Financial Accounting and Reporting

Teena May D. Mendoza January 7, 2020

BSA-I
Chapter 4 from overpayments, returns and allowances,
Questions: and advance payments from customers.
1. Define receivables. These are classified as current liabilities and
-financial assets that represent a contractual are not offset against the debit balances in
right to receive cash or another financial other customers’ accounts, except when the
asset from another entity. same is not material in which case only the
2. Explain the classification and net accounts receivable may be presented.
presentation of receivables in the
statement of financial position.
Receivables are classified into:
Trade Receivables- which are
expected to be realized in cash within the
normal operating cycle or one year,
whichever is longer, are Current Assets.
Non-trade Receivables- are those
expected to be realized in cash within one
year, the length of the operating cycle
withstanding as classified as Current Assets.
If collectible beyond one year, it is otherwise
known as Non-current Assets.
Trade Receivables and Non-trade
Receivables which are currently collectible
shall be presented on the face of the
statement of financial position as One-line 4. Explain the initial and subsequent
item called trade and other receivables. The measurement of trade accounts
details of the total trade and other receivables.
receivables shall be disclosed in the notes to -Initial Measure of accounts receivables
financial statements. mean that a financial asset shall be
The disclosure may appear as follows: recognized initially at fair value plus
transaction costs that are directly
Accounts Receivable 4 000 000
attributable to the acquisition. The fair value
Allowance for DA (100 000)
Notes receivable 2 000 000 is usually the transaction price (fair value).
Accrued interest on
For short-term receivables Fair value= face
note receivable 120 000
Advances to officers and amount or original invoice amount. Cash
employees 100 000
flows relation to short-term are not
Dividends receivable 300 000
discounted because the effect of discounting
Total trade and other rcvbls 6 620 000
is usually immaterial.
3. Explain the treatment of customers’ Accordingly, accounts receivable shall be
credit balances measured initially at face amount or original
-Customer Credit Balances are credit invoice amount.
balances in accounts receivable resulting
 Financial Accounting and Reporting
Teena May D. Mendoza January 7, 2020
BSA-I
-Subsequent Measurement means that after and crediting accounts receivable. If the
initial recognition, A/R shall be measured at accounts are only doubtful of collection, no
amortized cost. It is usually the net adjustments made.
realizable value of A/R. The net realizable 8. Give the performa entry under the
value of accounts receivable is the amount of allowance method for each of the ff:
cash expected to be collected or the a) Doubtful Accounts
estimated recoverable amount. Doubtful Accounts Expense 50 000
Allowance for Da 50 000
5. Explain the two methods of recording b) Accounts Receivable proved Worthless
accounts receivable and credit sales. Allowance for DA 50 000
A. Gross Method- the A/R and sales are Accounts Receivable 50 000
recorded at Gross amount of the invoice. c) Recovery of Accounts previously written-
off
Accounts Receivable 50 000
B. Net Method- The A/R and sales are Allowance for DA 50 000
recorded at Net amount of the invoice 9. Give the performa entry under the
meaning the invoice price minus the cash direct write-off method for each of the
discount. following:
a) Doubtful Accounts
NO ENTRY
6. Explain the allowance method of b) Accounts Receivable proved Worthless
accounting for bad debts. Doubtful Accounts Expense 50 000
- Under the allowance method, a company Accounts Receivable 50 000
records an adjusting entry at the end of each c) Recovery of accounts previously written-
accounting period for the amount of the off
losses it anticipates as the result of Accounts Receivable 50 000
extending credit to its customers. The entry Doubtful Accounts Expense 50 000
will involve the operating expense account 10. Explain the presentation of
Bad Debts Expense and the contra-asset doubtful accounts in the income
account Allowance for Doubtful Accounts. statement.
Later, when a specific account receivable is I. Distribution Cost
actually written off as uncollectible, the -If the granting of credit and collection of
company debits Allowance for Doubtful accounts are under the charge of the sales
Accounts and credits Accounts Receivable. manager, doubtful accounts shall be
considered as distribution cost.
7. Explain the direct write-off method of II. Administrative expense
accounting for bad debts. -If the granting of credit and collection of
-an account receivable is written-off directly accounts are under the charge of an officer
to expense only after the account is other than sales manager, doubtful accounts
determined to be uncollectible. Worthless shall be considered as administrative
accounts are recorded by debiting bad debts expense. In the absence of any contrary
 Financial Accounting and Reporting
Teena May D. Mendoza January 7, 2020
BSA-I
statement, doubtful accounts shall be
classified as administrative expense. D.
 Subscription Receivables should be
deducted from subscribed share capital.

Problem 4-2  Deposit in contract should be classified as

A. non-current and presented as other non-

January 1 current asset.

Accounts Receivable 600 000  Advances to Affiliates should be classified

Charge Sales 6 000 000 as non-current and presented as long-

Total 6 600 000 term investment.

Less: Collections
From custmrs 5 300 000 Chapter 5:

Write-off 35 000 1. What are the three methods of

Merchandise estimating doubtful accounts?

Returns 40 000 There are three methods of estimating

Allowance to doubtful accounts. Namely:

Customers 25 000 (5 400 000)  Aging the accounts receivable or

December 31 “statement of financial position approach”

Accounts Receivable 1 200 000  Percent of accounts receivable or also

B. statement of financial position approach

Subscription Receivable 150 000  Percent of sales or “income statement

Deposit on contract 120 000 approach”

Claim receivable 60 000 2. Explain the aging method of

Advances to Employees 10 000 estimating doubtful accounts.

Advances to Affiliated 100 000 The aging of accounts receivable

Advances to Supplier 50 000 involves an analysis when the accounts are

Accounts Receivable 490 000 classified into not due or past due:
Subscription Receivable: A. Not due
Shareholders’ subscriptions 200 000 E. 91 to 120 days past due
Collections on subscriptions (50 000)
B. 1 to 30 days past due
150 000
F. 121 to 180 days past
C.
due
Accounts Receivable 1 200 000
C. 31 to 60 past due
Claims Receivable 60 000
G. 181 to 365 days past
(IOUS)Advances to Employees 10 000
due
Advances to a Supplier 50 000
D. 61 to 90 past due
Total Trade and
H. More than 1 year past due
Other Receivables 1 320 000
The allowance is then determined by
Claims Receivable:
Claims against common multiplying the total of each classification
Carrier for damages 100 000 by the rate or percent loss experienced
Collections on carrier claims (40 000) by the entity for each category.
60 000
 Financial Accounting and Reporting
Teena May D. Mendoza January 7, 2020
BSA-I
6. Explain why the percentage of sales
3. Explain the percentage of accounts method is known as ‘income
receivable method of estimating statement approach’.
doubtful accounts. When the “percent of sales” method is
A certain rate is multiplied by the open used in computing doubtful accounts, proper
accounts at the end of the period in order matching of cost against revenue is
to get the required allowance balance. achieved. This is so because the bad debt
The rate used is usually determined from loss is directly related to sales and reported
past experience of the entity. This in the year of sale. Thus, this method is an
procedure has the advantage of income statement approach because it
presenting the accounts receivable at favors the income statement.
estimated net realizable value. The 7. When is an account past due?
approach is also simple to apply. The credit terms will determine
4. Explain why the aging method and whether an account is past due. For
percentage of accounts receivable are example, if the credit terms were 2/10,
known as “statement of financial n/30, and the account is 45 days old, it is
approach”. considered to be 15 days past due.
The aging method has the advantage Therefore, the phrase “past due”
of presenting fairly the accounts refers to the period beyond the maximum
receivable in the statement of financial credit term. In the example, the credit term
position at net realizable value. And The or credit period is 30 days.
percentage of accounts receivable also 8. Explain the treatment of an
has the same advantages. Their results inadequate or excessive allowance for
both appear on statements of financial doubtful accounts.
position hence the known title. Where the allowance is inadequate or
5. Explain the percentage of sales excessive, a question arises as to the proper
method of estimating doubtful treatment of the discrepancy, whether to
accounts. consider it as an error or a component of
The amount of sales for the year is profit or loss.
multiplied by a certain rate to get the The correction is to be reported in the
doubtful accounts expense. The rate may income statement either as an addition to or
be applied on credit or total sales. subtraction from doubtful accounts expense.
Theoretically, the rate to be used is When the allowance is excessive, there is a
computed by dividing the bad debt losses corollary problem when the discrepancy is
in prior years by the charge sales of prior more that the debit balance in the doubtful
years. The rate thus obtained is accounts expense account.
multiplied by the current years charge 9. Is the debit balance in the allowance for
sales to arrive at the doubtful accounts doubtful accounts possible?
expense. Yes, the debit balance does not
indicate that the allowance is inadequate
because the accounts written off during the
 Financial Accounting and Reporting
Teena May D. Mendoza January 7, 2020
BSA-I
year and charged to the allowance may have Required Allowance 50 000
arisen from current year sales. (10% x 500 000)
Thus, the charge to the allowance account
simply predates the recording of doubtful Less: Credit Balance of
accounts. Allowance (20 000)
10. What does a debit balance in the Doubtful Accounts Expense 30 000
allowance for doubtful accounts indicate?
The debit balance does not indicate Doubtful Accounts 30 000
that the allowance is inadequate because the Allowance for DA 30 000
accounts written off during the year and Problem 5-4
charged to the allowance may have arisen A.
from current year sales. 1. Accounts Receivable 2 600 000
Thus, the charge to the allowance Sales 2 600 000
account simply predates the recording of (3 070 000-470 000)

doubtful accounts. 2. Cash 1 000 000

(2 455 000 -1 455 000)

Accounts Receivable 1 000 000

Problem 5-1
3. Cash 1 455 000
A.
Sales Discount 45 000
Credit Sales 3 750 000
(1 455 000/.97 x 3%)
(75 % x 5 000 000)
Accounts Receivable 1 500 000
Doubtful Accounts 75 000
(2% x 3 750 000) (1 455 000/.97)

4. Allowance for DA 20 000

Doubtful Accounts 75 000 Accounts Receivable 20 000
Allowance for DA 75 000 5. Cash 470 000
Sales 470 000
B. 6. Sales Returns and
Doubtful Accounts 50 000 Allowances 55 000
(1% x 5 000 000) Accounts Receivable 55 000
7. Sales Returns and
Doubtful Accounts 50 000 Allowances 10 000
Allowance for DA 50 000 Accounts Receivable 10 000
C. 8. Accounts Receivable 5 000
Required Allowance 80 000 Allowance for DA 5 000
Less: Credit Balance of Cash 5 000
Allowance (20 000) Accounts Receivable 5 000
Doubtful Accounts Expense 60 000 B.
Credit Sales 2 600 000
Doubtful Accounts 60 000 Less: Sales Discount 45 000
Allowance for DA 60 000 Sales R&A 55 000 (100 000)
D. Net Credit Sales 2 500 000
 Financial Accounting and Reporting
Teena May D. Mendoza January 7, 2020
BSA-I
(60 000 + 15 000 – 55 000)
Doubtful Accounts Increase in Allowance 30 000
(2 500 000 x 2%) 50 000
Doubtful Accounts 30 000
Doubtful Accounts 50 000 Allowance for DA 30 000
Allowance for DA 50 000 C.
C. December 1
Accounts Receivable 625 000 Accounts Receivable 1 250 000
Less: Allowance for DA (60 000) Allowance for DA (50 000)
Net Realizable Value 565 000 Net Realizable value 1 200 000

Problem 5-5 Chapter 6:

A. Questions
1. Accounts Receivable 7 935 000 1. Define notes receivables.
Sales 7 935 000 Notes Receivables are claims
2. Cash 4 410 000 supported by formal promises to pay usually
Sales Discount 90 000 in the form of notes.
Accounts Receivable 4 500 000 2. What is a negotiable promissory note?
(4 410 000/98%) It is an unconditional promise in
3. Cash 2 475 000 writing made by one person to another,
Sales Discount 25 000 signed by the maker, engaging to pay on
Accounts Receivable 2 500 000 demand o at a fixed determinable future
(2 475 000/99%) time a sum certain in money to order or to
4. Accounts Receivable 15 000 bearer.
Allowance for DA 15 000 3. Explain the treatment of dishonored note
Cash 15 000 receivable.
Accounts Receivable 15 000 It is deemed dishonored when a
5. Cash 1 100 000 promissory note matures and is not paid.
Accounts Receivable 1 100 000 Dishonored notes receivable should be
(8 000 000 - 4 410 000 - 2 475 000 - removed from the notes receivable account
15 000) and transferred to accounts receivable. The
6. Allowance for DA 55 000 amount debited to accounts receivable
Accounts Receivable 55 000 should include the face amount, interest and
7. Sales Return 30 000 other charges. Such approach is defended on
Accounts Receivable 30 000 the ground that the overdue note has lost
B. part of its status as a negotiable instrument
Rate (60 000/1 500 000) 4% and really represents only an ordinary claim
against the maker.
Required Allowance 50 000 4. Explain the initial measurement of short-
(4% x 1 250 000) term notes receivables.
Allowance before adjustment 20 000
 Financial Accounting and Reporting
Teena May D. Mendoza January 7, 2020
BSA-I
Notes Receivables should be measured 10. Explain the computation of present
initially at present value. The prevailing value of long -term notes receivable.
market rate of interest is actually the  Interest-Bearing
effective interest rate. However, short-term Present Value=Face Value/Selling Price
notes receivable shall be measured at face  Noninterest-Bearing
value. Present Value- Discounted value of the
5. Explain the initial measurement of long- future cash flows using the effective
term note receivables. interest rate
The initial measurement of long-term 1. Present Value=Cash Sale Price
notes will depend on whether the notes are 2. Present Value=Annual Installment x
interest-bearing or noninterest-bearing. Present Value
Interest-bearing long-term notes are Factor
measured at face value which is actually the 3. Present Value=Preceding balance –
present value upon issuance. Annual Principal
Payment
6. What is the meaning of noninterest- 4. Present Value=Face of Note –
bearing note receivable? Unearned Interest Income
Non-interest-bearing long-term notes
are measured at present value which is the Problem 6-4
discounted value of the future cash flows 1.
using the effective interest rate. It is simply December 31, 2019
a case of the interest being included in the Note Receivable 2 500 000
face amount rather than being stated as a Sales 1 995 000
separate rate. (500 000 x 3.99)
7. Explain the subsequent measurement of Unearned Interest Income 505 000
long-term notes receivables. December 31, 2020
Subsequent to initial recognition long- Cash 500 000
term notes receivable shall be measured at Note Receivable 500 000
amortized cost using the effective interest Unearned Interest Income 159 600
method. Interest Income 159 600
8. Explain compounding of interest in (8% x 1 995 000)
relation to interest bearing notes
receivable. 2.
When interest is compounded, this Note Receivable 2 000 000
means that any accrued interest receivable (2 500 000-500 000)
also earns interest. Unearned Interest Income (345 000)
9. What is the meaning of present value of (505 000-159 600)
notes receivables? Carrying Amount-12/31/2020 1 654 600
It is the sum of all future cash flows
discounted using the prevailing market rate 3.
of interest for similar notes. Interest Income for 2021 132 368
 Financial Accounting and Reporting
Teena May D. Mendoza January 7, 2020
BSA-I
(8% x 1 654 600)

Problem 5-6
1. Required Allowance Amount Percent of
Uncollectible
-Not yet due 1 700 000 -
-1-30 days past due 1 200 000 5% = 60 000
-31-60 days past due 100 000 25% = 25 000
-61-90 days past due 150 000 50% = 75 000
-Other 90 days past due 120 000 100% = 120 000
3 270 000 280 000
Accounts Receivable Allowance for DA
2. January 1 December 31
Allowance 170 000

Receivable 30 000
3. DA Expense 345 000
DA Expense 345 000
Allowance for DA 345 000
(squeeze)
Total 545 000
4. Accounts Receivable 3 210 000
Less: Write-off 265 000
Less: Allowance for DA (280 000)
(235 000 + 30 000)
Net Realizable Value 2 990 000
Required Allowance 280 000
 Financial Accounting and Reporting
Teena May D. Mendoza January 7, 2020
BSA-I