HAND-OUT NO.

2: ACCOUNTS RECEIVABLE
Brian Christian S. Villaluz, CPA
FINANCIAL ACCOUNTING AND REPORTING
HAND-OUT NO. 2: Accounts Receivable

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

Common Examples of Receivables

1. Accounts receivable – receivables supported by oral or informal promises to pay. These are not supported by
formal promissory notes.
2. Notes receivable – receivables supported by written or formal promises to pay in the form of promissory notes.
3. Loans receivable – receivables arising from loans extended by financial institutions, such as banks, financing
companies, and lending institutions. These are also supported by promissory notes and are generally backed by
collateral securities.
4. Advances
5. Accrued income
6. Deposits
7. Claims receivable – receivables from insurance companies for casualties sustained, defendants under suit,
government agencies for refundable taxes and other remittances, common carriers for damaged or lost goods,
and suppliers for returned or damaged goods.

Trade and Non-trade Receivables

For non-financial institutions, receivables are classified into:
(1) Trade receivables – these are claims arising from sale of goods or services in the ordinary course of business.
(2) Nontrade receivables – these are claims arising from sources other than sale of goods or services in the
ordinary course of business.

The normal operating cycle of an entity is the time between the acquisition of assets for processing and their realization
in cash or cash equivalents. When the entity’s normal operating cycle is not clearly identifiable, it is assumed to be 12
months.

FINANCIAL STATEMENT PRESENTATION

Trade and non-trade receivables that are currently collectible are combined and presented on the statement of financial
position in a single line item “trade and other receivables”.

ABNORMAL BALANCES IN ACCOUNTS

Customers’ credit balances

 Credit balances in accounts receivable resulting from overpayments, returns and allowances, and advance
payments from customers.
 These are classified as current liabilities and are not offset against the debit balances in other customers’
accounts.

Adjusting Journal Entry:

Accounts receivable xx
Customer’s credit balances xx

Suppliers’ debit balances

 Debit balances in accounts payable resulting from overpayments, advance payments to suppliers.
 These are classified as current assets and are not offset against accounts payable.

Adjusting Journal Entry:

Advances to suppliers xx
Accounts payable xx

Problem 1: (Trade and other receivables)

Information from the records of Gull Company is shown below:

Accounts receivable (net of P10,000 credit balance) P50,000

Notes receivable – trade 5,000
Notes receivable – nontrade (P5,000 due in one year) 25,000
Dividends receivable 1,000
Subscription receivable 2,000
Advances to officers and employees (due in 18 months) 4,000
Accounts payable (net of P6,000 debit balance) 3,000

Compute for:
1. Total trade receivables
2. Total trade and other receivables.

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 HAND-OUT NO. 2: ACCOUNTS RECEIVABLE
Brian Christian S. Villaluz, CPA
INITIAL MEASUREMENT OF RECEIVABLES
Receivables are recognized simultaneously with the recognition of revenue under IFRS 15. Receivables are initially
recognized at fair value plus transaction costs under IFRS 9 Financial instruments while revenue should be measured
at the amount of the transaction under IFRS 15 Revenue from Contracts with Customers.

TRADE DISCOUNTS AND CASH DISCOUNTS

Trade discounts are given to encourage orders in large quantities or to hide the true invoice price from competitors.
These are deducted from the list price when determining the invoice price. These are not accounted for separately.

Cash discounts are given to encourage prompt payment. Cash discounts are deducted from the invoice price when
determining the net amount collectible within the discount period. These are accounted for separately.

ACCOUNTING FOR CASH DISCOUNTS

There are two accounting treatments for cash discounts:
1. In accordance with traditional GAAP
2. In accordance with IFRS 15 Revenue from Contracts with Customers

Traditional GAAP
Under traditional GAAP, cash discounts are accounted using either the (a) gross method or (b) net method.
a. Gross method – Under this method, accounts receivable and sales are initially recorded at amounts gross of
cash discounts. Cash discounts are recorded only when they are taken. They are debited to “Sales Discount”
account. Cash discounts not taken are not accounted for.
b. Net method – under this method, accounts receivable and sales are initially recorded at amounts net of cash
discounts. Cash discounts not taken are credited to the “Sales discount forfeited” account and included as part
of other income. Cash discounts taken are not accounted for.

IFRS 15 Revenue from Contracts with Customers

When the consideration includes a variable amount (for example, the customer is given a discount), the entity is required
to estimate the amount to which it expects to be entitled in exchange for transferring the promised good or service. The
entity recognizes revenue and receivable equal to the estimated amount when it satisfies its performance obligation in
the contract.

Problem 2: (Accounting for Cash Discounts with trade discounts; Under Traditional GAAP)
An entity sells inventory with a list price of P10,000 on account under the credit terms of 20%, 10%, 2/10, n/30.

Prepare the journal entries to record the transaction above under (1) gross method and (2) net method assuming:
(a) Collection is made within the discount period.
(b) Collection is made beyond the discount period.

Problem 3: (Accounting for Cash Discounts with trade discounts; Under IFRS 15)
An entity sells inventory with a list price of P10,000 on account under the credit terms of 20%, 10%, 2/10, n/30. The entity
estimates that only 80% of the cash discount will be taken and concludes that it is highly probable that a significant reversal
in the cumulative amount of revenue recognized will not occur as the uncertainty is resolved.

1. Prepare the journal entries to record the sale and collection assuming:
(a) 80% of the cash discount is actually taken.
(b) 70% of cash discount is actually taken.

Allowance for sales return

Allowance for sales return is recognized when buyers are given the right to return goods, and it becomes probable that
the recorded accounts receivables may not be wholly recoverable.

Sale with a right of return (IAS 18)

Under IAS 18 Revenue, if the entity retains significant risks of ownership, the transaction is not a sale and revenue is not
recognized. Example is when the buyer has the right to rescind the purchase for a reason specified in the sales contract
and the entity is uncertain about the probability of return. However, revenue can be recognized at the time of sale provided
the seller can reliably estimate future returns and recognize an allowance for sales returns based on previous experience
and other relevant factors.

Sale with a right of return (IFRS 15)

Sale with a right of return is an arrangement in which an entity transfers control of a product to a customer and also grants
the customer the right to return the product for various reasons such as dissatisfaction with the product and receive any
combination of the following:
a. A full or partial refund of any consideration paid;
b. A credit that can be applied against amounts owed, or that will be owed to the entity; and
c. Another product in exchange.

To account for the transfer of products with a right of return and for some service that are provided subject to a refund,
an entity shall recognize all of the following:

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 HAND-OUT NO. 2: ACCOUNTS RECEIVABLE
Brian Christian S. Villaluz, CPA
(a) Revenue for the transferred products in the amount of consideration to which the entity expects to be entitled
(therefore, revenue would not be recognized for the products expected to be returned);
(b) Refund liability; and,
(c) An asset for its right to recover products from customers on settling the refund liability.

Problem 4: (Allowance for Sales Return; IAS 18 vs. IFRS 15)

On December 31, 2018, ABC Co. sold goods costing P100,000 and with sales price of P150,000 to DEF Co. on account.
To induce sale, ABC provides its buyers the right to return goods within 30 days upon purchase if the buyers are not satisfied
with the goods. The company uses perpetual inventory system in recording its inventories.

1. Prepare all the necessary entries under IAS 18 and IFRS 15 assuming:
(a) ABC can reliably estimate that 30% of the goods sold will be returned within the agreed period of time. On
January 15, 2019, 45% of the goods were actually returned and the balance of receivable was collected.
(b) ABC cannot reliably estimate future returns. On February 1, 2019, the customer did not return any of the goods.

Problem 5: (Right of Return)

Cyclops Company enters into 200 contracts with customers. Each contract includes the sale of one product for P15,000.
Cash is received when control of a product is transferred. The entity’s customary business practice is to allow a customer
to return any unused product within 30 days and receive a full refund. The entity’s cost of each product is P6,000. The entity
estimates that 97% of the products will not be returned.

1. Prepare the journal entries assuming the following independent cases:

(a) The estimated 3% returned the goods.
(b) The estimated 3% did not returned any goods.
(c) The return period has lapsed.
(d) The customers returned 5% of goods.
(e) The customers returned only 1% of the goods.

SUBSEQUENT MEASUREMENT
 Accounts receivable are subsequently measured at net realizable value (NRV). This is computed as accounts
receivable less the following deductions:
 Allowance for sales return
 Allowance for sales discount
 Allowance for doubtful accounts

ACCOUNTING FOR DOUBTFUL ACCOUNTS

There are two methods of accounting for bad debts:
1. Allowance method – an allowance is recognized for bad debts when the collectability of accounts becomes
doubtful.
 This method conforms with the accrual basis, matching, and conservatism. When it becomes certain that
accounts are uncollectible or worthless, the accounts are written off.
 When accounts previously written off are subsequently recovered, the write-off is reversed and reestablished
and the collection is recorded.
2. Direct write off method – this method does not conform to the concepts of accrual basis of accounting, matching,
and conservatism because bad debts are recognized only when uncollectability becomes certain.

Problem 6: (Allowance method vs. Direct writeoff method)

ABC Co. found the accounts receivable of P10,000 to be doubtful of collection on December 31, 2018. On January 15,
2018, the P10,000 doubtful account is deemed worthless and needs to be written off. On October 1, 2020, the P10,000
account previously written off is subsequently collected.

1. Prepare the journal entries to record the foregoing under:

(a) Allowance method
(b) Direct writeoff method

METHODS OF ESTIMATING DOUBTFUL ACCOUNTS

1. Percentage of credit sales
2. Percentage of receivables
3. Aging of receivables

Problem 7: (Bad Debt Computation; Percentage of Sales)

At the beginning of 2020, Gap Company had a credit balance of P260,000 in the allowance for uncollectible accounts.
Based on past experience, 2% of credit sales would be uncollectible.

During the current year, the company wrote off P325,000 of uncollectible accounts. Sales for the year totaled P11,250,000,
of which 20% is cash sales.

1. What is the uncollectible accounts expense for 2020?

2. What amount should be reported as allowance for uncollectible accounts at year-end?

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 HAND-OUT NO. 2: ACCOUNTS RECEIVABLE
Brian Christian S. Villaluz, CPA
Problem 8: (Bad Debt Computation; Percentage of Accounts receivable)
OK Company provided the following accounts abstracted from the unadjusted trial balance at year-end:

Debit Credit
Accounts receivable 5,000,000
Allowance for doubtful accounts 40,000
Net credit sales 20,000,000

The company estimated that 3% of the gross accounts receivable will become uncollectible.

1. What amount should be recognized as doubtful accounts expense for the current year?

Problem 9: (Bad Debt Computation; Aging of Receivables)

TK Company used the allowance method of accounting for doubtful accounts.

The following summary schedule was prepared from an aging of accounts receivables outstanding on December 31, 2018:

Number of days outstanding Amount Percentage estimated to be uncollectible

0 – 30 days 5,000,000 2%
31 – 60 days 2,000,000 10%
Over 60 days 1,000,000 20%

The following additional information is available for the year 2018:

Net credit sales for 2018 40,000,000

Allowance for doubtful accounts:
Balance, January 1 450,000 credit
Balance before adjustment, December 31 20,000 debit

The company based the estimate of doubtful accounts on the aging of accounts receivable.

1. What amount should be reported as doubtful accounts expense for 2018?

Problem 10:
Fan Company reported the following adjusted balances at year-end:

2017 2018
Accounts receivable 4,800,000 5,250,000
Net realizable value 4,725,000 5,100,000

During 2018, the company wrote off accounts totaling P160,000 and collected P40,000 on accounts written off in previous
years.

1. What amount should be reported as bad debts expense for the year ended December 31, 2018?

Problem 11:
QR Company provided the following information relating to accounts receivable for the year 2018:

Accounts receivable, 1/1/18 P 1,300,000

Credit sales 5,400,000
Collections from customers (excluding recovery) 4,750,000
Accounts written off 125,000
Collection of accounts written off 25,000
Estimated uncollectible receivables per aging of receivables, 12/31/18 165,000

1. What is the balance of accounts receivable, before allowance for doubtful accounts on December 31, 2018?

Problem 12:
Gringo Company provided the following transactions affecting accounts receivable during 2025:

Sales – cash and credit P 5,900,000

Cash received from non-credit customers 2,100,000
Cash received from credit customers, all of whom took advantage of the discount
terms 4/10 n/30 3,024,000
Accounts receivable written off as worthless 50,000
Credit memorandum issued to credit customers for returns and allowances 250,000
Cash refunds given to non-credit customers for returns and allowances 20,000
Recoveries on accounts receivable written off as uncollectible in prior periods not
included in cash received from customers stated above 80,000

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Balances on January 1, 2025:
Accounts receivable
Allowance for doubtful accounts
HAND-OUT NO. 2: ACCOUNTS RECEIVABLE
Brian Christian S. Villaluz, CPA
P 950,000
100,000

The company provided for uncollectible account losses by crediting the allowance for doubtful accounts in the amount of
P70,000 for the year 2025.

1. What is the balance of accounts receivable on December 31, 2025?

2. What is the balance of allowance for doubtful accounts on December 31, 2025?

FINANCIAL ACCOUNTING THEORIES

1. Trade receivables are classified as current assets if they are reasonably expected to be collected
A. Within one year.
B. Within the normal operating cycle.
C. Within one year or within the operating cycle, whichever is shorter.
D. Within one year or within the operating cycle, whichever is longer.

2. Non-trade receivables are classified as current assets only if they are reasonably expected to be realized in cash
A. Within one year or within the operating cycle, whichever is shorter.
B. Within one year or within the operating cycle, whichever is longer.
C. Within one year, the length of the operating cycle notwithstanding.
D. Within the normal operating cycle.

3. Under IFRS 9 Financial Instruments, Receivables are initially recognized at

A. Fair value
B. Fair value plus transaction costs
C. Transaction price
D. Cost

4. Credit balances in accounts receivable are classified as

A. Current liabilities
B. Part of accounts payable
C. Long-term liabilities
D. Deduction from accounts receivable

5. Accounts receivable are subsequently measured at their net realizable value. Which of the following methods of
estimating uncollectible accounts is in conformance with the IFRSs?
A. Allowance method
B. Direct writeoff method
C. Both A and B
D. None of these

6. Why is the allowance method preferred over the direct write-off method of accounting for bad debts?
A. Allowance method is used for tax purposes.
B. Estimates are used.
C. Determining worthless accounts under direct write-off method is difficult to do.
D. Improved matching of bad debt expense with revenue.

7. When an accounts receivable aging schedule is prepared, the resulting amount from the computation
A. when added to the total accounts written off during the year is the desired credit balance of the allowance for
doubtful accounts at year-end.
B. is the amount of doubtful accounts expense for the year.
C. is the amount that should be added to the beginning allowance for doubtful accounts to get the doubtful
accounts expense for the year.
D. is the amount of desired credit balance of the allowance for doubtful accounts to be reported at year-end.

8. The entry debiting accounts receivable and crediting allowance for doubtful accounts would be made when
A. A customer pays an account balance.
B. A customer defaults on an account.
C. A previously defaulted customer pays the outstanding balance.
D. Estimated uncollectible receivables are too low.

9. When the allowance method of recognizing bad debt expense is used, the allowance for doubtful accounts would
decrease when
A. Specific account receivable is collected.
B. Account previously written off is collected.
C. Account previously written off becomes collectible
D. Specific uncollectible account is written off.

END OF HANDOUT

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