Chapter 4 ACCOUNTS RECEIVABLE

Learning Objectives
• Classify receivables as either current or noncurrent assets.
• State the timing of recognition and measurement of trade receivables.
• Estimate the recoverable historical cost of trade receivables.

Discussion:

Trade vs. Non-trade receivables

• Trade receivables are receivables arising from the sale of goods or services in
the ordinary course of business.
• Receivables arising from other sources are non-trade receivables.

Financial statement presentation

• Trade receivables are classified as current assets when they are expected to be
realized in cash within the normal operating cycle or one year, whichever is
longer.
• Non-trade receivables are classified as current assets only when they are
expected to be realized in cash within one year.
• Trade and non-trade receivables that are current assets are aggregated and
presented in the statement of financial position as “Trade and other
receivables.”

Initial Measurement
• Trade receivables that do not have a significant financing component are
measured at the transaction price in accordance with PFRS 15 Revenue from
Contracts with Customers.
• Transaction price is “the amount of consideration to which an entity expects to
be entitled in exchange for transferring promised goods or services to a
customer, excluding amounts collected on behalf of third parties (e.g., some
sales taxes).” (PFRS 15)
• As a practical expedient under PFRS 15, an entity may not discount a trade
receivable if it is due within 1 year.

Recognition
• Trade receivable is recognized when the entity has right to consideration that is
unconditional. This is normally the case when the control over the promised
goods or services is transferred to the customer.

FOB Shipping point vs. FOB Destination

• Under FOB shipping point, ownership is transferred to the buyer upon
shipment. Therefore, sales and accounts receivable are recognized on shipment
date.
• Under FOB destination, ownership is transferred only upon receipt of the goods
by the buyer. Therefore, sales and accounts receivable are recognized only when
the buyer receives delivery of the goods.

Accounting for sales discounts

• Trade discount vs. Cash discount
 • Traditional GAAP vs. PFRS 15 treatment

Allowance method of accounting for bad debts

• Journal entries
• T-account of the “Allowance for doubtful accounts” account.
• T-account of the “Accounts receivable” account.

Estimating doubtful accounts

1. Percentage of net credit sales method
2. Percentage of ending receivable method
3. Aging method

DO-IT-YOURSELF!

Multiple Choice. Write the letter of your chosen answer.

1. Which of the following is incorrect?
a. The operating cycle always is one year in duration.
b. The operating cycle sometimes is longer than one year in duration.
c. The operating cycle sometimes is shorter than one year in duration.
d. The operating cycle is a concept applicable both to manufacturing and retailing
enterprises.

2. The category "trade receivables" includes

a. advances to officers and employees.
b. income tax refunds receivable.
c. claims against insurance companies for casualties sustained.
d. none of these.

3. Which of the following should be recorded in Accounts Receivable?

a. Receivables from officers
b. Receivables from subsidiaries
c. Dividends receivable
d. None of these

4. When the direct write-off method of recognizing bad debt expense is used, the entry
to write off a specific customer account would
a. increase net income.
b. have no effect on net income.
c. increase the accounts receivable balance and increase net income.
d. decrease the accounts receivable balance and decrease net income.

5. When comparing the allowance method of accounting for bad debts with the direct
write-off method, which of the following is true?
a. The direct write-off method is exact and also better illustrates the matching
principle.
b. The allowance method is less exact but it better illustrates the matching
principle.
 c. The direct write-off method is theoretically superior.
d. The direct write-off method requires two separate entries to write off an
uncollectible account.

6. When the allowance method of recognizing bad debt expense is used, the entry to
record the write-off of a specific uncollectible account would decrease
a. allowance for doubtful accounts.
b. net income.
c. net realizable value of accounts receivable.
d. working capital.

7. When a specific customer's account is written off by a company using the

allowance method, the effect on net income and the net realizable value of the
accounts receivable is
Net Realizable Value
Net Income of Accounts Receivable

a. None None
b. Decrease Decrease
c. Increase Increase
d. Decrease None

8. When the allowance method of recognizing bad debt expense is used, the entries at
the time of collection of a small account previously written off would
a. increase net income.
b. increase the allowance for doubtful accounts.
c. decrease net income.
d. decrease the allowance for doubtful accounts.

9. A method of estimating bad debts that focuses on the balance sheet rather than
the income statement is the allowance method based on
a. direct write-off.
b. aging the trade receivable accounts.
c. credit sales.
d. specific accounts determined to be uncollectible.

10.The entry

Accounts Receivable xxx

Allowance for Uncollectible Accounts xxx

would be made when

a. a customer pays its account balance.
b. a customer defaults on its account.
c. a previously defaulted customer pays its outstanding balance.
d. estimated uncollectible receivables are too low.
Exercises.
1. The following information was abstracted from the records of the Captain Ri
Corporation:
Accounts Receivable, 12/31/2012 590,000
Allowance for bad debts before adjustment, 12/31/2012 18,000 (dr)
Sales, 2012 2,180,000
Sales Discounts, 2012 18,000
Sales Returns, 2012 27,000
Prepare the adjusting entry for doubtful accounts expense under the following
assumptions:
1. 3% of outstanding accounts receivable are uncollectible.
2. 1.5% of net sales are uncollectible.
3. An aging schedule of the accounts shows that 21,400 of the accounts are
uncollectible.

2. A trial balance before adjustment of Yoon Se Ri Co included the following:

Debit Credit
Accounts receivable 90,000
Allowance for doubtful accounts 730
Sales 360,000
Sales returns and allowances 8,000
Requirement: Give the journal entries assuming that the estimate of uncollectibles is
determined by taking (1) 6% of gross accounts receivable and (2) 2% of net sales.

REFERENCE:

Millan, Intermediate Accounting 1(2019), Philippines: Bandolin Enterprise