RECEIVABLES

RECEIVABLES
- Financial asset
- Contractual right to receive cash in the future
- legitimate claim from others for money, goods or services
- Unconditional

TRADE RECEIVABLES
- Arise from sale of goods or services in the normal/ordinary course of business
(nature of business: e.g, manufacturing company of furnitures)

a. ACCOUNTS RECEIVABLE
-
b. NOTES RECEIVABLE
- Evidenced by promissory note or a time draft
- Negotiable: unconditional
o except when it becomes dishonored/overdue
o Dishonored notes
- when a promissory note matures and is not paid
- NR is reclassified as AR, together with the accrued interest & other
charges, if any.

Accounts Receivable xx
Entry: Notes Receivable xx
Interest Receivable xx
- Subscriptions Receivable – current asset if collectible currently; deducted from
Subscribed Share Capital if otherwise

NON-TRADE RECEIVABLES
- Arise from sources other than from sale of goods or services in the normal course
of business
a. Loans to officers, shareholders, directors, and employees
b. Advances to affiliates
c. Advances to supplier for acquisition of merchandise
d. Accrued income (dividends receivable, accrued rent income, accrued royalties
income, and accrued interest on bonds investment)
e. Deposit with creditors, claims for losses and damages
f. Deposits to guarantee performance or payment or to cover possible damages or losses
g. Claims receivable from common carriers for damaged or lost goods
h. Special deposit on contract bids
i. Debit balance of creditors account from overpayments or returns and allowances

CLASSIFICATION IN THE STATEMENT OF FINANCIAL POSITION

Current Assets
 a. All Trade Receivables
 w/in 12 months
 beyond 12 months (however, the amount/estimate thereof not collectible w/in 12
months should be disclosed)
b. Non-trade receivables
 w/in 12 months

Non-current Assets
a. Non-trade receivables
 Beyond 12 months

NOTES RECEIVABLE

 Face value – kung magkano yung mismong nakalagay sa note

 Future value – typically measure cash flows at the end of a project’s life
 Present value (carrying amount) - the value in the present of a sum of money, in
contrast to some future value it will have when it has been invested at compound
interest.
- Measure cash flow at the start of a project’s life

SHORT-TERM NOTES RECEIVABLE (interest & non-interest bearing notes)

- Measured initially and subsequently at face value unless interest rate is
unrealistic

LONG-TERM NOTES RECEIVABLE

a. Interest-bearing NR (with realistic rate)

- Has a stated percentage of interest (nominal rate)
- Measure initially and subsequently at face value (present value)
- Ex: compound interest

b. Interest-bearing NR (with unrealistic rate)

- Measured initially at present value
- Measured subsequently at amortized cost

c. Non-interest-bearing NR
- Interest is included in the face amount
- Measured initially at present value
- Measured subsequently at amortized cost (decreased by principal collection;
increased by real interest income)
 Note is exchanged solely for cash:
-present value/amortized cost of the note = cash proceeds
 Note is exchanged for property, goods, or services:
-Recorded at fair value (if not determinable, imputed rate is used)
COLLECTION UNDER NON-INTEREST N/R

PV of a Single Payment
- Used if you need to compute the present value of a single payment or lump sum
- Also used for computing mixed stream cash flows
PV of Ordinary annuity
- Used if the amt. of cash flows are equal every period
- Cash flows occur at the end of each period (e.g, January 1,2020 start, December
31,2020 collection)
PV of Annuity due
- Cash flows occur at the beginning of each period (e.g, January 1, 2020 start,
January 1,2020 collection)

a. Lump Sum
- one-time collection at the maturity date
- present value of P1

b. Installment
1. Unequally – present value of P1 (single payment)
2. Equally – present value of ordinary annuity
3. Equally w/ advance collection at the very first day – present value of annuity
due

AMORTIZATION TABLE – LUMP SUM ( Amortized cost - Increasing)

Date Interest Revenue Amortized Cost
(CV of note x ER%) (CV of note – Discount
Amort.)
1/1/2019 xx
12/31/2019 xx Xx
12/31/2020 Xx Xx (face value)
(=discount on NR)

AMORTIZATION TABLE – EQUAL INSTALLMENT ( bal of principal - decreasing)

Date A B C D
Periodic Applied to Applied to Balance of
Payment interest principal principal
(D x ER%) (A – B) (D – C)
1/1/2019 Xx
12/31/2019 xx Xx xx Xx
12/31/2020 Xx xx Xx Xx
(=discount on NR)

COMPOUNDING INTEREST MORE FREQUENTLY THAN ANNUALLY

a. Semi-annually
- compounding of interest involves two compounding interest w/in the year
 - one-half of the stated interest rate is paid twice a year
- divide the interest by half; multiply the period by 2
b. Quarterly
- Compounding of interest involves four compounding interest w/in the year
- One-fourth of the stated interest rate is paid four times a year
- divide the interest by four; multiply the period by 4
c. Monthly
- Compounding of interest involves twelve compounding interest w/in a year
- one-twelfth of the stated interest rate is paid twelve times a year
- divide the interest by 12; multiply the period by 12

Unrealistic interest rate

- Interest rate that is significantly different from prevailing interest for similar
notes
- Face value/nominal rate is significantly different from the market value/effective
rate.
- Nominal rate (stated rate/contract rate) is the interest rate stated on the face
of the note.
- Effective rate (market rate/yield rate) is the rate prevailing in the market of
same receivable.
- Nominal rate < Effective rate = Discount (Deducted from face value = Present
value); FV > PV
- Nominal rate > Effective rate = Premium (Added to face value = Present value); FV
< PV
- Nominal rate = Effective rate = No Discount/Premium; FV = PV
*FV - face value ; PV - present value
Discount / Premium on NR
a. Discount on NR (credited)/ Unearned Interest Income
- Contra-account of notes receivable
- excess of the face value over its present value (FV > PV)
- Unamortized discount is deducted from NR

b. Premium on NR (debited)
- adjunct account of notes receivable
- excess of the present value over its face value (FV < PV)
- unamortized premium is added to NR

Gain/Loss on Sale of Equipment

a. Gain (credited) – excess of the selling price over its carrying value (SP > CV)
b. Loss (debited) – excess of the carrying value over its selling price (SP < CV)

Effective interest – interest income/revenue (CV x effective rate x time)

Problem 1 – COMPOUND INTEREST

On January 1, 2020, ABC Co. extended a P4,000,000 loan to one of its officers as
part of ABC’s car and housing assistance program. The note receivable is due on January
1, 2023 and bears a 10% interest compounded annually. How much is the interest income on
December 31, 20x2?

Problem 2 – NON-INTERERST-BEARING NOTE (LUMP SUM)

On January 1, 20x1, A Corp. sold a transaction equipment with a historical

cost of P8,000,000 and accumulated depreciation of P2,800,000. In consideration
for the sale, A Corp received cash of P400,000 and a noninterest-bearing note
receivable due on January 1, 20x4. The prevailing rate of interest for this type
of note is 12%.
1. How much is the carrying amount of the note on initial recognition?
2. How much is the interest income for 20x1?
3. How much is the carrying amount of the note on december 31, 20x1?

Problem 3 – NON INTEREST BEARING NOTE (INSTALLMENT IN ADVANCE)

On January 1, 20x1, Protract Co. sold transportation equipment with a

historical cost of P8,000,000 and accumulated depreciation of P2,800,000. In
consideration for the sale, Protract received cash of P400,000 and a noninterest-
bearing note receivable of P4,000,000 due in 4 equal annual installments. The
first installment was made on January 1, 20x1. The prevailing rate of interest
for this type of note is 12%.
1. How much is the carrying amount of the note on initial recognition?
2. How much is the interest income for 20x1?
3. How much is the carrying amount of the note on December 31, 20x1?
Problem 4 – NON INTEREST BEARING NOTE (SEMI ANNUAL INSTALLMENT)

On january 1, 20x1, Emphatic Co. sold machinery with historical cost of

P8,000,000 and accumulated depreciation of P4,400,000 in exchange for a 3-year,
P4,800,000 noninterest-bearing note receivable due in equal semi-annual payments
starting July 1, 20x1. The prevailing rate of interest of this type of note is
10%.
1. How much is the carrying amount of the note on initial recognition?
2. How much is the interest income for 20x1?
3. How much is the carrying a mount of the note on December 31, 20x1?

Problem 5 – NON INTEREST BEARING NOTE (UNEQUAL/NON-UNIFORM INSTALLMENT)

On january 1, 20x1, Resuscitate Co. sold machinery costing P8,000,000 with

accumulated depreciation of P4,400,000 in exchange for a 3-year, P4,800,000
noninterest-bearing note receivable due as follows:
December 31, 20x1 2,400,000
December 31, 20x2 1,600,000
December 31, 20x3 800,000
Total 4,800,000
The prevailing rate of interest for this type of note is 10%.
1. How much is the carrying amount of the note on initial recognition?
2. How much is the interest income for 20x3?
3. How much is the carrying amount of the note on December 31, 20x2?
Problem 6- EQUAL INSTALLMENTS

On January 1, 20x1, Pathetic Co. sold transportation equipment with a historical

cost of P8,000,000 and accumulated depreciation of P2,800,000. In consideration for the
sale, Pathetic Co. received cash of P400,000 and a noninterest-bearing note receivable of
P4,000,000 due in 4 equal annual installments starting December 31, 20x1. The prevailing
rate of interest of this type of note is 12%.
1. How much is the carrying amount of the note on initial recognition?
2. How much is the interest income of the note for on December 31, 20x1?
3. How much is the current portion of the note on December 31, 20x1?
4. How much is the non-current portion of the note on December 31, 20x1?

SAMPLE PROBLEM #7 –

RECEIVABLE FINANCING

I. Secured borrowing
a. Pledging
b. Assignment
c. Discounting of NR w/ recourse (still liable)
II. Sale of receivables
a. Discounting of NR w/out recourse (sale)
b. Factoring

Discounting with recourse

- Accrued interest is from the date of the note until the maturity date because there
was no derecognition of the AR.
- Endorser is still liable to endorsee (financing company) in case the maker
(customer) fails to pay the obligation.
- treated as liability
- No gain or loss

Discounting without recourse

- Accrued interest is from the date of the note until the date of discount only
because there was a derecognition of the AR.
- Endorser is not liable to endorsee in case maker fails to pay
- There is gain or loss