HOMEWORK ON RECEIVABLES

Problem 1

The net realizable value of Red Band Corp.’s accounts receivable at the end of the year was P1,800,000. At the
beginning of the year, the allowance for doubtful accounts had a balance of P120,000. Charges to bad debts expense
for the year were P160,000 and accounts receivable amounting to P80,000 were written off.

Determine the gross amount of Red Band’s accounts receivable at the end of the year.

Problem 2

An examination of the 2018 financial statements of McAvoy Co. discloses the following information:

2017 2018
Accounts receivable, end P558,000 P561,300
Allowance for doubtful accounts, end 22,200 21,000
Allowance for sales returns and allowances, end 14,100 11,748
Gross sales returns and allowances (estimated for the
year) 14,700 15,600
Estimated bad debts for the year 21,600 22,500
Sales discounts not taken at end of year 0 1,200
Credit sales during the year (terms, 2/10, n/60) 1,125,000 1,140,000
Cash collected on accounts receivables during the year
(net of discounts taken) 1,056,000 1,102,500

Required:

Reconstruct the journal entries that were made by McAvoy during 2018 to record the changes in the following
accounts. (Assume that sales returns and allowances are estimated in the period of sales and the net method is used
in accounting for sales discounts.)

1. Allowance for doubtful accounts

2. Allowance for sales returns and allowances
3. Accounts receivable

Problem 3

McHale Co. prepared the following analysis of its accounts receivable on Dec. 31, 2018:

0-30 days 4,000,000

31-60 days 2,500,000
61-90 days 1,200,000
91-180 days 600,000
Over 180 days 120,000
For five years, McHale has experienced the uncollectability of its accounts receivables for the last five years:

End of year % uncollectible on days overdue

Year
balance 0-30 31-60 61-90 90-180 Over 180
2017 9,700,000 6 9 22 55 84
2016 9,300,000 5 8 18 64 75
2015 8,800,000 2 9 20 62 82
2014 8,200,000 3 12 24 59 80
2013 7,500,000 4 7 16 60 79

Before any adjustments were made, the balance of the allowance for doubtful accounts was P150,000. McHale
computes for the balance of the allowance for doubtful accounts at the average percentage of the losses for the last
five years.

Compute for McHale’s doubtful accounts expense and ending allowance for doubtful accounts balance.

Problem 4

Sabbith Co. purchases the accounts receivable of other companies on a without recourse, notification basis. At the
time the receivables are factored, 15% of the amount factored is charged to the client as commission and recognized
as revenue in Sabbith’s books. Also, 10% of the receivables factored is withheld by Sabbith as protection against
sales returns or other adjustments. This amount is credited by Sabbith to the Client Retainer account. At the end of
each month, payments are made by Sabbith to its clients so that the balance in the Client Retainer account is equal to
10% of unpaid factored receivables. Based on Sabbith’s bad debt loss experience, an allowance for bad debts of 5%
of all factored receivables is to be established. Sabbith makes adjusting entries at the end of each month.

On January 3, 2018, Munn Co. factored its accounts receivable totalling P1,000,000. By January 31, P800,000 of
these receivables had been collected by Sabbith.

Prepare the entries on Sabbith’s and Munn’s books to record the above information.

Problem 5

Skinner Corp. required additional cash for its operation and used its accounts receivable to raise such needed cash,
as follows:

On December 1, 2018, Skinner assigned on a non-notification basis accounts receivable of P4,000,000 to a bank in
consideration for a loan of 90% of the receivables less a 0.5% service fee on the accounts assigned. Skinner signed a
note for the bank loan. On December 31, 2018, Skinner collected assigned accounts of P2,400,000 less discount of
P160,000. Skinner remitted the collections 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 1.25% per month on the loan balance.

Skinner sold P1,750,000 of accounts receivable for P1,350,000. The receivables had a carrying amount of P1,600,000
and were sold outright on a non-recourse basis.
Skinner received an advance of P400,000 from Waterston Bank by pledging P350,000 of accounts receivable.

On December 31, 2018, Skinner discounted at a bank a customer’s P1,200,000, 10-month, 10% note receivable dated
April 30, 2018. The bank discounted the note at 15% on the same date.

1. In its December 31, 2018, statement of financial position, how much should Skinner report as note payable in its
current liabilities section?
2. How much is Skinner’s equity in the assigned accounts receivable as of December 31, 2018?
3. How much were the proceeds from the note receivable discounted on December 30?
4. How much was debited to the Allowance for Doubtful Accounts during the sale of the receivables?

Problem 6

On March 1, 2019, Exile Co. discounted its P1,000,000, 10%, 9-month note to a financial institution. The note was
dated January 1, 2019, and the institution discounted the note at 12%.

How much did Exile receive on March 1?

Problem 7

Ruffalo Corp. received a 5-year, 8% note from Stokes Inc. for the sale of its inventory on Jan. 1, 2018. The items cost
Ruffalo P1,200,000 and were sold for P4,000,000, the face value of the note signed by Stokes. The note pays interest
every June 30 and Dec. 31. The effective interest on this note is 10%.

1. What is the amount of the note at initial recognition?

2. How much is the interest revenue recorded by Ruffalo on 2019?
3. What is the carrying value of the note at the end of 2020?
4. What is the unamortized discount on the note on Dec. 31, 2021?

Problem 8

On January 1, 2019, Clark Co. received a P3,000,000, 10% note from a customer upon the sale of its goods. The note
is to be paid in six equal semi-annual installments, plus interest on the outstanding balance every June 30 and
December 31, starting June 30, 2019. The effective rate on the note is 9%.

1. How much is the note upon initial recognition?

2. How much is the interest income recognized by Clark in 2019?
3. How much is the carrying amount of the note on December 31, 2020?
Problem 9

On January 1, 2019, Brave Co. received a P4,000,000, noninterest-bearing note from a borrower. The note is to be
paid in 16 quarterly installments starting January 1, 2019. The effective rate on this note is 12%.

1. How much is the note upon initial recognition?

2. How much is the interest income recognized by Brave in 2019?
3. How much is the carrying amount of the note on December 31, 2020?

Problem 10

Hoying Corp. included the following in its notes receivable as of December 31, 2018:

Note receivable from sale of land P880,000

Note receivable from consultation 1,200,000
Note receivable from sale of equipment 1,600,000

In connection with your study of the accounts, you were able to gather the following transactions during 2018 and
other information pertaining to the company’s notes receivable:

a. On January 1, 2018, Hoying sold a tract of land. The land, purchased 10 years ago, was carried on Hoying’s
books at a value of P500,000. Hoying received a noninterest-bearing note for P880,000. The note is due on
December 31, 2019. There is no readily available market value for the land, but the current market rate of interest
for comparable notes is 10%.
b. On January 1, 2018, Hoying finished consultation services and accepted in exchange a promissory note with a
face value of P1,200,000, a due date of December 31, 2020, and a stated rate of 5%, with interest receivable at
the end of each year. The fair value of the services is not readily determinable and the note is not readily
marketable. Under the circumstances, the note is considered to have an appropriated imputed interest rate of 10%.
c. On January 1, 2018, Hoying sold equipment with a carrying amount of P1,600,000 to Grassi Corp. As payment,
Grassi gave Hoying a P2,400,000 note. The note bears an interest rate of 4% and is to be repaid in three annual
instalments of P800,000, plus interest on the outstanding balance. The first payment was received on December
31, 2018. The market price of the equipment is not reliably determinable. The prevailing rate of interest for notes
of this type is 14%.

1. How much is the consultation service fee revenue should Hoying recognize in 2018?
2. How much is the gain on the sale of the equipment?
3. How much is the noncurrent notes receivable as of December 31, 2018?
4. How much is the current portion of the long-term notes receivable as of December 31, 2018?
5. How much is the interest income to be recognized in 2018?

June 2019