ACCOUNTS RECEIVABLE

RECEIVABLE – are financial assets that represent a contractual right to receive cash or another
financial asset from another entity.

For retailers and manufacturers, receivables are classified into:

 Trade Receivable
 Nontrade Receivable
TRADE RECEIVABLES

It is expected to be realized in cash within the normal operating cycle or one year, whichever is
longer, are classified as current assets.

2 types:

 ACCOUNTS RECEIVABLE
 NOTES RECEIVABLE

ACCOUNTS RECEIVABLE
Accounts receivable is the amount owed to a company resulting from the company providing
goods and/or services on credit. The term trade receivable is also used in place of accounts
receivable.
The amount that the company is owed is recorded in its general ledger account entitled Accounts
Receivable. The unpaid balance in this account is reported as part of the current assets listed on
the company's balance sheet.

When goods are sold on credit, the seller is likely to be an unsecured creditor of its customer.
Therefore, the seller should be cautious when selling goods on credit.

Good accounting requires that an estimate should be made for any amount in Accounts
Receivable that is unlikely to be collected. The estimated amount is reported as a credit balance
in a contra-receivable account such as Allowance for Doubtful Accounts. This credit balance
will cause the amount of accounts receivable reported on the balance sheet to be reduced. Any
adjustment to the Allowance account will also affect Uncollectible Accounts Expense, which is
reported on the income statement.
Accounts Receivable pt.2

Ano ba ang mga transactions na nakakaapekto sa Accounts Receivables? Lahat ng klase ng

pautang mo (lahat ng serbisyong binigay mo na hindi pa nababayaran o lahat ng bagay na may
kapalit na di pa nababayaran). In layman’s term, pautang. Kelan madadagdagan ang AR? Kapag
syempre, nagpautang ka (not necessarily nag-outlay ka ng cash. Pwedeng through service or
goods).

Kelan naman nababawasan ang AR? Kapag: nagbayad, nag sales return(assuming na credit sales),
at pag nag-write-off.

Madali lang naman ang basic theories ng account na “Accounts Receivable” nagiging mejo
kumplikado lang kapag may Bad Debts na.

Bad Debts
Sa business, hindi natin maiiwasan ang customer na balasubas o yung mga hindi nagbabayad.
Syempre, ano magiging epekto nun, nagpautang ka or nagbigay ka ng serbisyo mo para lang sa
wala so, isa syang loss. Kaya may bad debts expense.
Ok, dalawang methods ang pagmemeasure ng bad debts expense. Ang DIRECT WRITE-OFF at
ALLOWANCE METHOD.

Ang direct write-off, kinikilala mo lang ang bad debts kapag siguradong nataguan ka na nga ng
customer mo o pag bankrupt na ang customer at di na talaga sya makakabayad. PERO ang direct
write-off, as per IFRS and FASB, hindi na talaga allowed. Kaya kahit anong bansa ka magpunta
hindi ginagamit ang direct writeoff sa GAAP. Pero in practice, ginagamit pa naman yan lalo pag
immaterial ang amount. Pero since nasa school pa tayo, gawin natin kung ano ang sinasabi ng
GAAP.
Ang Allowance Method naman, inaassume nito na normal lang na may balasubas talaga na
mangungutang kaya every period, nagrerecognize tayo ng Bad Debts Expense. Ngayon, anong
logic nyan? Kasi, considering na hindi lahat ng customer mo siguradong makakabayad, magiging
parang OVERSTATED ang accounts receivable mo kung HINDI ka magrerecognize ng bad debts
every period. So, para makasunod sa principle of “Conservatism”, we recognize Bad Debts
Expense every period even though there’s no actual default from customers. Gets?
Ano mga entrada (allowance method nalang ha, kasi bale wala
naman yung direct w/off)?
To Recognize Bad debts Every Period

(dr) Bad Debts Expense

(cr) Allowance for Bad Debts
To Write Off Accounts:

(dr) Allowance for Bad Debts

(cr) Accounts Receivable
Account Recovery (tandaan, dalawang entry ah huwag i-net ang AR. Importante to for disclosure
kasi):

(dr) Accounts Receivable

(cr) Allowance for Bad Debts
(dr) Cash
(cr) Accounts Receivable
Bakit hindi innet agad ang Accounts Receivable, eh parang ganon din naman? Una, for disclosure
purposes. Pangalawa, papano kung nakarecover ka na pero hindi ka pa nakakakolekta (rare to’ng
case na to ah)?

Ok, sa allowance method, dalawang approaches ang estimation ng bad debts namely: Income
Statement approach at balance sheet approach.

Pag income statement approach, yung rate na given, inaapply sa Income Statement accounts
tulad ng Net Sales. Pag based sa income statement approach ang computation, yung
makokompute mo na amount, yun na mismo yung Bad Debt. So kunyari lang, may P1,000,000 ka
na net sales at ang estimation ng company for bad debts ay 5% ng net sales ang bad debts
expense mo ay yung P50,000 na mismo agad .
Pag balance sheet approach naman, yung rate na given, inapply sa Balance Sheet account,
which is the balance of the Accounts Receivable, usually, ending balance. Pag yun ang ginamit,
ang makokompute mong amount will be the ENDING BALANCE OF THE ALLOWANCE FOR BAD
DEBTS. So, importante gumamit ng T-Account para dito.
Ok, to Illustrate, let’s use the problem in your book

Info:
A/R, January 1, 2009 …………………………..1,200,000
Allowance for BD, Jan 1, 2009 …………………..60,000
Sales during 2009 ……………………………..10,000,000
Cash collected from customers …………………..8,720,000
The cash collected from customers included a 20,000 recovery from a customer whose account
was written off in prior year. On Nov 15, a customer settled his overdue account by issuing 1 15%,
4 month note fro 400,000. During 2009, accounts of 100,000 were written off as worthless.

Analysis of the accounts receivable at Dec 31, 2009 revealed that 600,000 were considered past
due. Management’s estimate of probable loss on past due accounts is 20% and on current
accounts at 5%

Define the ff:

-Adjusted balance of Allowance for BD at Dec 31, 2009
-Bad debts expense for year 2009
-Net amortized cost of A/R at Dec 31, 2009
Tip ko nga pala, pag nagsasagot kayo, gumamit kayo ng T-Account. At pag medyo madami,
himay-himayin. Tandaan, ang accounting parang pagkain. Pag pinag-sabaysabay mo,
mabubulunan ka, at mahihirapan ka. Kung hihimay-himayin mo, mas smooth at madali. Ok.

Ang technique dito, basahin yung problem at tignan kung papano makakaapekto sa AR Account

Sales:
Unahin natin yung sales. Ang ginagawa ko, pag walang sinabi kung magkano ang cash sales at
credit sales, ang assumption ko, lahat ng sales ay credit sales para mas madali at hindi maguluhan
ang aking isip.
Cash Collection:
Ok, sabi yung 20,000 daw, koleksyon ng recovery diba? So Yung 8,700,000 lang ang para sa
collection sa sales.
Ok, alalahanin ang entry. Makakaapekto ba yung 8,700,000 sa AR? Syempre, koleksyon yan eh.
Eh yung P20,000? Tignan natin:
Entry ng recovery:
(dr) AR 20,000
(cr) Allowance for Bad debts 20,000
(dr) Cash 20,000
(cr) AR 20,000
In effect, walang epekto sa AR kasi mao-offest din. Diba? So, yung makakaapekto lang ay yung
8,700,000

Overdue account for notes:

Bale ang nangyari dyan, since overdue na yung account ng customer, nag-issue nalang yung
customer ng promissory note para masiguro tayo na mababayaran talaga nya tayo. So, reclassify
nalang to NR.
(dr) Notes Receivable 400,000
(cr) AR 400,000
(syempre sa problem hindi nyo na kelangan mag-entries. Kaya nga sabi ko gumamit kayo ng T-
Account. Pinapakita ko lang dito sa entries kung papano ang epekto sa accounts. Pero pag
nagsosolve na kayo, galingan nyo na sa diskarte)

Accounts Written off

Ano epekto nyan? Bawas sa AR at bawas din sa ABD. So:

(dr) Allowance for Bad Debts 100,000
(cr) AR 100,000
O, baka tanungin sa quiz, “what is the effect of a write-off to the NET Accounts receivable”. Baka
sabihin nyo decrease, mali yun. Ang tama, NO EFFECT. Kasi, bumaba yung AR account at yung
contra account nya na ABD for the same amount so, NO EFFECT sa NET Accounts receivable. Eh
papano pag “what is the effect of a write-off to the Accounts receivable ACCOUNT”. Ang sagot,
decrease. Baket? Kasi ang tinatanong yung ACCOUNT mismo ng AR, yung GROSS pa, hindi yung
NET AR. Nakuha po? Iba ang “Accounts Receivable Account” sa “Net Accounts Receivable ah. Yung
una, pag dinagdag yung word na “account” ibig sabhihin gross yung tinatanong.

Ok, so, compute natin muna yung AR

So,
1,200,000 + 10,000,000 – 400,000 – 8,700,000 – 100,000 = P2,000,000
Eh yung ABD:
60,000 + 20,000 – 100,000 = 20,000 (debit balance)
Oops, di pa natatapos dyan ang istorya. Tandaan, mayron pang computation ng bad debts
expense!

Balik tayo sa 1a&b nyo. Anong klaseng entry ang Bad Debts Expense? Adjusting Entry. Kelan
ginagawa ang adjusting entry? At the end of the period. SO, TANDAAN, ipasok muna lahat ng
transaksyon na nakaapekto sa AR (sales, collection, etc) at sa ABD (writeoff and recoveries) BAGO
tayo mag-estimate ng bad debts expense. Malinaw?

So sabi sa problem, sa AR daw, 600,000 yung past due. Magkano yung current? Eh di 1,400,000.
Kaya importanteng ipasok muna lahat ng transaksyong nakakaapekto sa AR kasi para malaman
natin kung magkano ba ang “Current” at “Past Due” accounts at the end of the year. Naalala nyo
yung sabi ko kanina about computation of bad debts expense? Sa case na to, balance sheet yung
approach kasi based sya sa accounts receivable. So,

600,000 * 20% = 120,000

1,400,000 * 5% = 70,000
So, magkano dapat ang ENDING BALANCE mo ng ALLOWANCE FOR BAD DEBTS? Eh di
120,000+70,000= 190,000 credit balance.

Computation ng bad Debts expense:

Ok, since di ako makagamit ng t-account dito, I’ll use algebra nalang
-20,000 + x = 190,000
X = 190,000 + 20,000
X = P 210,000 Bad Debts Expense.
So sagutan na natin ang mga tanong:

Adjusted balance of Allowance for BD at Dec 31, 2009: P190,000

Bad debts expense for year 2009 P 210,000
Net amortized cost of A/R at Dec 31, 2009 (dati ang term ay Net Realizable Value, ngayon net
amortized cost na. papaliwanag ko mamaya kung bakit)
2,000,000 – 190,000 = P1,810,000
Ok po? Malinaw po sya? Susunod yung Amortization ng AR. Post muna kayo ng problem na may
impairment ng AR para mas maapply nyo. Tpos papaliwanag ko kung papano.   

Follow-up:

Ipaliwanag ko lang yung reason behind “Disclosure” requirement for the ABD recovery kung baket
kelangan dalawa yung entry:

para kasi ipakita na na-recover mo talaga yung dating written-off account.

NOTES RECEIVALE

It is a claims supported by formal promises to pay usually in the form of notes.

A negotiable promissory note is an unconditional promise in writing made by one person to

another, signed by the maker, engaging to pay on demand or at fixed determinable future time a a
sum certain in money to order or to bearer.

Simply stated, a promissory note is a written contract in which one person, known as the maker,
engaging to pay another person, known as the payee, a definite sum of money.

The note may be a payable on demand or at a definite future date.

Standing alone, the term “notes receivable” represents only claims arising from sale of merchandise
or service in the ordinary course of business.

Thus, notes received from officers, employees, shareholders, and affiliates shall be designed
separately.

THE TREATMENT OF DISHONORED NOTES

When a promissory notes matures and is not paid, it is said to be dishonoured.

Theoretically, is dishonoured notes shall be removed from the notes receivable account and
transferred to accounts receivable at an amount to include, if any, interest and other charges.

Such approach is defended on the ground that the overdue note has lost part of its status as a
negotiable instruments and really represents only an ordinary claims against maker.

INITIAL MEASUREMENT OF SHORT TERM NOTES RECEIVABLE

Conceptually, notes receivable shall be measured initially at present value.

The present value is the sum of all future cash flows discounted using the prevailing market rate of
interest or effective interest rate.

However, short-term notes receivable shall be measured at face amount.

Cash flows relating to short term notes receivable are not discounted because the amount of the
discount is not material.
INITIAL MEASUREMENT OF LONG TERM NOTES RECEIVABLE

The initial measurement of Long term notes depends on whether the notes are interest bearing or
non-interest bearing.

INTEREST BEARING long term notes are measured at face value which is actually the present value
upon issuance.

NON-INTEREST BEARING long term notes are measured at present value.

Actually, the term “non-interest bearing” is a misnomer because all notes implicitly contain interest.

It is simply a case of the “interest being included in the face amount” rather than being stated as a
separate rate.

SUBSEQUENT MEASUREMENT OF NOTES RECEIVABLE

Subsequent to initial recognition, long term notes receivable shall be measured at amortized cost
using the effective interest method.

For the long term non-interest bearing notes receivable, the amortized cost is present value plus
amortization of the discount, or the face value minus the unamortized unearned interest income.
NOTES RECEIVABLE pt. 2

Remember from earlier in the chapter, a note (also called a promissory note) is an
unconditional written promise by a borrower to pay a definite sum of money to the
lender (payee) on demand or on a specific date. On the balance sheet of the lender
(payee), a note is a receivable.  A customer may give a note to a business for an
amount due on an account receivable or for the sale of a large item such as a
refrigerator. Also, a business may give a note to a supplier in exchange for
merchandise to sell or to a bank or an individual for a loan. Thus, a company may
have notes receivable or notes payable arising from transactions with customers,
suppliers, banks, or individuals.

Most promissory notes have an explicit interest charge. Interest is the fee charged
for use of money over a period. To the maker of the note, or borrower, interest is an
expense; to the payee of the note, or lender, interest is a revenue. A borrower incurs
interest expense; a lender earns interest revenue. For convenience, bankers
sometimes calculate interest on a 360-day year; we calculate it on that basis in this
text. (Some companies use a 365-day year.)

The basic formula for computing interest is:

                      Principal x Interest Rate x Frequency of a year

Principal is the face value of the note. The interest rate is the annual stated interest
rate on the note. Frequency of a year is the amount of time for the note and can be
either days or months.  We need the frequency of a year because the interest rate is
an annual rate and we may not want interest for an entire year but just for the time
period of the note.

To show how to calculate interest, assume a company borrowed $20,000 from a

bank. The note has a principal (face value) of  $20,000, an annual interest rate of
10%, and a life of 90 days. The interest calculation is:

$20,000 principal x 10% interest rate x (90 days / 360 days) = $500

Note that in this calculation we expressed the time period as a fraction of a 360-day
year because the interest rate is an annual rate and the note life was days.  If the
note life was months, we would divide by 12 months for a year.

The maturity date is the date on which a note becomes due and must be paid.
Sometimes notes require monthly installments (or payments) but usually all of the
principal and interest must be paid at the same time. The wording in the note
expresses the maturity date and determines when the note is to be paid. A note
falling due on a Sunday or a holiday is due on the next business day. Examples of
the maturity date wording are:

 On demand. “On demand, I promise to pay…” When the maturity date is on

demand, it is at the option of the holder and cannot be computed. The holder is
the payee, or another person who legally acquired the note from the payee.
  On a stated date. “On July 18, 2015, I promise to pay…” When the maturity
date is designated, computing the maturity date is not necessary.
 At the end of a stated period.

(a)”One year after date, I promise to pay…” When the maturity is expressed in years,
the note matures on the same day of the same month as the date of the note in the
year of maturity.

(b)”Four months after date, I promise to pay…” When the maturity is expressed in

months, the note matures on the same date in the month of maturity. For example,
one month from July 18 is August 18, and two months from  July 18 is  September
18. If a note is issued on the last day of a month and the month of maturity has fewer
days than the month of issuance, the note matures on the last day of the month of
maturity. A one-month note dated  January 31, matures on February 28.

(c)  “Ninety days after date, I promise to pay…” When the maturity is expressed in
days, the exact number of days must be counted. The first day (date of origin) is
omitted, and the last day (maturity date) is included in the count. For example, a 90-
day note dated  October 19 matures on  January 17 of the next year, as shown here:

Life of note (days)  

Days remaining in October not counting date of origin of note:  

Days to count in October (31 – 19) 12

Total days in November 30

Total Days in December 31

Maturity date in January

 
(90 total days – 73 days from Oct to Dec)

Sometimes a company receives a note when it sells high-priced merchandise; more

often, a note results from the conversion of an overdue account receivable. When a
customer does not pay an account receivable that is due, the company may insist
that the customer  gives a note in place of the account receivable. This action allows
the customer more time to pay the balance due, and the company earns interest on
the balance until paid. Also, the company may be able to sell the note to a bank or
other financial institution.

To illustrate the conversion of an account receivable to a note, assume that Price

Company  had purchased $18,000 of merchandise on August 1 from Cooper
Company on account. The normal credit period has elapsed, and Price cannot pay
the invoice. Cooper agrees to accept Price’s $18,000, 15%, 90-day note dated
September 1 to settle Price’s open account. Assuming Price paid the note at maturity
and both Cooper and Price have a December 31 year-end, the entries on the books
of Cooper are:
       D

Aug 1 Accounts Receivable—Price Company  1

    Sales

    To record sale of merchandise on account.

Sept. 1 Notes Receivable 

    Accounts Receivable 

     To record exchange of a note from Price Company for open account.

Nov. 30 Cash 

    Notes Receivable

    Interest Revenue [18,000 x 15% x (90/360)]

     To record receipt of Price Company note principal and interest.

 Note:  Maturity date calculated as November 30 since it was a 90 day note – 29

days left in September (30 days in Sept – note day Sept 1) – 31 days in October
leaves 30 days remaining in November.

The $18,675 paid by Price to Cooper is called the maturity value of the note.

Maturity value is the amount that the company (maker) must pay on a note on its
maturity date; typically, it includes principal and accrued interest, if any.

Sometimes the maker of a note does not pay the note when it becomes due. The
next section describes how to record a note not paid at maturity.

A dishonored note is a note that the maker failed to pay at maturity. Since the note
has matured, the holder or payee removes the note from Notes Receivable and
records the amount due in Accounts Receivable.

At the maturity date of a note, the maker is responsible for the principal plus interest.
The payee should record the interest earned and remove the note from its Notes
Receivable account. Thus, the payee of the note should debit Accounts Receivable
for the maturity value of the note and credit Notes Receivable for the note’s face
value and Interest Revenue for the interest.

   

      Debit
 18,675
Nov. 30 Accounts Receivable—Price Company

    Notes Receivable  

    Interest Revenue  

    To record dishonor of Price Company note.  

 Accounting In The Headlines

How does Square account for the amounts it loans to small businesses?

Square, the mobile payments company, allows small businesses to take credit cards
by swiping customer credit cards using a small square device attached to the audio
jack found on mobile devices. Since its founding in 2009 and the launch of its first
app in 2010, Square has found its way into many small businesses – and large
businesses.  Starbucks uses Square to process transactions with credit or debit card
customers.  In November 2014, Square announced that it would be accepting Apple
Pay. Whole Foods uses Square in select locations.

Square has recently gotten into lending money to its customers through its Square
Capital program.  According to Business Insider (April 15, 2015 article), Square
has paid out over $100 million in small business financing over the past year.

See Jack Dorsey, co-founder of Square, explain the small business loan concept in
this CNN Money video (2:26 minutes)
at http://money.cnn.com/video/technology/2014/05/28/t-square-capital-
dorsey.cnnmoney/  Essentially, the business owner clicks on a link in the Square
Capital app to let Square know that the business would like to borrow a certain
amount of money.  Square Capital calls this step “requesting capital.” The next
morning, the funds are deposited in the checking account of that business.   The
business pays Square back the funds by having a certain percentage of each day’s
receipts deducted for the payback.

For example, if a business wants to borrow $7,000, Square might charge a total of
$7,910 for the loan.  Upon approval, the $7,000 is deposited into the business’s
checking account the next day and then Square charges 9% of the business’s credit
card sales each day until the $7,910 is fully paid.  Square says that the advantage of
this percentage-of-sales method is that the business does not have to make large
payments when business is slow. The percentage that Square charges stays
constant until the loan is paid off fully.

Square determines the amount to be charged for the loan and the percentage to be
charged each day using data analytics.  Each Square account has potentially
different terms based on its history and trends.
 NOTES RECEIVABLE pt.3
Ano ba ang promissory note? Para saan ba ito?

According sa Act No. 2031, Chapter 16, Section 184 (sa ating Negotiable Instruments Law)

Sec. 184. Promissory note, defined. – A negotiable promissory note within the meaning of this Act
is an unconditional promise inwriting made by one person to another, signed by the maker,
engaging to pay on demand, or at a fixed or determinable future time, a sum certain in
money to order or to bearer. Where a note is drawn to the maker’s own order, it is not
complete until indorsed by him.
Sa madaling sabi, ito yung utang na sinulat mo, binigay mo sa nagpautang sayo at sinasabi mo na
“babayaran mo yun, promise”. Kaya promissory note, hehehe. But seriously, ganon nga yun. Kung
mapapansin nyo, sa definition, may mga highlighted parts. Yun kasi yung mga elements ng
isang NegotiablePromissory note. Pero since financial accounting ang itatalakay ko dito, hindi nyo
naman kelangang hanapin yan sa quiz nyo. Ang importante sa test nyo sa financial accounting,
yung mga data sa promissory notes.

I. TYPES

There are two types of Notes (receivable/payable).

 Interest-Bearing Notes
 Non-interest Bearing Notes
Sa dalawang nabanggit, tandaan niyo palagi na parehong may interest yan. Ang interest kasi ay
ang “payment for the use of money”. Ano ang pinag-iba ng dalawa?

Sa interest-bearing notes, the rate is applied to the FACE of the note because the interest is
not imputed in the face amount of the note yet. So kung may interest bearing note ka payable
in one year worth P2,000 at an interest rate of 3% per annum, sa isang taon, ang interest nya ay
P60
Sa non-interest bearing notes, ang interest ay imputed na sa FACE amount ng note. So, pag
nakita mo yung face amount non-interest bearing note, kasama na dun yung interest. Kung baga,
yun yung future value ng note mo (Principal plus Interest). So, ano gagawin mo para macompute
mo yung interest? Edi i-present value mo yung note. So sa example kanina, kung may NON-
interest bearing note ka payable in one year worth P2,000 at an interest rate of 3% per annum, sa
isang taon, ang interest mo ay P58 (explain ko mamaya).
II. EXAMPLES and ENTRIES

Tandaan natin:

 palaging mag-aaccrue ng interest at year end (pag long-term ang notes, meaning extends
to more than 1 year)
 alamin muna kung interest bearing or non-interest bearing ang note. Malalaman mo
naman ito depende sa wording ng problem. Usually pag interest bearing ang sinasabi “…bearing an
interest of”  o di kaya   “…an interest bearing note”.
 carefully take note of the DATE for it is important in computing the interest.
 Kung serial (installment) ang bayad ng principal, mag-ingat. Dapat iamortize ang principal
palagi para tama ang interest na makokompute mo.
 ang rate na binibigay, unless otherwise specified, ay ANNUAL interest. So pag short term
lang ang note, palaging iappropriate based lang kung gano katagal yung note.
INTEREST BEARING NOTE
1.  Assume that on April. 1 2010, Tomasino Corp. issued a 30-day note for P2,000, bearing an
interest of 2% per annum. What are the entries?
we had an interest of 3 pesos computed as (2,000 * 2% * 30/360). Tandaan, inappropriate ko
yung interest sa 30 days lang.

2. On June 1, 2010 Dela Rosa wrote a promise to pay P2,000,000 to  Benavides, bearing an
interest of 3%, on May 30, 2013 with the interest payable yearly. What are the entries?

So at the end of every year (Dec. 31), nag-aaccrue tayo ng interest payable/receivable.

Interest is computed as: (2,000,000 * 3% * 7/12)

So pag tinanong, how much is the total interest for the year:
2010 = 35,000 2011= 60,000    (35,000 + 25,000) 2012 = 60,000    (35,000 +
25,000)2013= 25,000
ang interest for the year ay ang total na interest na na-incur/earned for the whole year

Madali lang diba?

NON-INTEREST BEARING NOTE

Sa non-interest bearing note entries, parang bonds lang yan. Hindi gaano naiiba yung entries nito
sa bonds kasi dito, we’ll use a “Discount on Notes Payable” account. The discount will represent a
Deferred Interest Income (on the payee’s side) or an Prepaid Interest Expense (on the maker’s
side) which has to be amortized yearly to reflect in the income statement the amount being
recognized as interest income/expense.

Sa non-interest bearing note, ang PROCEEDS mo ay equal sa present value ng note mo (Face
Amount minus Discount). So binawas yung interest. Sa maker’s side, kaya para syang Prepaid
Interest kasi imbes na matatanggap mo yung buong amount ng face, binawas na yung imputed
interest kaya yung proceeds mo face amount minus discount. Sa payee’s side, kaya parang
deferred interest income sya kasi yung binigay mong proceeds sa nangugutang, mas mababa sa
face value kasi nga binawas mo yung interest so in effect parang bayad na yung interest.
Confused much? Tignan nyo yung examples para medyo maliwanagan kayo.

SITUATION A – LUMP SUM PAYMENT OF PRINCIPAL AT THE END

1. On May 1, 2010 St. Raymund’s Co. issued a 3 year non-interest bearing note worth
P4,000,000 to Beato Angelico Corp. for a machine bought with a fair market value of
P3,455,350. Assume that the company uses calendar year as its accounting period. Give
the entries.
Dito, hindi sinabi ang rate. So we have to compute for the effective interest rate. The fair market
value of the machine is considered as the present value of the note kasi yun yung proceed na
natanggap mo. So lumalabas, kung at the end, babayaran ni St. Raymund si Beato Angelico ng
total of P4,000,000 edi may interest na P544,650. Ang face amount ng note ay  P4,000,000 kaya
dun sa 4M na yun, imputed na ang interest. Kaya kelangan nating kunin yung effective rate.

Ang PV rate natin ay 3,455,350 / 4,000,000 = 0.8638 kung titignan nyo sa PV of a Single

Payment table yan sa period na 3 years, lalabas na 5% ang Effective Annual Rate. Hindi naman
siguro ipapacompute ng prof nyo yan. Malamang yan sasabihin nalang yung rate or magsusupply
sila ng table.

The effective interest rate is applied to the carrying value of the note. Ito ang table ng interest at
carrying value tapos papakita ko kung paano kinompute yung yearly interest
Since hindi sakto yung end of period sa calendar end period, yung interest iaappropriate natin.
Kung baga ganito yung logic kung paano kinukuha yung accrual ng interest every Dec. 31

Clear?

Usually naman tinatanong sa test yung CV at December 31 (year end). Carrying value is computed
as Notes Receivable minus Discount on Notes receivable.
SITUATION B – PERIODIC PRINCIPAL PAYMENT
Ang pinag-iba naman nito sa unang situation, yung principal binabayaran every period.  (parang
serial bonds naman to)

1. On May 1, 2010 St. Raymund’s Co. issued a 3 year non-interest bearing note worth
P4,000,000 to Beato Angelico Corp. for a machine bought with a fair market value of
P3,771,481. The principal is to be paid P1,333,333  every April 30. Assume that the
company uses calendar year as its accounting period. Give the entries.
Syempre kelangan nating kompyutin yung effective annual rate. Since lumalabas na parang
annuity ito, yung PV ng Note (the fair value of the machine) is to be divided by the annuity.

PV Factor = 3,771,481 / 1,333,333

PV Factor = 2.8286
if you’ll look at the PV of Ordinary Annuity Table, this amount will fall under 3% (for 3 periods,
syempre).
So, eto mga entries

Bale yung entries kanina nadagdagan ng Periodic Payment every April 30. Saka take note of the
interest, always apply the interest on the carrying value after the payment of principal.
ito yung computation ng interest saka yung table ng amortization:
DISCOUNTING OF NOTES RECEIVABLE
Nagdidiscount ang isang entity ng kanyang Notes Receivable kung kailangan nito ng salapi/cash
immediately. Bale, imbes na hihintayin nyang matapos yung term ng notes, ibebenta nalang nya
ang note nya sa bank (termed as discounting). Pero syempre, the bank would withhold a certain
amount na magsisilbing kabayaran mo sa pagbigay nila sayo ng immediate cash (which is called
the discount). Let’s not confuse the term “discount” in this topic with the “discount on notes
receivable”. Magkaiba yun.

So, when we discount, makakatanggap tayo ng Cash, tatanggalin natin sa balance sheet ang
Notes Receivable (since binenta nga natin) at mayroon tayong Interest Gain/Loss from
Discounting.

Ang Discount naman ay kino-compute as (MV * Discount Rate * Remaining Holding

Period/365)
Ang proceeds na matatanggap natin ay equal sa MATURITY VALUE NG NOTES minus THE
DISCOUNT (MV – Disct)
So, let’s say for example De Porres discounted his120-day, 7%,  P6,000 note to the bank for 18%
discount after holding it for 40 days.

1. Compute for the Maturity value of the Note

6,000 * 7% * 120/365 = 138 interest

138 + 6000 = 6,138.08 MV

2. Compute for the Discount

6,138.08  * 18% * 80/365 = 242.16

3. Compute for the Proceeds

6138.08 – 242.16 =  5,859.92

Entries:

(dr) Cash        5,859.92

(dr) Interest Expense   186.08

(cr) Notes Receivable      6,000

(cr) Interest Revenue     46

TAKE NOTE: Be careful of the denominator pag nagkokompyut kayo ng interest sa discounting.
Always use the whole year’s days 360 or 365 NOT the term of the note.
NONTRADE RECEIVABLE

Represent claims arising from sources other than the sale of merchandise or services in ordinary
course of business.

Non trade receivables are amounts due for payment to an entity other than its normal
customer invoices for merchandise shipped or services performed. Examples of non-trade
receivables are amounts owed to a company by its employees for loans or wage advances,
tax refunds owed to it by taxing authorities, or insurance claims owed to it by an insurance
company.

Non trade receivables are usually classified as current assets on the balance sheet, since
there is typically an expectation that they will be paid within one year. If you anticipate that
payment will be over a longer period of time, then classify it as a non-current asset.

If there is a large amount of interest receivable from a third party, consider recording it in a

separate interest receivable account.

In all of the examples, the non-trade items are typically not billed using the company's
invoicing software; instead, they are recorded as journal entries. This is a key distinction,
since there should be few (if any) journal entries impacting the accounts receivableaccount,
while usually journal entries are the only form of transaction to be used in the non-trade
receivables account. Indeed, the use of a journal entry to record a transaction can be
considered a key indicator that a receivable should be treated as a non-trade receivable.

You should periodically evaluate the individual items recorded in the non-trade receivables
account to see if the company is still likely to receive full payment. If not, reduce the
amount in the account to the level you expect to receive, and charge the difference
to expense in the period in which you make this determination. This evaluation should be
conducted as part of the period-end closing process.

EXAMPLES:

1. Advances to or receivables from shareholders, directors, officers or employees. If

collectible one year, such advances or receivables should be classified as current
assets. Otherwise, such advances or receivables are classified as noncurrent assets.
2. Advances to affiliates are usually treated as long term investments.
3. Advances to supplier for the acquisition of merchandise are current assets
4. Subscription receivable are current assets if collectible one year. Otherwise,
subscriptions receivable should be shown preferably as a deduction from subscribed
shared capital.
5. Creditor’s accounts may have debit balances as a result of overpayment or returns
and allowances. These are classified as current assets.
If the debit balances are not material an offset may be made against the creditors
accounts with credit balances and only the net accounts payable may be represented.
6. Special deposits on contracts bids normally are classified as noncurrent assets
because such deposits are likely to remain outstanding for a considerable long period
of time.
However, the deposits that are collectible currently should be classified as noncurrent
assets.

7. Accrued income such as dividends payable, accrued net rent income, accrued
royalties income and accrued interest on bond investment are usually classified as
noncurrent assets.
8. Claims receivable such as claims against common carriers for losses or damages,
claims for rebates and tax refunds, for claims from insurance entities are normally
classified as current assets.
 LOANS RECEIVABLE
For banks and other financial institution, receivables result primarily from loans to
customers.
The loans are made to heterogeneous customers and the repayment periods are frequently
longer or over several years.
Loans receivable is an account in the general ledger of a lender, containing the current balance
of all loans owed to it by borrowers. This is the primary asset account of a lender.

CUSTOMERS CREDIT BALANCES

It is the credit balances in accounts receivable resulting from overpayments, returns and
allowances and advance payments from customers.
These credit balances are classified as current liabilities and are not offset against the debit
balances in other customer’s account, except when the same is not material in which case
only the net accounts receivable may be represented.
No adjustment is necessary to formally recognize the customers ‘credit balance because
ultimately these are cancelled for sales and cash settlement.

Overview

The balance of your customers can be affected by credits and overpayments.  Depending on the

way credits are issued, they will immediately affect the balance or generate available credits for
future orders.
 

When creating customer credits you'll find the following situations in the customer's balance:
 When a customer credit is created and the credit is approved before the payment is
posted, the balance of the order will be reduced (only the balance, not the amount of the
invoice). The customer will only pay the remaining balance on the order.
 When the credit is approved after the payment is posted, the amount of the credit will
appear as available credit to be used in the next payment.
 If a payment has been applied by using a customer credit and it is cancelled, the open
credit will be also cancelled since the payment is no longer valid.
 If the customer doesn't have open invoices the system allows you to generate
overpayments that will be shown as available credits for future orders.
INITIAL MEASUREMENT OF ACCOUNTS RECEIVABLE