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Chapter 6
Receivables – Additional Concepts
PROBLEM 1: TRUE OR FALSE
1. TRUE
2. TRUE – Direct origination costs increase the carrying
amount of a financial asset. Therefore, direct
origination costs decrease the effective interest rate.
This is based on the concept that the effective interest
rate and the present value amount have an inverse
relationship.

3. TRUE
4. FALSE
5. FALSE – original effective interest rate
6. TRUE
7. FALSE
8. TRUE
9. TRUE
10. TRUE

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. B
2. B
3. B
4. D
5. C
6. A
7. C
8. C
9. B
10. D
11. A
12. A
13. B
14. C
15. A
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PROBLEM 3: EXERCISES
1. Solution:
Principal amount 2,000,000
Direct origination cost 24,000

Origination fee (₱2,000,000 x 6%)

( 120,000)
Initial carrying amount of loan 1,904,000

 Using “trial and error,” effective interest rate is

approximately 12%.

Collectio Interes
Amortizati Present
Date ns of t
on value
interests income
Jan. 1, 20x1 1,904,000
Dec. 31, 1,932,48
200,000 228,480 28,480
20x1 0
Dec. 31,
200,000 231,898 31,898 1,964,378
20x2
Dec. 31,
200,000 235,725 35,725 2,000,103
20x3

2. Solutions:

July 1, 20x1
July 1, Loan receivable 2,400,00
20x1 Cash 0 2,400,000
July 1, Impairment loss* 24,000
20x1 Loss allowance 24,000
* Equal to 12-month expected credit losses

December 31, 20x1

Dec. 31, Impairment loss 85,200
20x1 Loss allowance (109.2K** – 85,200
24K)
** Lifetime expected credit losses

Dec. 31, Interest receivable 144,000

20x1 Interest income 144,000
(2.4M x 12% x 6/12)***
*** Interest revenue is computed on the gross carrying amount
because the loan is not credit-impaired (i.e., Stage 2 rather than
Stage 3).

December 31, 20x2

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Dec. 31, Loss allowance (109.2K – 103,200

20x1 6K****) 103,200
Impairment gain
****12-month expected credit losses – Morning Co.
reverts back to measuring expected credit losses equal to
12-month expected credit losses because the credit risk
has significantly decreased since initial recognition. This
is evidenced by the fact that the 12-month expected
credit losses of ₱6,000 on 12/31/20x2 are lower than the
12-month expected credit loss of ₱24,000 on 7/1/20x1.
Dec. 31, Interest receivable 144,000
20x1 Interest income 144,000
(2.4M x 12% x 6/12)

3. Solutions:
Requirement (a):
The present value of estimated future cash flows is
computed as follows:
Estimated future cash flows
(2M ÷ 2 equal annual installments)
1,000,000
Multiplied by: PV of ordinary annuity at 10%, n= 2
1.7355372
Present value of estimated future cash flows
1,735,537

The carrying amount is computed as follows:

Principal amount 2,000,000
Interest receivable (accrued interest in 20x2)
200,000
Carrying amount of loan before impairment
2,200,000

Present value of estimated future cash flows

(recoverable amount)
1,735,537
Carrying amount of loan before impairment
( 2,200,000)
Impairment loss
( 464,463)
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The impairment loss is recorded as follows:

Direct
Dec. Impairment loss 464,46
31, Interest receivable 3 200,00
20x3 Loan receivable 0
264,46
3

Allowance
Dec. Impairment loss 464,46
31, Interest receivable 3 200,00
20x3 Allowance for 0
impairment loss 264,46
3

Requirement (b):
Collectio Interest Amortizati Present
Date
ns income on value
Dec. 31, 1,735,53
20x3 7
Dec. 31, 1,000,00 909,09
20x4
173,554 826,446
0 1
Dec. 31, 1,000,00
20x5
90,909 909,091 -
0

4. Solutions:
Requirement (a):
Date Cash 180,0
Loss on transfer 00
Loans receivable 20,00 200,0
0 00

Requirement (b):
Date Cash 180,00
Liability on repurchase 0 180,00
agreement 0

Requirement (c):
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Date Cash 180,0

Loss on transfer 00
Loans receivable (200K – 20,00 180,0
20K) 0 00
Liability on repurchase 20,000
agreement

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. D Solution:
Martin Bank, the lender:
Principal amount 150,000
Direct loan origination costs 4,000
Origination fee (150K x 4%) (6,000)
Carrying amount 148,000

Duff, the borrower:

Principal amount 150,000
Origination fee (150K x 4%) (6,000)
Carrying amount 144,000

2. C (194,000 x 12.4% x 1/12) = 2,005

3. B
Solution:
Jan. Loan receivable 500,000
1,
Unrealized loss – “Day 1” 182,240
20x
1 difference 500,000
Cash 182,240
Unearned interest (1)

(1)

Future cash flow 500,000

Multiply by PV of ₱1 @12%, n=4 0.63552
Present value of loan receivable 317,760

Face amount 500,000

(317,7
Present value of loan receivable
60)
Unearned interest income 182,
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240

 The net effect in the 20x1 profit is determined as

follows:
Interest income (317,760 x
12%) 38,131

Unrealized loss - "Day 1" (182,240

difference )

(144,10
Net decrease in profit 9)

4. A (8,200,000 – 623,246) x 10% = 757,675

5. D Solution:
PV of future cash flows (1.4M x PV ann. due 3,766,07
@12%, n=3) 1
(5,600,00
Carrying amount
0)
(1,833,9
Impairment loss
29)

Collectio Interest Amortizati Present

Date ns income on value
Dec. 31,
20x1 3,766,071
Jan. 1, 1,400,00
20x2 0 0 1,400,000 2,366,071
Jan. 1, 1,400,00
20x3 0 283,929 1,116,071 1,250,000
Jan. 1, 1,400,00
20x4 0 150,000 1,250,000 -

6. C Solution:
 The impairment loss is computed as follows:
PV of remaining cash flows 3,568,785 (a)
Less: Carrying amount (4,068,501)(b)
Impairment loss (499,716)
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The PV of the remaining cash flows is computed as

(a)

follows:
Cash PV of 1 PV Present
Date flows @11% factors value
1,000,00
1/1/x3 0 n=0 1 1,000,000
1,500,00 0.900900
1/1/x4 0 n=1 901 1,351,351
1,500,00 0.811622
1/1/x5 0 n=2 433 1,217,434
3,568,785

The carrying amount of the loan is computed as

(b)

follows:
Initial measurement:
Face amount 4,000,000
Direct origination costs 364,098
Origination fees (240,000)
Initial carrying amount 4,124,098

Subsequent measurement:
Collecti Interest Amortizat Present
Date ons income ion value
1/1/x1 4,124,098
12/31/x
1 480,000 453,651 26,349 4,097,749
12/31/x
2 480,000 450,752 29,248 4,068,501

 The interest income in 20x2 is computed as follows:

(3,568,785 – 1,000,000) x 11% = 282,566

7. A Bigco, Inc. has not surrendered control over any

amount of the transferred receivables because it is
obligated to repurchase them.

8. D
Since the transfer of the bond is used only as security for
the loan, and not as a sale of the bond, Dayco would not
recognize the bond in its books at the time of the
transfer. The bond would be recognized in Dayco's books
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on the date Rayco defaulted. The bond is measured at

fair value.

9. C
Solution:
Year Expected fees Fractions
1 40,000 40/80
2 30,000 30/80
3 10,000 10/80
80,000

60,000 servicing asset x 40/80 fraction in Year 1 =

30,000 amortization

10. C – (750,000 x .02 =15,000 service fee) +

(750,000 x .12 x 51/365 = 12,575 interest expense) =
total of 27,575

11. C
Maturity value = 500,000 + (500,000 x 8%) = 540,000
Discount = 540,000 x 10% x 6/12 = 27,000
Net proceeds = 540,000 – 27,000 = 513,000

12. A

Maturity value [1M + (1M x 12% x 90/365)] 1,029,589

Protest fee 1,000

Amount transferred to accounts 1,030,58

receivable 9

PROBLEM 5: FOR CLASSROOM DISCUSSION

1. Solution:

Initial measurement:
5,000,00
Face amount 0
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261,98
Direct loan origination costs 6
(100,00
Origination fees (5M x 2%) 0)
5,161,9
Carrying amount - 1/1/x1 86

Subsequent measurement:
Future cash flows x PV factor @ x% = Present value
of note

First trial (using 9%):

 Principal of (5,000,000 x PV of 1 @ 9%, n=4) +
Interest of (500,000 x PV of ordinary annuity @ 9%,
n=4) = 5,161,986
 (5,000,000 x 0.70842521105) + (500,000 x
3.23971987722) = 5,161,986
 (3,542,126 + 1,619,860) = 5,161,986 is equal to
5,161,986

 The effective interest rate is 9%.

Collecti Interest Amortizat Present

Date ons income ion value
1/1/x1 5,161,986
12/31/ 5,126,56
x1 500,000 464,579 35,421 5
12/31/
x2 500,000 461,391 38,609 5,087,956
12/31/
x3 500,000 457,916 42,084 5,045,872
12/31/
x4 500,000 454,128 45,872 5,000,000

2. Solution:
Initial measurement: 2M x PV of 1 @ 10%, n=4 =
1,366,027

Jan. Loan receivable 2,000,0

1,
Unrealized loss (“Day 1” 00
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20x1 difference) 633,973 2,000,00

Cash 0
Unearned interest 633,973

3. Solutions:

July 1, 20x1

July 1, Loan receivable 2,000,00

20x1 Cash 0 2,000,000
July 1, Impairment loss* 20,000
20x1 Loss allowance 20,000

* Equal to 12-month expected credit losses (2.5% x 800,000)

December 31, 20x1

Dec. 31, Impairment loss 71,000

20x1 Loss allowance (91K – 71,000
20K)

Lifetime expected credit losses = (3.0% + 10%) x 700,000 =

91,000

Dec. 31, Interest receivable 100,000

20x1 Interest income (2M x 10% x 100,000
6/12)**

** Interest revenue is computed on the gross carrying amount

because the loan is not credit-impaired (i.e., Stage 2 rather than
Stage 3).

December 31, 20x2

Dec. 31, Loss allowance (91K – 5K) 86,000

20x2 Impairment gain 86,000

12-month expected credit losses = (1% x 500,000) = 5,000

Sunny Day Corp. reverts back to measuring expected

credit losses equal to 12-month expected credit losses
because the credit risk has significantly decreased since
initial recognition. This is evidenced by the fact that the
12-month default risk of 1% on 12/31/20x2 is lower than
the 12-month default risk of 2.5% on 7/1/20x1
Dec. 31, Interest receivable 100,000
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20x2 Interest income (2M x 10% 100,000

x 6/12)

4. Solution:

PV of future cash flows (1M x PV ord. ann. 2,486,85

@10%, n=3) 2
Carrying amount (3M principal + .4M int. (3,400,00
receivable) 0)
Impairment loss (913,148)

Direct Allowance
Dec. 31, 20x1 Dec. 31, 20x1
Impairment loss 913,148 Impairment loss 913,148
Interest receivable Interest receivable
400,000 400,000
Loan receivable Loss allowance
513,148 513,148

Collectio Interest Amortizati Present

Date ns income on value
Dec. 31,
20x1 2,486,852
Dec. 31, 1,000,00
20x2 0 248,685 751,315 1,735,537
Dec. 31, 1,000,00 909,09
20x3 0 173,554 826,446 1
Dec. 31, 1,000,00
20x4 0 90,909 909,091 -

5. Solution:
Nov. Cash 28,00
14,
Liability on repurchase 0 28,00
20x1
agreement 0

The transfer does not qualify for derecognition

because Athena Co. is required to repurchase the
transferred loan. The cash received on the transfer is
recorded as liability.
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6. Answer: ₱200,000 – the gross amount. Offsetting is

not applicable because ABC Co. does not intend to
settle the accounts receivable and accounts payable
simultaneously. A financial asset and a financial
liability are offset and only the net amount is
presented in the statement of financial position if the
entity has both:
a. a legal right of setof; and
b. an intention to settle the amounts on a net basis or
simultaneously

7. Solution:

Cash 723,000
Discount on loan payable 27,000
Loans Payable 750,000

8. Solutions:

 Journal entries
Notification basis Non-notification basis
1. To record the assignment
Accts. receivable – assigned Accts. receivable – assigned
900K 900K
Accounts receivable Accounts receivable
900K 900K
2. To record the receipt of loan
Cash Cash
723K 723K
Discount on L/P (900M x 3%) Discount on L/P (900M x 3%)
27K 27K
Loan payable Loan payable
750K 750K
3. To record the collections
Cash
350K
Sales returns
No entry yet
560
Accts. rec’ble – assigned
350,560
4. To record the write-off
Allowance for bad debts Allowance for bad debts
530 530
Accts. receivable – Accts. receivable –
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assigned 530 assigned 530

5. To record the remittance of collections to Sunday, plus
interest
Loan payable
350K
(a)
Not applicable (see #’s 6 & 7 Interest expense
below) 7.5K
Cash
357.5K
6. Sunday Financing Corp. notifies Morning Co. of the
collections
Loan payable
350K
Sales returns 560
Accts. rec’ble – assigned
350,560
7. Morning Co. pays the interest
Interest expense (a)
7.5K
Cash
7.5K
(a)
(750K x 12% x 1/12) = 7.5K

 Equity in assigned receivables

A/R – assigned Loan payable

beg 900,00 750,0
. 0 00 beg.

350,56 350,00
0 collection payment 0
53
0 write-off

548,91 400,0
0 end. end. 00

A/R - assigned (900K -

351,090) 548,910
Loan payable (750K -
350K) (400,000)
Equity in assigned
receivables 148,910
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9. Solutions:
Requirement (a):

Mug Co.’s books:

Cash..................... (squeeze)
368,000
Due from Factor (2% × ₱400,000) 8,000
Loss on Sale of Receivables (6% × ₱400,000) 24,000
Accounts Receivable
400,000

Coffee Co.’s books:

Accounts Receivable 400,000
Due to Mug
8,000
Financing Revenue
24,000
Cash
368,000

Requirement (b):

Mug Co.’s books:

Cash 368,000
Due from Factor
8,000
Service charge (6% × ₱400,000) 24,000
Loss on recourse obligation 7,000
Accounts Receivable
400,000
Recourse Liability
7,000

10. Solution:
Maturity value = Principal + Interest for the full term of
the note
Maturity value = 1,000,000 + (1,000,000 x 12% x 6/12)
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Maturity value = 1,060,000

Discount period = unexpired term (or full term – expired

term)
Discount period = 6 months – 4 months from July 1 to
Nov. 1
Discount period = 2 months

Discount = Maturity value x Discount rate x Discount

period
Discount = 1,060,000 x 16% x 2/12
Discount = 28,267

Net proceeds = Maturity value - Discount

Net proceeds = 1,060,000 – 28,267
Net proceeds = 1,031,733

Interest income = accrued interest as of date of

discounting
Interest income = 1,000,000 x 12% x 4/12
Interest income = 40,000

Requirement (a): Without recourse basis

Nov Cash (equal to net proceeds) 1,031,7
. 1, Loss on discounting (squeeze) 33
20x
Note receivable 8,267 1,000,0
1
Interest income 00
40,000

Requirement (b): With recourse basis – Conditional

sale
Nov Cash (equal to net proceeds) 1,031,7
. 1, Loss on discounting (squeeze) 33
20x
Note receivable 8,267 1,000,0
1
discounted 00
Interest income 40,000

Requirement (c): With recourse basis – Secured

borrowing
Nov Cash (equal to net proceeds) 1,031,7
. 1, Loss on discounting (squeeze) 33
20x
Liability on note 8,267 1,000,0
1
discounted 00
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Interest income 40,000