowing
Cash Cash Cash
Loss on discounting Loss on discounting Loss on discounting
Note receivable Note receivable discounted** Liability on note discounted***
Interest income Interest income Interest income
**contra-asset account, presented as deduction to note receivable. Contingent liability is disclosed in the notes.
***liability account, included in the “trade and other payable” line item.

END OF JSC.NOTE_02:

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