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    57 views7 pages

    P1 915 PDF

    Uploaded by

    Karlo Jude Acidera

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    © All Rights Reserved
    Download as PDF or read online from Scribd
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    PRACTICAL COUNTING Iberita/C, Espenitla Receivables-Lecture 1, Nature of receivables ~ Receivable represents financial asset arising from a contractual right to receive cash or another financial asset from another company. It falls under one of four categories of financial instruments, namely Loans and Receivables. Loans and Receivables are non-derivative financial assets with fixed maturity (including loan assets, trade receivables, investments in debt securities and deposits held by banks) that are not quoted in an active market other than those classified as “financial assets at fair value". The reference to fixed maturity in the definition means a contractual arrangement that defines the amounts and dates of payments to the holder such as interest and principal payments. For most entities, they comprise trade receivables, loan assets, investments in debt instruments. For banks and similar institutions, they constitute a significant proportion of their non-trading assets, in particular loans and advances to customers. . Classes of receivables Trade receivables - are claims arising from sale of merchandise or service in the ordinary course of business operations; such as the following (a) accounts receivable and (b) notes receivable. Non-trade receivable - are claims arising from sources other than from sale of goods and services in the normal course of business; such as the following (a) advances to officers and employees (b) advances to subsidiaries (c) dividends and interest receivable (d) deposits as a guarantee of performance or payment (e) deposits to cover potential damages or losses (f) claims for; insurance, tax refunds, lawsuits, merchandise damaged or lost in transit, returnable items, etc. 3. Presentation of receivables on the face of the balance sheet or in the notes Receivables are disaggregated into amounts receivable from trade customers, receivables from related parties prepayments and other amounts (PAS 1 paragraph 75b) Trade receivables should be presented on the face of the balance sheet as one line item and classified as current assets but the detail of which will be disclosed in the notes. Non-trade receivables that are currently collectible should be presented as one line item under the current asset section but the detail of which will be disclosed in the notes. 4, Valuation of Loans and Receivables: a. At initial recognition loans and receivables are measured at fair value (transaction price). The fair value is based on the total expected future cash inflows that an enterprise will realized. b. Subsequent to initial recognition loans and receivables are measured at amortized Cost. The amortized cost of a financial asset is the amount at which the financial asset is measured at initial recognition minus principal repayments, plus or minus. principal amortization using the effective interest method of any difference between that initial amount and maturity amount and minus any reduction (directly through the use of allowance account) for impairment or uncollectibility. Accounts receivable are measured at original exchange price between the firm and the outside party, less adjustment for cash discount, sales return and allowances, yielding and approximation to fair value which is the amount expected to be collected. The issue of bad and doubtful debts will inevitably arise in accounting for trade receivables, There are currently no approved accounting standards that deal specifically with the measurement of bad and doubtful debts, the only guide which accountants rely on in practice is the prudence consideration of PAS 1, which generally requires that known bad and doubtful debts shall be provided for. However, the application of this prudence consideration on accounting for trade receivables is subjective as it is left mostly to the discretion of the reporting entity, ReSA / PRACTICAL ACCOUNTING 1 _—_Recelvables (Lecture) ‘One view of doubtful debt is based on the direct write-off method, where bad debts expense is recognized or recorded in the period in which it is determined that 4 specific trade receivable cannot be collected. This view that each sale results in & “good” trade receivable and accordingly, the full amount shall be recognized in the period of sale. In ather words, no allowance shall be made in respect of that “good” trade receivable. When later events proved that certain receivables ere uncollectible and are worthless, a direct write-off is made to recognize the bad debts. From a practical standpoint, this method has been argued as simple and convenient to apply. Furthermore, the amount written off is based on actual facts rather then estimates which may need revisions subsequently when facts become known. However, the direct write off method is theoretically deficient because it usually does not match costs with revenues of the period. This is due to the fact that trade receivables do not generally become worthless at an identifiable moment of time. As such, the method does not result in trade receivables being stated a the estimated realizable value on the balance sheet. In practice today, the view that is generally accepted is that bad and doubtful debts shall be provided immediately when they are known. This is in accordance with the prudence principle which requires that when the collectability of trade receivables is considered doubtful, adequate allowance shall be made. Notes receivable should be stated at present value. The present value of a note receivable maybe its face value (for notes that are short-term and interest bearing long-term notes) or discounted value (for long-term non-interest bearing and jong- term interest bearing but the interest rate is unreasonably low) A note receivable is said to be interest bearing when a specific interest rate is stated in the promissory note, The stated rate is the “nominal or face rate or coupon rate or contracted rate as part of the note which usually corresponds to the market rate of interest of similar risk. The market interest rate or effective interest rate or yield rate 1s the rate used in the market to determine the value of the note, which is actually the discount rate to determine present value. When the stated and market rates are equal it means the notes were selling at face but when the stated and market rates are different it means that the face of the note is differs from the present value of the note. The difference would either be a discount or premium that is to be amortized over the term of the note using the effective interest method as prescribed by the standard for financial instruments. A note Is said to be non-interest bearing when there is no specific stated interest rate, The interest rate is already imbedded in the face of the note and consequently the maturity value of a note is its face amount, therefore, it is necessary to separate the interest from the note by discounting the note using the prevailing market interest rate. 5. Impairment of Loans and Receivables: Assessment and recording of impairment loss - An entity shall assess at each balance sheet date whether there is any objective evidence that a financial asset or group of financial assets is impaired. A financial asset or group of financial assets is impaired and impairment losses are considered, if and only if: (a) there is objective evidence of impairment as a result of one or more events (loss events) that occurred after initial recognition, and (b) that the event (loss event) has an impact on the estimated future cash flows of the financial assets that can be reliably estimated. It may not be possible to identify a single discrete event that caused the im irment. The combined effect of several events that could have caused the impairment should be considered. Losses expected as a result of future events, no matter how likely, are not recognized. Objective evidence that a financial asset or group of financial assets such as receivables is impaired includes observable date that come © of the financial asset about the following loss events: Geprceeritbes enact a. Significant financial difficulty of the debtor, issuer or obligor. b._ Default or delinquency in interest or principal payments, ¢. The creditor granting the debtor a concession that the creditor would not otherwise enneiien: REAL ACCOUNTING I Receivables (Lecture) d. e. fe Probability that the borrower will enter bankruptcy or other financial reorganization or restructuring. Disappearance of an active market for that financial asset because of financial difficulties, Indication that there is a measurable decrease in the estimated future cash flows from the group of financial assets including: 1. Adverse changes in the payment status of the borrower in the group (e. g. increase number of delayed payments. 2, National or local economic conditions that correlate with difficulties on the assets in the group (example, increase in the unemployment rate, decrease in proper Price for mortgages in the relevant areas, adverse changes in industry conditions affect the borrower in the group). If there is objective evidence that the receivables are impaired an impairment loss should be recognized. The amount of the loss is the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate. The carrying amount of the receivables shail be reduced either directly or through use of an allowance account and the amount of the loss shall be recognized in profit or loss. 6. Transfer of receivables: a. Pledging of Account receivable 1. Continue to recognize and report the receivable with appropriate disclosure. 2. Recognize the proceeds as a liability rather than as income 3. Charge interest on the carrying value of the liability Assignment of Account receivable 1. Transfer the account receivable to account receivable assigned 2, Recognized the proceeds as a liability and charge interest on the carrying value of the liability 3. Changes in the value of the assigned receivable such as, returns, write-offs and collections with-in or after the discount period are accounted the usual way with a corresponding credit to the account “Account Receivable Assigned”. 4. Any balance in the Account Receivable Assigned is reported and classified in the same manner for outstanding account receivables. Factoring of Accounts receivab! The receivables are sold to a factor, which then collects the cash from the customers. The factor makes a profit either by charging a fee, charging interest, or by paying below face value for the receivables. The company selling its receivables is nearly always referred to as the seller, even if the receivables have not been sold in the eyes of accounting theory. Typical arrangement might include the following terms: 1. The setler will assign (sell) some or all of its receivables to the factor. 2, The factor will then advance a percentage of the amount factored, The amount advanced will typically be about 70% - 90% of the face value of the receivables. 3. The factor can be repaid in a number of ways: a. The factor may collect in all the cash from the customers, and then pass on the balance to the seller (less any charges). b. The seller may repay the advance after a specified period of time (plus any charges). 4. The factor may charge the seller a fee based upon the length of time that it takes to collect in the receivables. 5. Receivables may be factored with recourse (hybrid method) or without recourse (continuing agreement method). @, With recourse means that the seller has to reimburse the factor for any unpaid receivables. Sometimes this is timited to a fixed amount. b. Without recourse means that the factor bears the cost of unpaid receivables. There will obviously be a higher charge for this service to compensate the factor for the higher risks taken. 6. The factor may also administer the sales ledger for a separate fee. This will have no effect on the accounting treatment. yey iett {PRACTICAL ACCOUNTING 1 Receivables (Lecture) Accounting for factoring of receivables: 1, If the receivables have been sold, then they will be removed from the balance sheet and replaced by cash. However, if the seller retains significant risks and benefits relating to the receivable like, slow payment risks (time value of money), non-payment risks and the benefit of being paid more or sooner than expected, the seller should continue to recognize the asset and the proceeds of sale will be recognized as a liability in the balance sheet. If all the benefits and risks have been disposed of, then there has been a genuine sale and the receivables will be derecognized. The difference between the net proceeds plus any amount retained by the factor and the amortized cost a (face - allowances for returns, discounts and bad debts, if any) of the receivable factored will be charged to profit or loss. Any amount retained by the factor (e.g. Factors’ holdback or Receivable from factor) is recognized and reported as current asset. Discounting of Notes Receivable - generating cash out of the note prior to maturity, the discounting may be recorded as a borrowing or as a sale. It is to be recorded as @ borrowing when the payee has the option to repurchase the nate or if the entity retains substantially all the risks and rewards of ownership of the financial asset. An entity has retained substantially all the risk and rewards of ownership of a financial asset if its exposure to the variability in the present value of the future net cash flows from the financial asset does not change significantly as a result of the transfer (example - because the company has sold the financial asset but subject to an agreement to buy it back at a fixed price or the sales price plus a lenders retur). Most discounting of note receivables are treated as a sale, and a sale of financial asset requires derecognition from the accounting records since there has been a transfer of contractual rights to receive the cash flows of the financial asset, any gain or loss on derecognition is reported in the current period profit or loss. The gain or loss is determined by the difference of the selling price(net proceeds) and the carrying value of the financial asset. The carrying value of the financial asset (note receivable) is the combined amount of the present value or amortized cost of the note and any accrued interest on the date of sale. CAL ACCOUNTING 1 _C. Uberita/C. Espenilla/G. Macariola Loans and Receivables WV On December 31, 2012, the “Receivables” account of G Company shows a debit balance of P5,950,000. . ‘Subsidiary details show the following: ‘Accounts receivable. P725-000: Notes receivable, P106 000: Installments receivable, normally due 1 year to two years. P306,000; Customers’ accounts reporting csedit balances arising from sales returns. P30.000, Advance payments for purchase of merchandise, P1S6,000: Cash advances to subsidiary, P400,000: Claim from insurance company. P15.800; Subscription receivable due in 60 days. P300.000: Accrued interest receivable. P10,000. Deposit on contract bids. P3,000,000 and Advances to shareholders (collectible in 2014). 1,000,000. How much is the amount to be presented as “loans and receivables” under current assets section of the statement of financial position? a. P 725,000 . P1,590,000 bP 1,125,000 # P1,600,000 On January 1, 2012, F Company’ Trade Loans and Receivable has an outstanding balance of P500,000. Below are the transactions in its Trade Loans and Receivabies and other related accounts during 2012: ree \ 3 Total Sales including a PS00,000 cash sales, P7,700,000; Account receivable written-off, P50.000: Notes receivable to settle accounts, P800.000. : Purchases on account. P7.800.000; Payments to creditors, P6,400,000; Purchase discounts, P520,000; Total Sales retums,P50.000 of which P20.000 weréSales on a cash basis: Amount received trom credit customers. P4,900,000; Notes given to settle accounts, P500.000; Purchase returns, P140.000, Payments of notes, P200,000; Discounts taken by customers, P80.000; Proceeds from collection on notes receivable including interest of P10,000, P370,000. Provision for future returns and discounts on outstanding receivables,(P25,000.) ‘What is the amortized gost of the Loans and Receivable on December 31, 20127 - 2.255.000 c, P2,725.000 b. P2,280,000 d. P2,780,000 On the December 31, 2012 balance sheet of Microwave Company, the current receivables consisted of the following: ‘Trade accounts receivable P232,500 — Provision for uncollectible accounts (5,000) Claim against shipper for goods lost in transit (Oct. 2013) 7,500 Selling price of unsold goods sent by Microwave to consignee 65,000 * Security deposit on lease of warehouse used for storing inventories — 75,000 ~ Tota! 375,000 ‘What is the amortized cost of Microwave"'s current receivable as of December 31, 20127 & P235,000 ‘¢. P310.000 ‘b. P300,000 4, P375,000 Mould Corp. sells to wholesalers on terms of 2/15, 9/30. Mould has no cash sales but based on historical experience $0%-of Mould’s customers take advantage of the discount. Mould uses the gross method of Fecording sales and trade receivables. An analysis of Mould’s trade receivables balances at December 31, 2012 revealed the following: Age Amount Collectibitity, 0-15 days 300,000 100% 16-30 days 180,000 95% 31-60 days 15,000 90% 915 Over 60 days 2,300 P1500 Pape tat 502,500 BeSA/ PRACTICAL ACCOUNTING 1: Loans and recetvable Question J: In its December 31. 2012 statement of financial position, what amount should Mould report for provision for discounts? A P3.000 . P5025 6 Paseo 4. 6,000 Question 2: What is the amortized cost of the receivable on December 31, 20127 z P483.000 ©. P493,000 bs. PaB6.000 4. P499,500 5 Megabank granted an $96, 3-year P6,000,000 loan to Global Company on January 1, 2010. The interest on the loan is payable every December 31. Megabank incurred P148,122of direct origination cost but an origination fee of P300,000 was charged against Global Company. The effective rate on the Joan as a result of the origination fee and cost is now 9%, GEG, 12% ‘Question 1: What is the amortized cost of the loan on December 31, 2011 in Megabank’s accounting books? a. PS848.122 (ef PSIG. 954 b. PS.894.453 ‘d. P6,000.000 ‘Question 3 Whet amount of inerest income should Megabank disclose in its December 31, 20117 2. PS26,331 . P535,086 ye P530,s00 4. 540,000 6. On January 2, 2010, Star Company originates a 10-year 7% P4,000,000. The loan carries an annual interest rate of Ze and is repayable at par atthe end of year 10 (December 31, 2019), Star pogpgny charges a 125% (50,000) non-refundable loan origination fee to the borrower and also incurs PHSAEM in direct origination costs. The contract specifies that the borrower has an option fo pre-pay the instrument at approximately equal 47% {0 instrument's amortized cost at each exercise date, and that no penalty will be charged for pre-payment. But at * the inception of the contract, Star Company expects the borrower not to pre-pay, the amortization period is ‘equal to the instrument's full term and for that reason the eflective yield rate is determined at 6.823%. What is the amortized cost of the instrument on December 31, 20162 7 P4.018,640 ©. P4,029,167 P4.025,077 4. P4,033.932 7. On Dee. 2, 2012, Peter Company assigned P1.000,000 of accounts receivable to Paul Finance as a security for a ‘one-year foan of P600,000. Paul Finance charged a 2% commission on the amount of the loan: the interest rate (on the note was 10%. During December, Pete: collected P245,000 on assigned accounts after deducting PS,000 of discounts. Peter Company accepted returns worth P10,000 and wrote off assigned accounts totaling P9,060. ‘What amount of receivable should Paul Company continue to disclose in its December 31, 2012 statement of financial position? a none ©. P736,000 b. P731,000 4, P740,000 8. On November |, 2012, Jude Company assigned on a non-notification basis accounts receivable of 4,000,000 to a bank in consideration for a 24% interest bearing loan. ‘The loan value was 80% of the receivables assigned and a 5% service fee on the accounts assigned was charged by the finance company. Jude Company collected assigned accounts of P1,500,000 and P1,000,000, net of P75,000 and P50,000 discounts on November 30 and December 31, respectively, and remitted the collections to the finance company on a monthly basis in partial ra for the loan. ‘The finance company applied first the collection to the interest and the balance to the Principal. Question {: What amount of financial lisbility should Judas C in its ber 31, ‘statement of financial position? cf etait cies hay & none c. P799.280 b. 700,000 4. 828,000 ~ loans and receivable should Jude Company continue to recognize n y inancial position assuming the company expects to provide cash discounts on the outstanding receivables and itis hight “ompany wil discount and the reasonable amount is P100,000? See ee oe eee fn ©. P1.275,000 B.. P1Ame0 4, P1.500,000 Oo1w« provision hae esol: Pacitie Corporation factored receivables with a face amount of P6O0,000 (with existing PAM, 00 to Pane cits tthe smount of P12,000) to Atlanta Corperaion. Atlanta Corporation advances O08) to Pacific and retains 5% of the receivables, Pacific Corporation incurred and paid P6,000 i Cost related to the factoring, ant: What amount of loss from the transfer should Pacific recogn is considered as a salg? assuming the factoring agreement Nef fied (Burgers zon) Sal owe &. 74.000 Hood Coot luo tt ite) SF. 66o 000 ‘d. P88,000 74.00 sduestivn 2: What amount of loss from the transfer should Pacific recognize assuming the factoring agreement 'S considered as borrowings? Fone ¢ P74,000 b. P68,000 . P-88,000 1.8 S tember 30, 2012 Garamond Company discounted at the bank a customer's P600,000, 6-month, 10% note receivable dated May 31, 2012. The bank discounted the note at 12%.

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