MODULE 2 – RECEIVABLES

ANSWERS TO ASSESSMENT PROBLEMS

1. Wuhan Company is engaged in the sale of various home and office furnishings. It caters
to both cash and credit customers. The following transactions affecting the accounts
receivable of Wuhan Company took place during the year 2020:

Sales (cash and credit) 591,050

Cash received from cash customers 205,175
Cash received from credit customers (P281,300 was
received from customers who took advantage of the
discount feature of the company’s credit terms 3/10. 320,800
n/30
Accounts written off as worthless 4,955
Credit memoranda issued to credit customers for sales
returns and allowances 26,275
Cash refunds given to cash customers for sales returns
and allowances 16,972
Recoveries on accounts written off as uncollectible in prior
periods (not included in cash collections stated above) 6,615

An aging of the receivables indicates that P17,300 of the accounts receivable balance are
deemed uncollectible.

The following balances were taken from the December 31, 2019 statement of financial
position.

Accounts Receivable – P95,842 Allowance for Bad Debts – P9,740

a. What are the balances of Accounts Receivable and Allowance for Bad Debts that
would be shown in the December 31, 2020 statement of financial position?
b. What is the amount of bad debts expense reported in profit or loss for the year ended
December 31, 2020?
 a. Accounts receivable, December 31, 2019 P95,842
Sales on account (591,050 – 205,175) 385,875
Cash collections from credit customers (320,800)
Cash discounts granted to customers (281,300/97%) x 3% (8,700)
Accounts written off as worthless (4,955)
Credit memoranda for sales returns and allowances (26,275)
Accounts receivable, December 31, 2020 P120,987

This is easier shown by a T-account analysis:

Accounts Receivable
Balance, 12/31/19 95,842 Collections 320,800
Sales on account 385,875 Sales discounts 8,700
Write off 4,955
Sales returns & allowances 26,275
Total 481,717 Total 360,730
Balance 120,987

Allowance for bad debts, December 31, 2020 (given) P17,300

b. Allowance for doubtful accounts, December 31, 2019 P9,740

Accounts written off as worthless (4,955)
Recoveries of accounts previously written off 6,615
Allowance balance before adjustment/provision P11,400
Required allowance balance, end 17,300
Bad debts expense for the year P 5,900

Similarly, the T-account approach can be used, as follows:

Allowance for Bad Debts

Write off 4,955 Balance, 12/31/19 9,740
Recoveries 6,615
Total 4,955 Total 16,355

Balance before adjusment (16,355 – 4,955) 11,400

Required balance per aging 17,300
Required adjustment (Dr. Bad Debts Expense; Cr. Allowance for BD) 5,900

Take note that the recovery of accounts previously written off in the amount of 6,615 was not
included in the analysis of accounts receivable because said amount was not included in the cash
collections given; which means that upon recovery, entries are:
Dr. Accounts Receivable, 6,615
Cr. Allowance for Bad Debts, 6,615
and
Dr. Cash, 6,615
Cr. Accounts Receivable, 6,615
Thus, recoveries do not affect the amount of accounts receivable.
If the amount is included in the given cash collections, said amount should be reflected in the
debit side of the T-account for Accounts Receivable.
2. On January 1, 2020, Positive Company sold land that originally cost P400,000 to the
Negative Company. As payment, Negative gave Positive a P600,000 note. The note
bears an interest rate of 8% and is to repaid in three annual installments of P200,000 plus
interest on the outstanding balance. The first payment is due on December 31, 2020. The
market price of the land is not reliably determinable. The prevailing interest rate for notes
of this type is 8%.

a. How much is the gain on the sale of land?

b. How much is the interest revenue for the year 2020?
c. Assume the same facts given in the problem, but change the prevailing interest rate
for notes of this type to 12% (instead of 8%). At how much should the note be
recorded on January 1, 2020?
d. Using the assumption of (c), how much is the interest revenue for the year 2020?
e. Using the assumption of (c), what is the amortized cost of the note receivable at
December 31, 2020?

a. Selling price of land P600,000

Cost of land 400,000
Gain on sale of land P200,000

Entry upon sale of land;

Notes Receivable 600,000
Land 400,000
Gain on Sale of Land 200,000

The note received is recorded at its face amount of P600,000. The note bears an
interest rate of 8% which is equal to the prevailing interest rate for similar notes.

b. Interest revenue for 2020 (600,000 x 8%) P48,000

Since the stated interest rate (8%) is equal to the prevailing market interest rate,
the effective interest revenue is the equal to the nominal or stated interest,
computed as face value x stated interest rate.

Entries for the collections at December 31, 2020, 2021 and 2022 are:

2020 2021 2022

Cash 248,000 Cash 232,000 Cash 216,000
Notes R’ble 200,000 Notes R’ble 200,000 Notes R’ble 200,000
Interest Revenue. 48,000 Interest Revenue. 32,000 Interest Revenue. 16,000
c. Present value of note
200,000 + (8%x600,000)=248,000; 248,000x0.8929 221,439
200,000 + (8%x400,000)=232,000; 232,000x0.7972 184,950
200,000 + (8%x200,000)=216,000; 216,000x0.7118 153,749
560,138

If a non-interest bearing note is exchanged for property, goods, or services, the

transaction is recorded at the fair value of the goods received unless the fair value
of the note is more clearly determinable. In the problem, the market price of the land
is not determinable, so an imputed interest rate is used to determine the present
value of the note. The sale of land, then, is recorded as follows:

Notes Receivable 600,000

Discount on Notes Receivable 39,862
Land 400,000
Gain on Sale of Land 160,138

d. Interest revenue for 2020 (560,138 x 12%) P 67,217

Entries for the collections at December 31, 2020, 2021 and 2022 are:

2020 2021 2022

Cash 200,000 Cash 200,000 Cash 200,000
Notes R’ble 200,000 Notes R’ble 200,000 Notes R’ble 200,000
Interest Revenue. 48,000 Interest Revenue. 32,000 Interest Revenue. 16,000

Discount on NR. 19,217 Discount on NR 13,523 Discount on NR. 7,122

Interest Revenue. 19,217 Interest Revenue 13,523 Interest Revenue 7,122

Effective Stated Amortization Principal Carrying Value

Date Interest Interest of Discount Payment of Note
01/01/2020 560,138
12/31/2020 67,217 48,000 19,217 200,000 379,355
12/31/2021 45,523 32,000 13,523 200,000 192,878
12/31/2022 23,122* 16,000 7,122 200,000 -0
*Adjusted due to rounding off.

e. Carrying amount of note, January 1, 2020 560,138

1st principal payment on December 31, 2020 (200,000)
Amortization of discount (67,217 – 48,000) 19,217
Carrying amount of note, December 31, 2020 379,355