Chapter 3 – Receivables

CHAPTER 3 - RECEIVABLES

Question no. 7

a. Accounts Receivable
b. Receivables from Employees (part of non-trade receivables) – current assets
c. Advances to Suppliers – Current assets
d. Accounts Receivable
e. Customers’ Accounts with Credit Balances – Current Liabilities
f. Cost of merchandise must be included in inventories
g. Accounts Receivable
h. Subscriptions Receivable – current asset if collectible within 12 months;
otherwise, non-current asset
i. Other Non-Trade Receivables – Current asset or non-current asset depending on
terms of payment
j. Advances to Suppliers – Current Assets
k. Suppliers’ Accounts with Debit Balances or Advances to Suppliers – Current assets
l. Accounts Receivable
m. Claims for Income Tax Refund – Current Assets
n. Accounts Receivable, amount of loan presented separately as part of liabilities
o. Accounts Receivable
p. Not recognized anymore (for write off)

PROBLEMS

3-1 (Ginoo Company)

Gross Method
(Correction to the Text: Delete the second transaction on Dec. 10: Collected from
First Lady in full.)
Dec. Accounts Receivable-First Lady 68,400
9
Sales 68,400
80,000 x 90% x 95%

10 Accounts Receivable-Men’s World 50,000

Sales 50,000

19 Cash 67,032
Sales Discounts 1,368
Accounts Receivable-First Lady 68,400

26 Accounts Receivable-Teens’ Kingdom 40,000

Sales 40,000

31 Sales Discounts 800

Allowance for Sales Discounts 800

Jan. 5 Cash 39,200

Allowance for Sales Discounts 800
Accounts Receivable-Teens’ Kingdom 40,000

9 Cash 50,000
Accounts Receivable-Men’s World 50,000

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Chapter 3 – Receivables

Net Method
Dec. Accounts Receivable-First Lady 67,032
9
Sales 67,032
68,400 x .0.98

10 Accounts Receivable-Men’s World 49,000

Sales 49,000

19 Cash 67,032
Accounts Receivable-First Lady 67,032

26 Accounts Receivable-Teens’ Kingdom 39,200

Sales 39,200

31 Accounts Receivable-Men’s World 1,000

Sales Discount Forfeited 1,000
Accounts Receivable-Teens’ Kingdom 39,200

9
Cash 50,000
Accounts Receivable-Men’s World 50,000
Allowance Method
Dec. Accounts Receivable-First Lady 68,400
9
Allowance for Sales Discount 1,368
Sales 67,032

10 Accounts Receivable-Men’s World 50,000

Allowance for Sales Discount 1,000
Sales 49,000

Dec. Cash 67,032

19
Allowance for Sales Discount 1,368
Accounts Receivable-First Lady 68,400

26 Accounts Receivable-Teens’ Kingdom 40,000

Allowance for Sales Discount 800
Sales 39,200

31 Allowance for Sales Discount 1,000

Sales Discount Forfeited 1,000

Jan. 5 Cash 39,200

Allowance for Sales Discount 800
Accounts Receivable-Teens’ Kingdom 40,000

9 Cash 50,000
Accounts Receivable-Men’s World 50,000

3-2 (Colayco Company)

(1)
July Allowance for Doubtful Accounts 10,000
14
Accounts Receivable-Moret Co. 10,000

31 Notes Receivable 12,000

Sales 12,000

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Chapter 3 – Receivables

Aug. Cash 20,000

15
Notes Receivable 15,000
Sales 35,000

Nov. Cash 19,200

1
Credit Card Service Charge 800
Sales 20,000
4% x 20,000 = 800

Nov. 4 Accounts Receivable-P. Noval 12,300

Notes Receivable 12,000
Interest Revenue 300
12,000 x .10 x 90/360 = 300

5 Accounts Receivable-Credit Card 9,000

Sales 9,000

Nov. 9 Cash 8,550

Credit Card Service Charge 450
Accounts Receivable-Credit Card 9,000
5% x 9,000 = 450
Nov. Accounts Receivable-Moret Co. 10,000
15
Allowance for Bad Debts 10,000

15 Cash 10,000
Accounts Receivable-Moret Co. 10,000

Dec. Cash 15,600

13
Notes Receivable 15,000
Interest Income 600
15,000 x 12% x 120/360 = 600

3-3 (Format Company)

a. Carrying value of the note on January 1, 2009

P6,000,000 x 0.65752
P3,945,120
Prevailing interest rate
15%
Interest revenue for 2009 P 591,768

b. Carrying value, January 1, 2009

P3,945,120
Add amortization of discount during 2009 591,768
Carrying value, December 31, 2009 P4,536,888

(or simply P3,945,120 x 1.15 = P4,536,888)

3-4 (Formatted Company)

a. Carrying value of the note on January 1, 2009 (P2 M x 2.28323)

P4,566,460

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Chapter 3 – Receivables

Interest rate 15%

Interest revenue for 2009 P 684,969

Carrying value, December 31, 2009

4,566,460 + 684,969 – 2,000,000 P3,251,429
Interest rate 15%
Interest revenue for 2009 P 487,714

b. Carrying value, January 1, 2009

P4,566,460
Add amortization of discount during 2009 684,969
Less first payment of principal
(2,000,000)
Carrying value, December 31, 2009 P3,251,429

3-5 (HRV Company)

Accrued interest at June 30, 2009 (3,000,000 – 1,000,000) x 12% P

240,000

3-6 (FX Corporation)

a.
2009
Jan. 1 Notes Receivable 100,000
Accumulated Depreciation 420,000
Loss on Sale of Equipment 8,820
Equipment 500,000
Discount on Notes Receivable 28,820
100,000 x 0.7118 = 71,180
80,000 – 71,180 = 8,820 Loss on Sale
100,000 – 71,180 = 28,820 Discount
b.
2009
Dec. 31 Discount on Notes Receivable 8,542
Interest Revenue 8,542
12% x 71,180
2010
Dec. 31 Discount on Notes Receivable 9,567
Interest Revenue 9,567
12% x (71,180 + 8,542)
2011
Dec. 31 Discount on Notes Receivable 10,711
Interest Revenue 10,711
12% x (71,180 +8,542 + 9,567)
(or 28,820 – 8,542 – 9,567)

Dec. 31 Cash 100,000

Notes Receivable 100,000

3- 7 (Pinky Pop Company) (Solutions were based on PV factors rounded to five

decimal places)

The note is interest-bearing, but the rate of interest of the note is unreasonably lower
than the prevailing rate for similar obligation. Thus, the present value of the note is
determined as follows:

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Chapter 3 – Receivables

2.5 M + (5% x 7.5 M) = 2,875,000 x 0.89286

P2,566,972
2.5 M + (5% x 5.0 M) = 2,750,000 x 0.79719
2,192,273
2.5 M + (5% x 2.5 M) = 2,625,000 x 0.71178
1,868,422
Total P6,627,667
or 2.5 M x 2.40183 P6,004,575
(5% x 7.5 M) x 0.89286 334,822
(5% x 5.0 M) x 0.79719 199,298
(5% x 2.5 M) x 0.71178 88,972
Total P6,627,667

a. Amortization Table

Payment of Interest Interest Amortizatio Carrying

Date Principal Paid Revenue n of Value
Discount
01/01/09 6,627,667
12/31/09 2,500,000 375,000 795,320 420,320 4,547,987
12/31/10 2,500,000 250,000 545,758 295,758 2,343,745
12/31/11 2,500,000 125,000 281,255* 156,255* ------------

*rounded off

b. Journal entries
2009
Jan. 1 Notes Receivable 7,500,00
0
Discount on Notes Receivable 872,333
Gain on Sale of Land 627,667
Land 6,000,00
0
7,500,000 – 6,627,667 = 872,333 Discount
6,627,667 – 6,000,000 = 627,667 Gain

2009
Dec. 31 Cash 2,875,00
0
Discount on Notes Receivable 420,330
Interest Revenue 795,320
Notes Receivable 2,500,00
0
2010
Dec. 31 Cash 2,750,00
0
Discount on Notes Receivable 295,758
Interest Revenue 545,758
Notes Receivable 2,500,00
0
2011
Dec. 31 Cash 2,625,00
0
Discount on Notes Receivable 156,255

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Chapter 3 – Receivables

Interest Revenue 281,255

Notes Receivable 2,500,00
0

3.9 Pinky Pip Company

The note is interest-bearing, but the rate of interest of the note is unreasonably
higher than the prevailing rate for similar obligation. Thus, the present value of the
note is determined as follows:
2.5 M + (18% x 7.5 M) = 3,850,000 x 0.8929 P3,437,665
2.5 M + (18% x 5.0 M) = 3,400,000 x 0.7972 2,710,480
2.5 M + (18% x 2.5 M) = 2,950,000 x 0.7118 2,099,810
Total P8,247,955

or 2.5 M x 2.4018 P6,004,500

(18% x 7.5 M) x 0.8929 1,205,415
(18% x 5.0 M) x 0.7972 717,480
(18% x 2.5 M) x 0.7118 320,310
Total P8,247,705*
*Difference in the computations is due to rounding off

b. Amortization Table

Payment of Interest Interest Amortizatio Carrying

Date Principal Paid Revenue n of Value
Premium
01/01/09 8,247,955
12/31/09 2,500,000 1,350,000 989,755 360,245 5,387,710
12/31/10 2,500,000 900,000 646,525 253,475 2,634,235
12/31/11 2,500,000 450,000 315,765* 134,235* ------------

*Difference is due to rounding off

b. Journal entries
2009
Jan. 1 Notes Receivable 7,500,00
0
Premium on Notes Receivable 747,955
Gain on Sale of Land 2,247,95
5
Land 6,000,00
0
8,247,955 – 7,500,000 = 747,955 Premium
8,247,955 – 6,000,000 = 2,247,955 Gain
2009
Dec. 31 Cash 3,850,00
0
Premium on Notes Receivable 360,245
Interest Revenue 989,755
Notes Receivable 2,500,00
0
2010
Dec. 31 Cash 3,400,00

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Chapter 3 – Receivables

0
Premium on Notes Receivable 253,475
Interest Revenue 646,525
Notes Receivable 2,500,00
0
2011
Dec. 31 Cash 2,950,00
0
Premium on Notes Receivable 134,235
Interest Revenue 315,765
Notes Receivable 2,500,00
0

3-9 (Word Company)

Bad Debts Expense P52,000

Allowance for Bad Debts 50,000

Required balance in allowance account:

(2% x 500,000) + (10% x 200,000) + (20% x 100,000)
P50,000
Reported balance in allowance before adjustments (debit)
2,000
Required adjustment charged to bad debts expense
P52,000

3-10 (Edit Company)

Allowance for Uncollectible Accounts, beg P 6,000

Recovery of accounts previously written off
3,000
Uncollectible accounts expense for 2009
48,000
Allowance for Uncollectible Accounts, end (12,000)
Accounts written off during 2009 P45,000

3-11 (Toyota Products, Inc.)

a. Accounts Receivable 4,800,000

Sales 4,800,000

b. Cash 3,920,000
Sales Discounts 80,000
Accounts Receivable 4,000,000

c. Allowance for Uncollectible Accounts 20,000

Accounts Receivable 20,000

d. Accounts Receivable 5,000

Allowance for Uncollectible Accounts 5,000

Cash 5,000
Accounts Receivable 5,000

e. Notes Receivable 25,000

Accounts Receivable 25,000

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Chapter 3 – Receivables

h. Cash 400,000
Notes Payable-Bank 400,000

Cash 150,000
Accounts Receivable 150,000

Notes Payable-Bank 150,000

Cash 150,000

i. Uncollectible Accounts Expense 65,000

Allowance for Uncollectible Accounts 65,000
9,000 – 20,000 + 5,000 = 6,000 debit
59,000 + 6,000 = 65,000

j. Interest Receivable 250

Interest Revenue 250
25,000 x 12% x 30/360

Accounts Receivable
(450,000+4,800,000–4,000,000–20,000–25,000–150,000)
P1,055,000
Less Allowance for Uncollectible Accounts
59,000
Net realizable value/Net amortized cost P
996,000

3-12 (Rav, Inc.)

Accounts Receivable, December 31, 2008 P 337,000

Sales on account during 2009
1,500,000
Cash received from customers
(1,600,000)
Cash discounts allowed: (882,000 ÷ 98%) x 2% P18,000
(495,000 ÷ 99%) x 1% 5,000 ( 23,000)
Recovery of accounts written off
3,000
Accounts written off as worthless ( 11,000)
Credit memoranda for sales returns ( 6,000)
Accounts Receivable, December 31, 2009 P 200,000
Allowance for Uncollectible Accounts, December 31, 2008 P 12,000
Recovery of accounts written off
3,000
Accounts written off as worthless ( 11,000)
Impairment loss on receivables
15,000
Allowance for Uncollectible Accounts, December 31, 2009 P
19,000

The computation may also be conveniently done through T-accounts, as follows:

Accounts Receivable
Balance, beg 337,000 Collections 1,600,000
Sales on account 1,500,000 Cash discounts 23,000
Recovery 3,000 Write off 11,000
Sales returns 6,000

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Chapter 3 – Receivables

Total 1,840,000 Total 1,640,000

Balance, end 200,000

Allowance for Uncollectible Accounts

Write off 11,000 Balance, beg 12,000
Recovery 3,000
Impairment 15,000
Total 11,000 Total 30,000
Balance, end 19,000
3-13 (Revo Company)

Allowance for Uncollectible Accounts, January 1, 2009 P

34,000
Accounts written off ( 47,000)
Recovery of accounts previously written off
7,000
Additional accounts written off
( 6,000)
Allowance for Uncollectible Accounts, December 31, 2009
before adjustments (debit balance) (P 12,000)
Required balance in Allowance account based on aging:
(5% x 240,000) + (25% x 20,000) + (50% x 30,000) + (90% x 24,000)
53,600
Required adjustment/Doubtful Accounts Expense for 2009
P65,600

Accounts Receivable, December 31, 2009 P654,000

Less Allowance for Uncollectible Accounts 53,600

Net amortized cost P600,400

3-14 (Adventure Company)

a. Accounts Receivable, January 1 P 1,200,000

Sales during 2009 10,000,000
Cash collected from customers (8,720,000)
Recovery of accounts previously written off 20,000
Note received in settlement of an account ( 400,000)
Accounts written off as worthless ( 100,000)
Accounts Receivable, December 31 P 2,000,000
Accounts Receivable, December 31 P 2,000,000
Past due accounts 600,000
Current accounts/Not yet past due P 1,600,000

Required balance in Allowance for Uncollectible Accounts:

20% x 600,000 past due accounts P 120,000
5% x 1,400,000 current accounts 70,000
Total P 190,000

b. Allowance for Uncollectible Accounts, end P 190,000

Accounts written off during the year as worthless 100,000
Recovery of accounts previously written off ( 20,000)
Allowance for Uncollectible Accounts, beg ( 60,000)
Uncollectible Accounts Expense for year 2009 P 210,000

c. Accounts Receivable P 2,000,000

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Chapter 3 – Receivables

Less Allowance for Uncollectible Accounts 190,000

Net amortized cost P1,810,000

3-15 (ABC Realty)

Alternative 1
Carrying value (10 M + 1.2 M) 11,200,000
Present value of future cash inflows:
Principal due on 12/31/11
9M x 0.7972 P7,174,800
Interest for 2 years
9M x 8% = 720,000; 720,000 x 1.6901 1,216,872 8,391,672
Impairment loss P2,808,328
Entry: Restructured Notes Receivable 8,391,672
Impairment Loss – Receivables 2,808,328
Notes Receivable 10,000,000
Interest Receivable 1,200,000

Alternative 2
Carrying value (10 M + 1.2 M) 11,200,000
Present value of future cash inflows:
2M + (8% x 10M) = 2,800,000 x 0.89292,500,120
2M + (8% x 8M) = 2,640,000 x 0.79722,104,608
2M + (8% x 6M) = 2,480,000 x 0.71181,765,264
2M + (8% x 4M) = 2,320,000 x 0.63551,474,360
2M + (8% x 2M) = 2,160,000 x 0.56741,225,584 9,069,936
Impairment loss 2,130,064

Entry: Restructured Notes Receivable 9,069,936

Impairment Loss – Receivables 2,130,064
Notes Receivable 10,000,000
Interest Receivable 1,200,000

Alternative 3
Carrying value 10,000,000
Present value of future cash inflows:
Principal due on 12/31/09
10M x 0.7972 7,972,000
Interest due on 12/31/10 and 12/31/11
10M x 9% = 900,000; 720,000 x 1.6901 1,521,090 9,493,090
Impairment loss 506,910

Entry: Restructured Notes Receivable 9,493,090

Impairment Loss – Receivables 506,910
Notes Receivable 10,000,000

Alternative 4
Carrying value 11,200,000
Present value of future cash inflows:
Principal due on 12/31/11
11.2M x 0.797193876 8,928,572
Interest due on 12/31/10 and 12/31/11
11.2M x 12% = 1,344,000;
1,344,000 x 1.6900510 2,271,428 11,200,000
Impairment loss ---------

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Chapter 3 – Receivables

3-16 (Edsamail Company)

(a) Maturity value = 500,000 + (500,000 x .08) = 540,000

Proceeds = 540,000 – (540,000 x .10 x 5/12) = 517,500

(b) Interest Receivable 23,333

Interest Revenue 23,333
500,000 x 8% x 7/12

Cash 517,500
Loss on Sale of Notes Receivable 5,833
Notes Receivable 500,000
Interest Receivable 23,333

3-17 a. Proceeds 90,000 – (90,000 x 0.15 x 20/365) = P89,260

b. Maturity value 75,000 + (75,000 x 0.15 x 90/365) = P77,774

Proceeds 77,774 – (77,774 x 0.15 x 50/365) = P76,176

c. Maturity value 60,000 + (60,000 x 0.16 x 120/365) = P63,156

Proceeds 63,156 – (63,156 x 0.15 x 45/365) = P61,988

3-18 (Crosswind Corporation)

2009
Feb. 1 Notes Receivable 60,000
Accounts Receivable 60,000

April 1 Interest Receivable 1,600

Interest Revenue 1,600
60,000 x 16% x 2/12

1 Cash 61,320
Interest Expense 280
Liability on Discounted Notes 60,000
Interest Receivable 1,600
60,000 + (60,000 x .16 x 9/12) = 67,200
67,200 – (67,200 x .15 x 7/12) = 61,320
CV of Discounted Notes
61,600
Proceeds
61,320
Interest Expense
280

Nov. Liability on Discounted Notes 60,000

30
Accounts Receivable 68,700
Notes Receivable 60,000
Cash 68,700
67,200 + 1,500 = 68,700

3-19 (Lexus Company)

Amount of the loan P625,000

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Chapter 3 – Receivables

Less service charge (2% x 750,000) 15,000

Net proceeds from the assignment of accounts receivable
P610,000

Sept. 1 Accounts Receivable Assigned 800,000

Accounts Receivable 800,000

Cash 610,000
Finance Charges 15,000
Notes Payable – Pacific Bank 625,000

Sept 1- Cash 300,000

30
Accounts Receivable Assigned 300,000

Sept. 30 Notes Payable – Pacific Bank 300,000

Interest Expense (625,000 x 12% x 1/12) 6,250
Cash 306,250

Oct. 1- Allowance for Uncollectible Accounts 10,000

31
Accounts Receivable Assigned 10,000

Cash 400,000
Accounts Receivable Assigned 400,000

Oct. Notes Payable – Pacific Bank 325,000

31
Interest Expense (325,000 x 12% x 1/12) 3,250
Cash 328,250

31 Accounts Receivable 90,000

Accounts Receivable Assigned 90,000

3-20 (Explorer Company)

Accounts receivable factored

P2,000,000
Purchase price
85%__
Purchase price of accounts receivable factored P
1,700,000
Less amount withheld as protection against returns and allowances
5% x 1,700,000
85,000_
Net cash received from the factored accounts
P1615,000

Cash 1,615,000
Receivable from Factor 85,000
Loss on Factoring 300,000
Accounts Receivable 2,000,000

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Chapter 3 – Receivables

3-21 (Highlander Company)

a.
Sept. 1 Cash 684,000
Receivable from Factor 36,000
Loss from Factoring 80,000
Accounts Receivable 800,000
800,000 x 10% =80,000 Loss;
720,000 x 5% = 36,000 withheld

Nov. 1 Cash 582,000

Finance Charges 18,000
Notes Payable-Bank 600,000
3% x 600,000 = 18,000
b.
Dec. 31 Uncollectible Accounts Expense 10,400
Allowance for Uncollectible Accounts 10,400
(190,000 + 1,000,000) x 2% = 23,800 –
13,400

3.22 (Accord Company)

July 1 Accounts Receivable Assigned 4,000,000

Accounts Receivable 4,000,000

1 Cash 3,040,000
Finance Charges 160,000
Notes Payable – Bank 3,200,000
5% x 3,200,000 = 160,000

21 Sales Returns and Allowances 150,000

Accounts Receivable Assigned 150,000

31 Cash 2,450,000
Sales Discounts 50,000
Accounts Receivable Assigned 2,500,000
2% x 2,500,000 = 50,000

Aug 1 Notes Payable – Bank 2,500,000

Interest Expense 48,000
Cash 2,548,000
3,200,000 x 0.18 x 1/12 = 48,000

15 Allowance for Uncollectible Accounts 50,000

Accounts Receivable Assigned 50,000

Aug 31 Cash 1,000,000

Accounts Receivable Assigned 1,000,000

Sept 1 Notes Payable – Bank 700,000

Interest Expense 10,500
Cash 710,500
700,000 x 0.18 x 1/12 = 10,500

1 Accounts Receivable 300,000

Accounts Receivable Assigned 300,000

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Chapter 3 – Receivables

4,000,000– 150,000 – 2,500,000 - 50,000 – 1,000,000 =

300,000

3 – 23 (Fortune Company)

Oct. 1 Accounts Receivable Assigned 2,000,000

Accounts Receivable 2,000,000

1 Cash 1,440,000
Finance Charges 90,000
Notes Payable 1,500,000

31 Interest Expense 985,000

Notes Payable 15,000
Accounts Receivable Assigned 1,000,000

Nov. Notes Payable 515,000

30
Interest Expense 5,150
Cash 279,850
Accounts Receivable Assigned 800,000

MULTIPLE CHOICE QUESTIONS

Theory

MC1 A MC6 a MC11 c

MC2 A MC7 c MC12 a
MC3 A MC8 c MC13 d
MC4 A MC9 d MC14 a
MC5 C MC10 a MC15 c

Problems

MC16 b 450,000 x 1.4 = 630,000

630,000 – 585,000 = 45,000
MC17 d 105,000 x .90 = 94,500 (Invoice price/Gross)
94,500 x .98 = 92,610 (net price)
MC18 c 200,000 x .90 x .95 = 171,000 (Invoice price/Gross)
171,000 x .97 = 165,870 (Net)
MC19 b 1,300,000 + 5,400,000 + 25,000 – 4,750,000 – 125,000 = 1,850,000
MC20 a 360,000 ÷ 80% = 450,000
450,000 + 80,000 – 430,000 = 100,000
MC21 d 75,000 + 45,000 = 120,000
MC22 d 3% x 1,000,000 = 30,000
MC23 c 30,000 + 8,000 = 38,000
MC24 d 270,000 – 250,000 = 20,000
20,000 + 23,000 – 28,000 – 5,000 = 10,000
MC25 b 17,500 – 30,500 + 8,050 + 200,000 = 15,050
MC26 b 480,000 + 2,400,000 – 2,560,000 – 17,600 – 36,800* + 4,800 = 270,400
*1,411,200 ÷ .98 = 1,440,000 x 2% = 28,800
792,000 ÷ .99 = 800,000 x 1% = 8,000
28,800 + 8,000 = 36,800

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Chapter 3 – Receivables

MC27 a 19,200 + 4,800 – 17,600 = 6,400

5% x 270,400 = 13,520
13,520 – 6,400 = 7,120
MC28 a (5% x 600,000) + (10% x 40,000) + 14,000 = 48,000
MC29 b 20,000 + 7,500 – 12,500 – 3,700 = 11,300
MC30 d 50,000 + (50,000 x 10%) = 55,000
55,000 – (55,000 x .12 x 6/12) = 51,700
MC31 c 400,000 x .75 = 300,000
300,000 x 10% = 30,000
MC32 c 300,000 + 30,000 = 330,000
MC33 c 500,000 x 8% x 4/12 = 13,333; 500,000 + 13,333 = 513,333
500,000 + (500,000 x .08) = 540,000; 540,000 – (540,000 x .10 x 8/12) =
504,000
513,333 – 504,000 = 9,333 Interest Expense
MC34 b 1,250,000 - (2% x 1,250,000)} = 1,225,000
1,225,000 + 695,000 = 1,920,000
MC35 c 550,000 – [(500,000 x 0.8265) + (40,000 x 1.7355)] = 67,380

24