RECEIVABLES

Perpetual Bank
Perpetual Bank has a P10,000,000 loan to AMX Company, which
was invested by the latter in real estate development. Due to
the economic downtrend in the real estate business, AMX is
experiencing declining sales and is likely to default on its
obligation to Perpetual Bank. AMX requests for a restructuring
of its loan with Perpetual. Prevailing market rate of interest for
similar obligations at the time of restructuring is 8%. Accrued
interest receivable on the loan at December 31, 2020 is
P1,000,000, based on stated interest rate of 10%. Perpetual had
not previously recognized any impairment on this AMX note based
on 12-month expected credit loss on date of recognition.

For each of the following alternative restructuring arrangements,

determine the amount of impairment loss to be recognized by
Perpetual Bank, and give the entry in the books of the company
to record the impairment. (Round off present value factors to
four decimal places.)

Alternative 1
Ÿ Reduction of principal to P9,000,000
Ÿ Condonation of accrued interest
Ÿ Extension of maturity date to December 31, 2022
Ÿ Reduction of interest rate to 8%, payable annually
starting December 31, 2021

Alternative 2
Ÿ Condonation of accrued interest
Ÿ Principal amount of P2,000,000 plus interest on the unpaid
principal reduced to 8%, payable in annual intallments
to begin December 31, 2021

Alternative 3
 Ÿ Payment of accrued interest on the date of restructuring
(December 31, 2020)
Ÿ Extension of maturity date of the loan to December 31,
2022, with interest during the extended term at 7%
payable on December 31, 2021 and 2022

Alternative 4
Ÿ Extension of maturity date to December 31, 2022
Ÿ Interest at 10% on the carrying value of the loan
(P11,000,000) payable December 31, 2021 and
December 31, 2022

The present condition of AMX Company indicates that it has the

ability to meet the modified terms as indicated.

Bulacan Company
On September 1, 2020, Bulacan Company assigns specific
receivables totaling P800,000 to Pacific Bank as collateral on a
P650,000, 12% note. Bulacan will continue to collect the
assigned accounts. Pacific also assesses a 2% service charge
based on the total accounts receivable assigned. Bulacan is to
make monthly payments to Pacific with cash collected on
assigned accounts.

During the month of September, Bulacan collected P300,000 of

accounts assigned. This amount, plus one-month interest on the
loan balance was remitted to the finance company on
September 30. During October, Bulacan wrote off P10,000 and
collected P400,000 of assigned accounts. The balance of the
loan plus interest thereon was remitted to Pacific Bank on
October 31. The balance of assigned accounts receivable was
reverted to Bulacan.
Required:
Prepare journal entries in the books of Bulacan Company to
record the foregoing transactions.

Tarlac Company
During its second year of operations, Tarlac Company thought of
expanding its business. In order to generate additional cash
necessary for this expansion, on April 1, 2020, the company
factored P1,200,000 of accounts receivable to Camiling Finance.
Factoring fee was 10% of the receivables purchased. The finance
company withheld 6% of the purchase price as protection against
sales returns and allowances.

On May 1, 2020, accounts receivable amounting to P500,000 were

assigned to First Bank as collateral. The bank advanced 80% of
the assigned accounts less finance charge of 5% based on the
amount advanced. During the month of May, Tarlac collected
P350,000 which was remitted to the bank on June 1. This amount
was applied first to payment of interest at the rate of 1% per
month based on the outstanding balance and the remainder was
applied to the principal.

On June 1, a note receivable with a face value of P50,000 was

discounted with BPI at a discount rate of 10%. The P50,000 face
value note bears 9% interest dated April 30 and is due on
August 28.

Required: Determine the following: (Used 360 day year.)

a) Amount of cash received from the factoring of accounts
receivable.
ANSWERS
PERPETUAL BANK
Alternative 1:
Principal Value
Add: Accrued Interest
Total: Carrying Value
Less: Present Value of future cash inflows
(9,000,000 x 0.8264)
(9,000,000 x 8% x 1.7355)
Total: Impairment Loss

ENTRIES
Impairment Loss - Notes Receivable
Restructured Notes Receivable
Discount on Restructured Notes Receivable
Notes Receivable
Interest Receivable

Alternative 2:
Principal Value
Add: Accrued Interest
Total: Carrying Value
Less: Present Value
2,000,000 + 800,000 x 0.9091
2,000,000 + 640,000 x 0.8264
2,000,000 + 480,000 x 0.7513
2,000,000 + 320,000 x 0.6830
2,000,000 + 160,000 x 0.6209
Total: Impairment Loss

ENTRIES
Impairment Loss
Restructured Notes Receivable
Alternative 3:
Carrying Value
Less: Present Value of future cash inflows

Total: Impairment Loss

ENTRIES
Cash
Impairment Loss
Restructured Notes Receivable

Alternative 4:
Principal Value
Add: Accrued Interest
Total: Carrying Value
Less: Present Value of future cash inflows

ENTRIES
No entries were made.

Bulacan Company
Sept. 1, 2020 Accounts Receivable Assigned

Cash
 Finance Charge

Cash

Sept. 30, 2020 Notes Payable - Pacific Bank

Interest Expense

Allowance for Doubtful Accounts

Cash

Oct. 31, 2020 Notes Payable - Pacific Bank

Interest Expense

Accounts Receivable

Tarlac Company
a. Gross amount of receivables factored
Less: Factoring fee (1,200,000 x 10%)
Factor's holdback (1080,000 x 6%)
Total: Net cash received from factoring

ENTRIES
Cash
Loss from factoring
Factoring holdback
b. Accounts Receivable Assigned

Cash
Finance Charge

Cash

Notes Payable
Interest Expense

Accounts Receivables Assigned balance

Less: Notes Payable balance
Equity on assigned accounts

c. Principal Value
Add: Interest (50,000 x 9% x 120/360)
Total: Maturity Value
Less: Discount (51,500 x 10% x 88/360)
Total: Proceeds
 10,000,000
1,000,000
11,000,000

7,437,600
1,249,560 8,687,160
2,312,840

2,312,840
9,000,000
ed Notes Receivable 312,840
10,000,000
1,000,000

10,000,000
1,000,000
11,000,000

2,545,480
2,181,696
1,863,224
1,584,560
1,341,144 9,516,104
1,483,896

1,483,896
10,000,000
Discount on Restructured Notes Receivable 10,000,000
 Notes Receivable 10,000,000
Interest Receivable 1,000,000

10,000,000
uture cash inflows
10,000,000 x 0.8264 8,264,000
10,000,000 x 7% x 1.7355 1,214,850 9,478,850
521,150

1,000,000
521,150
10,000,000
Notes Receivable 10,000,000
Discount on Restructured Notes Receivable 521,150
Interest Receivable 1,000,000

10,000,000.00
1,000,000.00
11,000,000.00
uture cash inflows
11,000,000 x 0.826446281 9,090,909.09
11,000,000 x 10% x 1.73553719 1,909,090.91 11,000,000.00

0.00

800,000
Accounts Receivable 800,000

634,000
 16,000
Notes Payable - Pacific Bank 650,000

300,000
Accounts Receivable Assigned 300,000

300,000
6,500
Cash 306,500

10,000
Accounts Receivable Assigned 10,000

400,000
Accounts Receivable Assigned 400,000

350,000
3,500
Cash 353,500

90,000
Accounts Receivable Assigned 90,000

ables factored 1,200,000

00,000 x 10%) 120,000
(1080,000 x 6%) 64,800 184,800
d from factoring 1,015,200

1,015,200.00
120,000.00
64,800.00
Accounts Receivable 1,200,000.00
 500,000
Accounts Receivable 500,000

380,000
20,000
Notes Payable 400,000

350,000
Accounts Receivable Assigned 350,000

346,000
4,000
Cash 350,000

ssigned balance 150,000

54,000
96,000

50,000
9% x 120/360) 1,500
51,500
x 10% x 88/360) 1,259
50,241