Chapter4

Cash and Cash Equivalents

AA. The accountant of CLN Company gathered the following information:

Trade and Other Receivables
• The November 30 bank statement balance included the bank service
charges of P2,000.
• The November 30 cash balance in the ledger was P244,500.
❖ Learning Outcomes . •
• On November 30, outstanding checks were P63,000 while undeposited
collections were P36,000. After reading this chapter, you should be able to:
• The December bank service charges as shown on the bank statement was
P3,000. (a) define and classify receivables;
• The December 31 cash balance in the general ledger was P319,750 which (b) understand the proper valuation and presentation of receivables in the
recognized P482,7S0 for December receipts and P405,500 for checks statement of financial position;
written during December. In transit to the bank at December 31 were (c) understand the differences between interest-bearing and non-interest-bearing
receipts of P28,750. Checks of P15,000 written prior to December and notes receivable and solve problems relating to them;
checte ofP60,500 written in December had not yet cleared the bank. (d) account for bad debt expense and the impairment of receivables; •
fe) understand the accounts receivable and notes receivable financing
(40) Whatis the total disbursements per booksfor the month ofDecember? • arrangements; and •.
a. P403,500 (f) acquire proficiency and accuracy in answering theoretical questions and
b. 'P404,500 solving problems delating to trade and other receivables.
c. P405,500
d. P40Z500
❖ Definition
(41) Whatis the November 30 unadjusted balance per bank statement?
a. P27h500 Receivables are claims that are expected to be settled by receipt of cash or another
b. P269,500 financial asset fi'om another entity. Loans and receivables are financial assets under
c. P268,500 PFRS 9, Financial Instruments and PFRS 7,Financial Instruments - Disclosures.
d. P266,500
Classification
(42J Whatis the totalcash receipts per bank during the month ofDecember?
a. P490,000 > As to source
b. P482,500
c. P49Z250 • Trade receivables r- those arising from sale of goods or services in the
d. P488,000 normal course of business.

(43) Whatis the total cash disbursements per bank during the month ofDecember? • Non-trade receivables - all other claimis not arising from sale of goods or
services.
a. P419,000
b. P405,500
> As to timing of collection
c. P408,500
d. P396,000 ,
• Current receivables - those that are expected to be collected within twelve
months from the end ofthe reporting period. Generally,trade receivables
(44) Whatis the unadjusted bank balance on December 31?, are classified as current; however, portion of the receivables that are not
a. P316J50
collectible within tvy^elve months from the end of the reporting period
b.' P363,500
should be disclosed.
c. P322J50
d. P366,500 • Non-current receivables - all other claims that are not classified as current.

Valuation and Presentation in the Statement of Financial Position

> Loans and receivables are presented in the statement bf.financial position at
their net realizable value or net amortized cost using the effective, interest
method. '

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Chapter 5
Trade and Other Receivables Chapter 5
Trade and Otber Receivables
• The amortized cost ofa financial asset is the amount at which the financial
asset is measured at initial' recognition minus principal repayments, plus Unrealistic stated interest rate. When the note received bears an
(or minus)the cumulative amortization using the effective interest method interest rate that is unrealistic and significantly different from the
and minus rany reduction (directly or through the use of an allowance prevailing market interest rate for similar instruments,thejnarket value of
account)for impairment or uncollectibility. the note is equal to the present value ofthe principal and interest payments
discounted at an imputed interest rate, which should approximate the
• In (Case of long-term trade receivables, when the gross receivable includes market rate at that time.
a charge for interest,any unearned finance charges are deducted.
Example 1. On December 31, 2021,an entity sold a piece of land costing
> Notes receivable P800,000 and received a three-year,3%,Pl,200,000 note as payment The
interest on the note is payable annually every December 31. The principal
• Interest-bearing notes receivable amount of the note is payable on December 31, 2024. The prevailing
interest fate for similar obligation at December 31, 2021 is 10%. Assume
The stated interest ofthe note approximates the market interest rate. that there is no avciilable fair value for the land on the date ofsale.
When the note bears an interest rate that approximates the current market
rate for similar instrument,the present value ofthe note is equal to its face The present value ofthe note is computed as follows:
value. Subsequent to the date ofthe note, its cariying amount is the sum
ofthe principal or face value and any accrued interest 1,200,000x0.7513 901,560
1,200,000 X 3% X 2.4869 89.528
Example. On October 1, an entity received a 12%, one-year note for Total 991.088
P100,000 from a customer in settlement ofits account The market rate of
interest for similar note is 12%. The receipi of the note, periodic collection of interest and amortization of
discount, and the collection of the principal on maturity date are recorded
The note is recorded at its present value which is equal to its face value of as follows (Refer to the amortization table below for the amounts).
P100,000,as follows:
Principal Effective Nominal Amortization Arhortized
Notes Receivable 100,000 Date Payment Interest Interest of Discount Cosl
Accounts Receivable 100,000 12/31/21 991,088
12/31/22 99,109 36,000 63,109 1,054,197
At the end of the reporting period (assume that the entity's accounting 12/31/23 105,420. 36,000 69,420 1,123,617
period ends on December 31),an adjusting entry is made to record accrued 12/31/24 1,200,000 112.383* 36,000 76,383 -0-
interest, as follows: ^Adjusted due to rounding off.

Interest Receivable 3,000 12/31/21

Interest Revenue 3,000 Notes Receivable 1,200,000
100,000X im X 3/12 Discount on Notes Receivable 208,912
Land 800,000
On maturity date,the collection ofthe principal and interest is recorded as
Gain on Sale ofLand 191,088
follows(assume that a reversing entry was made on January 1):
Cash 112,000
Present value of note(presumed selling price ofland) 991,088
Notes Receivable 100,000
Carrying amount ofland 800t000
Interest Revenue Gain on sale 191.088
12,000

If no reversing entry was made on January 1,the collection on maturity date Face value of note 1,200,000
is recorded as: Present value of note 991iQ88
Discount on notes receivable 208.912
Cash 112,000
Notes Receivable 100,000 12/31/22
Interest Receivable 3,000 Cash 36,000
Interest Revenue
9,000 Discount on Notes Receivable • 63,109
Interest Revenue 99,109
86
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Chapter 5 Chapters
Trade and Other Receivables Trade and Other Receivables
ff
12/31/23 Face value of note 1,200,000
Cash 36,000 Present value of note 1.056.298
Discount on Notes Receivable 69,420 Discount on notes receivable • , 143.702
Interest Revenue 105,420
12/31/22
12/31/24 Cash 436,000
Cash 1,236,000 Discount on Notes Receivable 69,630
Discount on Notes Receivable 76383 Interest Revenue 105,630
Interest Revenue 112,383 Notes Receivable 400,000
Notes Receivable 1,200,000
12/31/23
Example 2. On December 31, 2021,an entity sold a piece of land costing Cash 424,000
P800,000 and received Pl,200,000 note as payment. The note is payable Discount on Notes Receivable 48,593
in three annual installments of P4Q0,000 beginning December 31, 2022 Interest Revenue 72,593 \
, i;.;.
plus interest at 3% based on the outstanding balance. The prevailing Notes Receivable 400,000
,i
interest rate for similar obligation at December 31,2021 is lD%. Assume ■fm 12/31/24
that there is no available fair value for the land on the date ofsale.
M Cash , 412,000
The present value ofthe note is computed as follows: ^ Discount oh Notes Receivable 25,479
Interest Revenue . ' 37,479
400,000 +(3% X 1,200,000)= 436,000; Notes Receivable 400,000
436,000x0.9091 ' 396,368
400,000 +(3% X 800,000)= 424,000; Non-interest-bearing notes receivable
424,000x0.8264 350,394
400,000 +(3% X 400,000)= 412,000; When a non-interest-bearing note is exchanged'solely for cash and no other
412,000x0.7513 309.536
q rights or privileges are exchanged, the present value of the note on the date
Total * 1.056.298 it it is received is equal to the cash proceeds exchanged.
V'
qp
The receipt of note; periodic collection of prindpal and interest and Example 1. An entity lent P105,600 receiving a one-year, non-interest-
amortization of discount-are recorded as follows(Refer to the amortization bearing note with A' face amount of PI20,000.- ; No other rights or privileges
table for the amounts): are attached to the transaction. The note is recorded equal to the cash
proceeds exchanged as follows:
Principal Effective Nominal Amortization Amortized
Notes Receivable 120,000
Date Payment Interest Interest of Discount Cost
Discount on Notes Receivable^ 14,400
12/31/21 •

1,056,298 ■ ^ W
)j- Cash 105,S00
12/31/22 400,000 105,630 36,000 69,630 725,928
12/31/23 400,000 72,593. 24,000 48,593 374,521 ir
\:f When the non-interest-bearing note is exchanged for property, godds or
12/31/24 400,000 37,479* 12,000 25,479 i '-'i]
-0- services, the present value of the note on the date it is received is the fair
* Adjusted due to rounding off. market value of the property, goods'or services or the fair market value of
note, whichever is more clearly determinable. Otherwise, an imputed rate
12/31/21 is used to determine its present value.
Notes Receivable 1,200,000
Discount on Notes Receivable 143,702 Example 2. An entity received a one-year, non-ihterest-bearing note for
Land 800,000 P100,000 a&payiTient for a used equipment costing PI20,000 and with an
Gain on Sale ofLand 256,298 accumulated depreciation of P45,000. At that time, the market interest rate
for similar note is 12%.
Present value of note(presumed selling price ofland) 1,056,298
Carrjnng amount ofland sold 800.000 Since there is no prevailing market value for the equipment sold, the note
Gain on sale 256.298 received is recorded at its present value of P89,286, computed as -
100,000x0.89286 or 100,000+ li2%

88 89
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 Chapter 5
Chapter 5
Trade and Other Receivables
Trade and Other Receivables

Notes Receivable 100,000

Allowancefor Bad Debts XX
Accumulated Depreciation 45,000
Accounts Receivable XX
Equipment 120,000
Discount on Notes Receivable ^ 10,714
Recovery of accounts previously written off is recorded by a reinstatement
Gain on Sale ofEquipment 14,286
of the account through the allowance account and subsequently followed
by the collection recorded in the usual manner.
Present value of note 89,286
Carrying amount of equipment(120,000 45,000) 75.000 Accounts Receivable XX

Gain on sale Allowancefor Bad Debts XX

Face value of note 100,000 Cash XX

Present value of note 89.286 Accounts Receivable XX

Discount on notes receivable 10.714

It can be observed that under the allowance method, the write off of an
> Receivables denominated in a foreign currency should be translated to local uncollectible account and the recovery of an account previously written off do
currency at the exchange rate as of the end of the reporting period. not change the net amount of the receivables nor do they affect the
determination of profit.

❖ Doubtful Accounts
Impairment of Loans and Receivables
> Direct Write Off Method
> PFRS 9 requires recognition of impairment losses on a forward-looking basis,
Method allowed for income tax purposes. which means that impairment loss is recognized before the occurrence of any
Recognizes impairment loss or bad debts expense by crediting directly the credit event. These impairment losses are referred to as expected credit losses
receivable account. C'ECL').

Bad Debts Expense/loss on Impairment ofReceivables XX

> PFRS 9 sets out three approaches to impairment:
Accounts Receivable XX
• General approach
Recovery of accounts previously written off is recorded by a reinstatement The general PFRS 9 approach to impairment follows a three-stage model:
of the account and recognition ofgain from recovery. This is subsequently
followed by a collection recorded in the usual manner. Stage 1 Stage 2 Stage 3
Trigger No significant Significant Credit-
Accounts Receivable XX
XX
increase in credit increase in impaired
Bad Debts Recovery
risk since initial credit risk
recognition
Cash XX
XX ECL 12-month ECL Lifetime ECL Lifetime ECL
Accounts Receivable
Effective Interest EIR on gross EIR on gross EIR on

Allowance Method
Rate (EIR)- carrying amount carrying amortized
Interest revenue (w^ ECL) amount(w/o cost(with
Recognizes impairment loss or bad debts expense by crediting a valuation ECL) ECL)
account, Allowance for Bad Debts or Allowance for Uncollectible Accounts.
Under PFRS 7 Financial Instruments: Disclosures, Credit risk is
Bad Debts Expense/Loss on Impairment ofReceivables XX the risk that one party to a financial instrument will cause a loss for the
Allowancefor Bad Debts XX other party by failing to pay for its obligation.
' I
■ i i When an account is certain to be uncollectible and can be identified, such Under PFRS 9,a financial asset is credit-impaired when one or more events
' --'j
account is written off by cancelling the receivable from the books, recorded that have occurred and have a significant impact on the expected future
as: cash flows of the financial asset. It includes observable data that has come
to the attention of the holder of a financial asset about the following events:

90 91
 Chapter 5 Chapter 5
Trade and Other Receivables Trade and Other Receivables

significant financial difficulty of the issuer or borrower; Impairment Loss on Receivables 15,045
a breach of contract,such as a default or past-due event; Allowancefor ECL 15,045
the lenders for economic or contractual reasons relating to the
borrower's financial difficulty granted the borrower a concession Carrying amount of the loan, December 31,2022 100,000
that would not otherwise be considered; Probability of collection 600/n
it becoming probable that the borrower will enter bankruptcy or Future cash flows 60,000
other financial reorganization; Present value factor(8%,3 periods) 0.7938
the disappearance of an active market for the financial asset Present value of future cash flows, December 31,2022 47.628
because of financial difficulties; or
the purchase or origination of a financial asset at a deep discount Carrying amount of the loan, December 31,2022 100,000
that reflects incurred credit losses. Present value offuture cash flows, December 31,2022 47.628
ECL ■ 52,372
Example (Stage 1: 12-month ECL). On January 1, 2021, Entity A lends Probability of default - 3 years 30%
Entity B P100,000. Entity B will repay the loan after 5 years at an effective Lifetime ECL 15,712
interest rate of8% with interest payable every December 31. Based on the Allowance for ECL, December 31,2021 (667)
credit information available for Entity B as of December 31, 2021, Entity A Impairment loss - 2022 15.045
determined that the probability of default for the next 12 months is 2% and
expected to collect only 90% of the principal. Example (Stage 3: Credit Impaired). As Entity B was hardly hit by the
economic recession. Entity A agreed for the settlement of the loan at 30% of
January 1,2021 the principal balance on the due date, provided that the interestfor 2023 will
Loan Receivable 100,000 be settled, which Entity B did.
Cash 100,000
December31,2023
December 31,2021 Cash 8,000
Cash 8,000 InterestIncome(100,000 x 8%) 8,000
InterestIncome(100,000 x 8%] 8,000
Impairment Loss on Receivables 58,569
Impairment Loss on Receivables 677 Allowancefor ECL 58,569
Allowancefor ECL 677
Allowancefor ECL "■ 70,000
Carrying amount ofthe loan, December 31,2021 100,000 Loan Receivable 70,000
90%
Probability of collection
Future cash flows '90,000 December 31,2024
Present value factor(8%,4 periods) 0.7350 Allowance for ECL 20,575
Interest Income 20,575
Present value of future cash flows, December 31,2021
(25,719x8%)
Carrying amount of the loan, December 31,2021 100,000
Carrying amount of the loan, December 31,2023 100,000
Present value of future cash flows, December 31,2021 66.150
Probability of collection 30%
ECL 33,850
Future cash flows 30,000
Probability of default - 12 months 2%
Present value factor (8%, 2 periods) 0.8573
12-month ECL
Present value of future cash flows, December 31, 2023

•• **
Example(Stage 2:Significant Increase In Credit Risk). On December 31, Carrying amount of the loan, December 31, 2022 100,000
2022,the probability of default over the remaining life ofthe loan increased Present value of future cash flows, December 31, 2022 25.719
to 30% and expected recovery of the principal is reduced to 60%. This,
Lifetime ECL 74,281
however, provides no objective evidence of receivable impairment.
Allowance for ECL, December 31, 2022 15.712
Impairment loss - 2023
December 31,2022
i :, Cash 8,000
- i'f.' -'
Interest Income(100,000 x 8%) 8,000

92 93
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1; :»>
.v", - f -v' V )
 ^ :• ... •
Chapter 5
Cjhapter 5
Trade and Other Receivables
Trade and Other Receivables

The collection of interest and amortization of discount on the restricted

Example (Stage 3: Credit Impaired). On December 31, 2021, one of A
notes receivable on December 31,2022 and December 31, 2023,as well as
Company's credit customers, B Trading, is experiencing financial
the collection of the principal amount, are recorded as follows:
difficulties. As a result, B Trading has missed the payment of the principal
amount of its notes payable ofP3,000,000 and accrued interest of P300,000 December31,2022
(10% X P3,000,000). A restructuring arrangement was approved by the Cash 160,000
management of A Company,as follows: Allowancefor ECL 33,048
Interest Revenue 193,048
• The principal was reduced to P2,000,000 and will be due on December
31,2023; December 31, 2023
• Accrued interest of P300,000 is condoned; Cash 160,000
• Interest rate is reduced to 8% payable on December 31, 2022 and Allowancefor ECL 36,472
December 31, 2023. Interest Revenue 196,472

The prevailing market interest rate for similar instrument at the time of Cash 2,000,000
restructuring(December 31,2021)remained at 10%. The impairment loss Allowancefor ECL 1,000^000
is computed and recorded as follows: Notes Receivable 3,000,000

Carrying value ofthe receivable P3,300,000

Present value offuture cash flows based on the
restructuring arrangement: December31,2022
P2,000,000x 0.8264 Pl,652,800 Cash 160,000
P2,000,000 X 8% X 1.7355 277.680 Restructured Notes Receivable(or Discount) 33,048
Impairment loss on receivables Interest Revenue . 193,048

December 31,2023
The market rate used in determining the present value offuture cash flows
Cash 160,000
from the restructured note is the historical rate of interest of the note.
Restructured Notes Receivable(or Discount) 36,472
Hence, even if the market rate of interest at time of restructuring differs
Interest Revenue 196,472
from 10%, the interest rate of the original note of 10% will still be used.
The entry to recprd the restructuring is as follows: 2,000,000
Restructured Notes Receivable 2,000,000
Impairment Loss on Receivables 1,369,520
Interest Receivable 300,000 The following table explains the amounts used in the foregoing journal
Allowancefor ECL 1,069,520 entries.

Effective Nominal Amortization Amortized

Restructured Notes Receivable 1,930,480 Interest Interest of Discount Cost

Impairment Loss on Receivables 1,369,520 1,930,480
Notes Receivable 3,000,000 33,048 1,963,528
Interest Receivable 300,000 2,000,000 196,472* 160000 36,472 -0-
* Adjusted due to rounding off. •
Alternatively,the restructured note may be recorded at its face amount and
discount is recognized for the difference between the face amount and the Simplified approach for certain trade receivables, contract assets and lease
discounted future cash inflows, as follows: receivables

Restructured Notes Receivable 2,000,000 Loss rate approach is most suitable for non-financial entities as it does not
Impairment Loss on Receivables 1,369,520 require sophisticated credit risk management systems in place. Under a
Notes Receivable 3,000,000 loss rate approach, lifetime ECL are calculated using a provision matrix
Interest Receivable 300,000 which can be constructed using the following steps:
Discount on Restructured Notes '69,520
 Chapter 5 Chapter 5
Trade and Other Receivables
Trade and Other Receivables

o receivables are segmented based on different credit loss patterns It is important to note that an asset is not credit impaired merely because it
[e.g. based on customer type, product type, geographical region, has high credit risk at initial recognition.
collateral etc.)
o ageing of receivables is prepared (e.g. not past due, past due 1-30
days, 31-60 days,90+ days) Notes and Accounts Receivable Financing Arrangements
o historical loss patterns are calculated and treated as a starting
point is estimating loss rate > Pledging/Hypothecation or General Assignment of Accounts Receivable
o historical data is adjusted to take into account reasonable and • Receivables are used as collateral to obtain loans or advances.
supportable information that is available without undue cost or
• The transaction will not result to a reduction in the accounts receivable
effort at the reporting date about current conditions and forecasts balance.
of future economic conditions.
• The amount of accounts receivable pledged should be disclosed
parenthetically or in the notes to financial statements.
Example. The following account balances are available for A Company as
of December 31, 2021:
Example. Ace Company assigned P1,000,000 of its accounts receivable to ABC
Accounts Receivable 2,000,000 Bank as collateral on a 20%,P80G,000 loan. A 3% finance charge based on the
Allowance for ECL 8,500
amount of the loan was deducted by the bank in advance.

An aging of accounts receivable indicates the following: The only entry required in the books of Ace Company is the loan obtained from
the bank. The fact that P1,000,000 of accounts receivable were pledged or
Age classification Amount Probability of collection assigned should be disclosed in the notes to financial statements. The journal
*
Current(1-30 days) 1,200,000 100% entry for the loan is
31-90 days 500,000 97%
Cash 776,000
91-120 days . 175,000 90%
Finance Charges 24,000
More than 120 days 125,000 80%
Notes Payable - ABC Bank 800,000
Total 2,000,000
> Specific Assignment of Accounts Receivable
The required balance of Allowance for ECL as of December 31, 2021 is
computed as follows: • Transfer of accounts receivable with recourse.
• Assigned accounts receivable are segregated from unassigned accounts
31-90 days(500,000 x 5%) 15,000 receivable.
91-120 days (175,000 x 10%) 17,500. • Equity of the assignor in assigned accounts is the excess of the accounts
More than 120 days(125,000 x 20%) 25.000
receivable assigned balance over the liability or notes payable relating to
Allowance for ECL, December 31,2021 57,500 the assigned accounts.
Unadjusted balance, Allowance for ECL 8.500 • Assigned accounts receivable are reported in the statement of financial
Impairment loss - 2021 position together, with unassigned accounts receivable at their net
realizable value.
December 31,2021
Impairment Loss on Receivables 49,000
Example. Ace Company assigned specific accounts receivable totaling
Allowancefor ECL 49,000
Pl,000,b00 to ABC Bank as collateral on 20%, P800,000 loan. A 3% finance
charge based on the amount of the loan was deducted by the bankin advance.
Specific approach for purchased or originated credit-impaired financial
assets. The journal entries required in the books of Ace Company are as follows:
PFRS 9 sets out a specific approach for purchased or originated credit- Accounts Receivable Assigned 1,000,000
impaired financial assets (often abbreviated to 'POCI' assets). For these Accounts Receivable 1,000,000
assets, entity recognizes only the cumulative changes in lifetime ECL since
initial recognition of such an asset Purchased or originated credit- Cash 776,000
impaired financial asset is an asset that is credit-impaired on initial Finance Charges 24,000
recognition. Notes Payable - ABC Bank 800,000

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Chapter 5 Chapter 5
■Trade and Other Receivables Trade and Other Receivables

Subsequent transactions affecting the assigned accounts receivable and the When there are no sales returns on the accounts factored, the amount
company's notes payable to bank are recorded in the usual manner. receivable from the factor is collected in due time and recorded as

To record collections. Cash 22,500

Cash XX
Receivable from Factor 22,500
Accounts Receivable Assigned XX
When returns are made by customers whose accounts were fartored, the
transaction is recorded as
To record write off of an uncollectible assigned account.
Allowance for Bad Debts xx Sales Returns xx
Accounts Receivable Assigned XX
Receivable from Factor . xx
To record payment of notes payable to bank (including interest). > Discountingof Notes Receivable
Notes Payable xx
Interest Expense xx • Discounting of notes receivable with recourse is similar to pledging of
Cash ' XX
accounts receivable where the endorser (entity that holds the nptes)
retains the asset (notes receivable) in its accounts and at the same time,
When the notes payable to bank is fully paid and a balance in the assigned recognizes a liability for the proceeds obtained from the bank (endorsee).
accounts receivable remains, the amount is reverted to unassigned accounts
receivable, as follows: • Discounting.of notes receivable without recourse is deemed as a sale
(similar to factoring of accounts receivable) where the asset (notes
Accounts Receivable xx receivable) is derecognized in the accounts and a gain or loss is recognized
Accounts Receivable Assigned XX
for the difference between the proceeds and the carjrying amount of the
note, including any accrued interest.
> Factoring of Accounts Receivable
•' Whether the discounting is with recourse or without recourse, the proceeds
• Factoring is, in effect, a transfer of accounts receivable without recourse; ' is computed in similar mannen It is the excess of the maturity, value of the
hence, considered as a sale. note bVer the discount charged by the bank.
• Accounts receivable factored should be cancelled from the accounts and a • Formulas:
gain or loss is recognized for the difference bet\veen the proceeds received
and the net carrying amount of the receivables sold. Maturity value = Principal + Interest
Discount = Maturity value x bank discount rate x discount period
• If the. purchaser of an entity's receivable (called as factor) withholds a Proceeds = Maturity value - Discount
certain portion of the purchase price of the receivables, the portion retained
should be reported under receivables (as a separate iterri, if material). Example. Discounting an interest-bearing note with recourse.- OnMay22i
2021, Ace Company discounted with recourse, a customer's 90-day, 15%,
Example. Ace Company factored F500,000 of accounts receivable to ABC P50,000 face value note, dated April 2,2021 at the BPl. The bank discount
Finance Company. Factoring fee was 10% of the receivables factored. ABC rate is ,16%. Assume a 360-day year.
withheld 5% of the purchase price as protection against sales returns.
Computations: ^ ,
The accounts receivable sold is P500,000 and the purchase price is 90% of
P500,000, or P450,000. There is, therefore, a loss of P50,000. Of the Interest = 56,000.x 15% x 90/360 = 1,87$
purchase price, 5% of P450,000, or P22,500 is withheld; thus, the net Maturity value = 50,000 + 1,875 = 51,875
amount received from factoring is P427,500. The journal entry to record Discount = 51,875 x 16% X 40/360 =922.22
the sale of the receivables is Proceeds = 51,875-r 922.22 = 50,952.78

Cash 427,500 The proceeds from the discounting of the note on May 22 is recorded as
Loss from Factoring 50,000
Receivable from Factor 22,500 Cash 50,952.78
Accounts Receivable 500,000 Liability on Discounted Notes 50,952.78

98 99
 Chapter 5
Trade and Other Receivables Chapter 5
Trade and Other Receivables

When the note that was discounted matures without protest an entry is
made eliminating the asset and the liability in the accounts, interest Cc) information about its exposure to credit risk including the amount that
expense is recognized for the discount and interest revenue is recognized best represents its maximum credit risk exposure at the balance sheet
for the total interest on the notes. The journal entry on maturity date is date, without taking account of the fair value of any collateral, in the
event of other parties failing to perform their obligations and including
Liability on Discounted Notes 50,952.78 significant concentrations of credit risks; and
Interest Expense 922.22
Cd) information about its exposure to interest rate risk including
Notes Receivable 50,000.00
contractual repricing or maturity date whichever dates are earlier and
Interest Revenue 1,875.00
including effective interest rates, when applicable.
When the note is dishonored by the maker on maturity,settlement is made For accounts receivable pledged or assigned and notes receivable discounted,
with the bank since the discounting was made with recourse. Assuming the entity shall disclose the following:
that the bank charged a protest fee of P500 as a result of dishonored note,
the journal entries on maturity date are: Ca) the nature of the risks and rewards of ownership to which the entity
remains exposed;
Liability on Discounted Notes 50,952.78
Interest Expense 922.22
03 the carrying amount of financial assets and of the associated liability;
Notes Receivable 50,000.00 and
Interest Revenue 1,875.00
(c) the terms and conditions relating to its pledge.
Accounts Receivable(51,875 + 500) 52,375.00
f • Cash 52,375.00 When the entity holds collateral and is permitted to sell or repledge the
collateral in the absence of default by the owner of the collateral, the following
If the discounting on May 22 was made without recourse, an accrual of about the collateral held shall be disclosed:
interest is recorded first The proceeds is treated as a sales price ofthe note
receivable that is deemed sold and a gain or loss is recognized. It.is Ca3 the fair value;

understood that the endorser is relieved of the responsibility for the note,
O) the fair value of any such collateral sold or re-pledged and whether the
whether or not it is settled by the maker on maturity. The journal entries entity has an obligation to return it; and
on May 22 are as follows:
1,041.67 Cc) the terms and conditions associated with the use.
Interest Receivable
Interest Revenue 1,041.67
An entity shall disclose material items of income and expenses, and gains and
50,000 X15% X 50/360 losses resulting from receivables. For this purpose,the disclosure shall include
Cash 50,952.78 at least, the following items:
Loss on Sale ofNotes Receivable 88.89
50,000.00 (d) total interest income,calculated using the effective interest method;
Notes Receivable
Interest Receivable 1,041.67
(e) the amount of interest income accrued on impaired receivables.

Disclosure Requirements An entity shall disclose the nature and amount of any impairment loss
recognized in profit or loss(Bad Debts Expense).
1- Under PFRS 7,an entity shall disclose the following in its financial statements:
(a] information about the extent and nature of receivables including
significant terms and conditions that may affect the amount,timing and
certainty of future cash flows;
I.,

(b) the accounting policies and methods adopted including the criteria for
V/
recognition and the basis of measurement applied; I.

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 Chapter 5 Chapter 5
Trade and Other Receivables
Trade and Other Receivables

TRUE OR FALSE QUESTIONS 17. A decline in the fair value ofthe asset below its previous carrjdng amount is an
objective evidence ofimpairment ofa financial asset.
1. Trade receivables include notes receivable and advances to officers and
employees. 18. Notes receivable are generally reported as noncurrent assets.

2. The net amount reported for short-term receivables is not affected when a 19. The carrying value of an impaired note before recognizing a loan impairment
specific account receivable is determined to be uncollectible using the excludes accrued interest
allowance method.
20. Assuming that the ideal measure ofshort-term receivables in the statement of
3. Companies record and report long-term notes receivable at the present value financial position is the discounted value ofthe cash to be received in the future,
ofthe cash they expect to collect failure to follow this practice usually does not make the statement offinancial
position misleading because the amount ofthe discount is not material.
4. For receivables sold with recourse, the seller guarantees payment to the
purchaser ifthe debtor fails to pay. 21. When buying receivables with recourse, the purchaser assumes the risk of
collectibility and absorbs any.credit loss.
5. All claims held against customers and others for money,goods, or services are
reported as current assets. 22. Loans and receivables are initially recognized at fair value plus transaction
costs that are diriectly attributable to the acquisition
6. Accounts receivable are trade receivables that are not evidenced by a formal
agreement or note. 23. Receivable balance should be valued at face amount minus allowance for
doubtful accounts and for any anticipated adjustments which in the normal
7. Trade receivables are recognized simultaneously with the recognition ofrelated course of events will reduce the amount receivable to estimated realizable
revenue when the criteria for revenue recognition are met. value.

8. Trade discounts are usecj to avoid frequent changes in catalogs and to alter 24. If accounts receivable are pledged against borrowing, the amount of accounts
prices for different quantities purchased. receivable pledged shall be included in total receivables with disclosure.

9. Credit balances in.customer's accounts receivable should be classified as 25. Loans receivable are normally reported in the financial statements at amortized
current liabilities. cost using the effective interest method.

10. The percentage^of-sales method results in a more accurate valuation of
receivables on the balance sheet.
11. Receivables denominated in foreign currency should be translated to local
currency using the exchange rate on balance sheet date.
12. The fair value ofa short:term receivable may be equal to its face amount.
26. When a customer purchases merchandise inventory from a business
organization,she may be given a discount which is designed to induce prompt
payment.Such a discount is called a cash discount.
27. Accounts receivable are classified as current assets whenever accounte
receivable arise from "normal" sales to customers, regardless of the credit
terms.

13. Credit loss is the difference between Contractual cash flows that are due to the
entity in accordance with the contract and all the cash flows that the entity
expects to receive discounted at the current effective interest rate.
J
14.' In the gross method,sales discounts are reported as a deduction from sales.
28. Discount period is the period of time remaining on the term ofthe note, which
is from the date of discounting to maturity date.
29. Long-term notes receivables which nominally bear no interest or an interest
which is unreasonably low should be stated at face value.

15. Any receivables not individually assessed should be collectively assessed for 30. The receivables turnover ratio is computed by dividing net sales by the ending
impairment. net receivables.
16. When the stated rate ofinterest exceeds the effective rate,the present value of
the note receivable will be less than its face value:

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Chapter 5
Trade and Other Receivables Chapter 5
Trade and Other Receivables

FINANCIAL ACCOUNTING THEORY QUESTIONS

8. A 90-day,15% interest bearing note was discounted to a bank at 18% after the
note was held for 40 days. The proceeds received from the bank upon
Which of the following items is a trade receivable? discounting would be the maturity value less the discount at
a. Claims in litigation a. 18% for 40 days.
b. Loans to employees b. 18% for 50 days.
c. Amounts due from customers c. 15% for 40 days.
d. Receivables from affiliates d. 15% for 50 days.

2. For banks and financial institutions, receivables arise primarily from 9. All of the following are characteristics of financial assets classified as loan and
a. loans. receivables,except
b. deposits. a. not quoted in an active market.
c. withdrawals. b. have fixed or determinable payments.
d. credit sales. c. holder has demonstrated positive intention and ability to hold them to
maturity.
The accounting for cash discounts and trade discounts are d. holder does not have the financial resources available to continue until
a. the same. maturity.
b. always recorded net.
c. not the same. ' 10. Accounts receivable usually appear in the statement of financial position
d. tied to the timing of cash collections on the account. a. ss either current assets or noncurrent assets, depending on whether the
allowance method or the direct write-off method is used to account for
What is imputed interest? uncollectible accounts.
a. Interest based on the stated interest rate. b. only if the balance sheet method of estimating uncollectible accounts is
b. Interest based on the implicit interest rate. used.
c. Interest based on the average interest rate. c. as current assets,immediately after cash and cash equivalents.
d. Interest based on the coupon rate. d. as current assets,combined with cash and cash equivalents.

Why would a company sell receivables to another company? 11. If the gross amount of receivables includes unearned interest or finance
a. To improve the quality of its credit granting process. charges,these should be
b. To limit its legal liability. a. added in arriving at the net amount to be presented in the statement of
c. To accelerate access to amounts collected. financial position.
d. To comply with customer agreements. b. ignored.
c. presented in the statement of financial position as liability.
6. What is "recourse" as it relates to selling receivables? d. deducted in arriving at the net amount to be presented in the statement of
a. The obligation of the seller of the receivables to pay the purchaser in case financial position.
the debtor fails to pay.
b. The obligation of the purchaser of the receivables to pay the seller in case 12. The most theoretically sound method ofaccounting for cash discounts on credit
the debtor fails to pay sales is the \
c. The obligation of the seller of the receivables to pay the purchaser in case a. net method
the debtor returns the product related to the sale. b. gross method
d. The obligation of the purchaser of the receivables to pay the seller if all of c. discounted price method
the receivables are collected. d. all three approaches are theoretically correct.

When specific customer's account is written off by a company using the 13. A non-interest-bearing note received in exchange for property, goods or
allowance method, the effect on profit and amortized cost of accounts services is recorded at
receivable are, respectively a. fair market value of property,goods or services or note, whichever is more
a. no effect, decrease. reliably determinable.
b. no effect, no effect. ' b. maturity value ofthe note.
C- decrease, decrease. * . c. face value of the note.
d- decrease, no effect. d. carrying amount ofthe property.

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Chapters Chapter 5
Trade and Other Receivables Trade and Other Receivables

14. A loss on sale of receivables is recorded when the sale is 20. A receivable financing that is equivalent to an- absolute sale of accounts
a. with recourse. receivable is > -
b. without recourse. a. assignment
c. with or without recourse. b. discounting.
d. a secured borrowing. c. factoring.
d. pledging.
15. When an account previously written off is subsequently recovered and
collected,the transaction would 21. When a note receivable is discounted with recourse,
.. I /;' ■

a. increase profit under the direct write off method. a. Liability on Discounted Notes Receivable is credited equal to the face value.
b. increase profit under the allowance method. b. Notes Receivable is credited equal to the face value.
c. decrease profit under the direct method. c. Liability on Discounted Notes Receivable is credited equal to the proceeds.
d. increase net accounts receivable under the allowance method. d. Notes Receivable is credited equal to the maturity value.

22. In Orchard Compan3^s December 31, 2021 statement of financial position, a

16. Club Intramuros Enterprise shipped the wrong shade of paint to a customer. note receivable was reported as a non-current asset and its accrued interest for
The customer agreed to keep the paint upon being offered a 10% price eight months was reported as a current asset Which of the following terms
reduction. The price reduction is an example ofa would fit Orchard's note receivable?
a. sales return.
a. Both principal and accrued interest amounts are payable on April 30,2022
b. sales allowance. '
and April 30,2023.
c. sales discount.
b. Principal and interest are due on December 31, 2023.
d. sales revenue.
c. Both principal and interest amounts are payable on December 31,2022 and
December 31,2023.
17. Theoretically,the amount of estimated future returns and allowances on credit
sales should be recorded during the period of the sale so as not to overstate
d. Principal is due on April 30,2023 and interest is due on April 30,2022 and
April 30,2023.
sales and ending accounts receivable. In practice, these estimates are rarely.^
recorded because 23. Which of the following statements is incorrect?
a. there is too much uncertainty surrounding such estimates, a. If credit terms to customers were 2/10, n/30,a two percent discount will
b. the amount ofsuch returns and allowances is usually not material, be granted if payment is made within 10 days ofthe date of sale.
c. such estimates are not allowed according to generally accepted accounting b. If the allowance for doubtful accounts has been underestimated, a sale of
principles the related receivables to a factor is more likely to result in a gain than in
d. the amount of such returns and allowances tends to fluctuate too greatly loss.
from period to period. c. If the estimate of bad debt expense is made on the basis of net credit sales,
an entry is made each period to the account, "Allowance for Doubtful
18. Which ofthe following methods may not be appropriate for estimating bad debt Accounts," without regard to the prior balance in that account.
expense? d. Ifthe estimate ofthe bad debt expense is made on the basis ofnet realizable
a. Percentage ofincome. value ofthe accounts receivable,the balance ofthe accpunt,"^^lowance for
b. Aging of accounts receivable Doubtful Accounts," is adjusted so that the adjusted balance reflects the
c. Percentage of outstanding accounts receivable computed amount needed to properly value the receivables.
d. Individual or collective assessment of outstanding receivables
24. The person who signs a note receivable and promises to pay the principal and
19. Which generally accepted accounting principle best supjports the establishment interest is the
ofthe account,allowance for doubtful accounts? a. holder.
a. Continuity principle b. maker.
b. Exception principle c. owner.
c. Matching principle d. payee. ,
d. Revenue principle

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Trade and Other Receivables
Trade and Other Receivables

25. The entry to record the dishonor of a note receivable assuming the payee 30. The amount of accounts receivable is included in total receivables with
expects eventual collection includes a debit to appropriate disclosures when
a. Cash. Pledged Assigned Factored
b. Notes Receivable. a. Yes Yes Yes
c. Accounts Receivable. b. Yes Yes No
d. Allowance for Doubtful Accounts. c. Yes No No
d. No No No
26. Camp Aguinaldo Trading received a 60-day, 10% note for P10,000 on April 16.
Which of the following statements Is true? 31. Fontana Company received a seven-year zero-interest-bearing note on
a. The principal of the note plus interest is due on June 15. February 22, 2021, in exchange for property it sold to Lakewood Company.
b. Camp Aguinaldo should record a total receivable due of P10,250 on June 16. There was no established exchange price for this property and the note has no
c. The maturity value of this note is PIO.OOO. ready market The prevailing rate of interest for a note of this type was 7% on
d. Camp Aguinaldo will receive P10,000 plus interest of PI,000 at maturity. February 22, 2021, 7.5% on December 31, 2021, 7.7% on February 22, 2022,
and 8% on December 31, 2022. What interest rate should be used to calculate
27. Alabang Country Club factored its receivables without recourse with PRIA Bank. the interest revenue from this transaction for the years ended December 31,
Alabang received cash as a result of this transaction which is best described as 2021 and 2022, respectively?
a. a loan from PRIA Bank collateralized by Alabang's accounts receivable, a. 0% and 0%
b. a loan from PRIA Bank to be repaid by the proceeds from Alabang's b. 7% and 7%
accounts receivable. c. 7% and 7.7%
c. a sale of Alabang's accounts receivable to PRIA Bank, with the risk of d. 7.5% and 8o/o
uncollectible accounts retained by Alabang.
d. a sale of Alabang's accounts receivable to PRIA Bank, with the risk of 32. If there are any rights and obligations created or retained in the transfer of
uncollectible accounts transferred to PRIA Bank. financial asset, they should be
a. derecognized immediately.
28. Beverly Place received a three-year, non-interest-bearing trade note for b. recognized separately as assets or liabilities.
P50,000 on January 1, 2021. The current interest rate at that time was 15% for c. evaluated first by comparing the entity's exposure before derecognizing the
similar notes. Beverly recorded the receipt of the note as follows: financial asset
d. none of these.
Notes Receivable 50,000
Sales 50,000 33. When accounts receivable are factored without recourse, what account does the
transferor credit?
What is the effect of this accounting for the notes receivable on Beverly Place's a. Accounts receivable
profit for years 2021, 2022, and 2023 and its retained earnings at the end of b. Accounts receivable assigned
2023,respectively? c. Liability
a. overstate, overstate, understate, no effect. d. Sales
b. overstate, understate, understate, no effect.
c. overstate, understate, understate, understate. 34. When comparing the allowance method of accounting for bad debts with direct
d. no effect on any of these. write off method, which of the following is true?
a. The direct write off method is exact and also better illustrates the matching
29. A company uses the allowance method to recognize uncollectible accounts concept.
expense. What is the effect at the time ofthe collection ofan account previously b. The direct write off method is theoretically superior.
written off on the following accounts? c. The direct write off method requires two separate entries to write off an
Allowance for bad debts Bad debts pypense uncollectible account.
a. No effect No effect d. The allowance method is less exact but it better illustrates the matching
b. Increase No effect principle.
Increase Decrease
, No effect Decrease

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Chapter 5 Chapter 5
Trade and Other Receivables Trade and Other Receivables

35. When the direct write off method of recognizing bad debts expense is used,the ''mm
PRACTICAL FINANCIAL ACCOUNTING
entry to write offa specific customer account would ■

a. . increase profit ■ii

Presented below' are unaudited balances of selected accounts of Hawks Company
b. have no effect on profit ill as of December 31,2021:
c. increase the accounts receivable balance and increase profit
d. decrease the accounts receivable balance and decrease profit
'11 Debit Credit
Cash 500,000
36. It is a predetermined amount withheld by a factor as a protection against 'iSl Accounts Receivable 1,300,000
customer returns,allowances and other special adjustments. Allowance for Uncollectible Accounts 8,000
a. Equity in assigned accounts Sales (net) 6,750,000
b. Service charge
c. Factor's holdback Additional information:
d. Loss on factoring
a • Goods amounting to P50,000 were invoiced for the account of Variety Store
37. The assignor's equity in assigned accounts that is required to be disclosed in the recorded on January 2,2022 with terms of net 60 days, FOB shipping point.
notes to the financial statements is equal to the /iSil The goods were shipped to Variety Store on December 30, 2021.
!'Mm
a. bank loan balance.
• The bank returned on December 29, 2021, a customer's check for P5,00p
b. assigned accounts receivable. marked "Drawn Against Insufficient Funds" but no entry was made.
c. bank loan balance less the assigned accounts receivable balance. \

d. assigned accounts receivable balance less the bank loan balance. * (1) What is the adjusted balance ofAccounts Receivable at December31,20217
38. Wakwak Company prepares an accounts receivable aging schedule with a series
18 a. Pl,355,000
b. Pl,350,000
ofcomputations as follows: 2% ofthe total peso balance of accounts from 1-60 ,

c. Pl,305,000
days past due, plus 5% ofthe total peso.balance of accounts from 61-120 days d. Pl,300,000
past due and so on. How would you describe the total amount determined in
m
this series ofcomputations?
a. It is the amount of bad debts expense for the year. B. On the December 3l, 2021 balance sheet of Mavericks Co., the current receivables
b. It is the amount that should be added to the allowance for bad debts at year , ■ consisted of the following:
end.
c. It is the amount ofthe desired credit balance ofthe allowance for bad debts Trade accounts receivable, including 12% VAT P30,000
to be reported in the year-end financial statements. Trade notes receivable due in Januaiy 15,2023 25,000
d. When added to the total of the accounts written off during the year, this Allowance for uncollectible accounts (2,000)
new sum is the desired credit balance ofthe allowance account. Claim against shipper for goods lost in transit (November 2021) 3,000
Receivable from sale of goods to employees net of huge
39. Which ofthe following is true? discounts 5,000
a. A debtor may not grant a security interest in certain assets to a lender to Selling price of unsold goods sent by Mavericks on consignment
serve as collateral without recourse. at 130% of cost (not included in Mavericks' ending
b. A debtor may not grant a security interest in certain assets to a lender to inventory) 26,000
serve as collateral with recourse. Security deposit on lease of warehouse used for storing some
c. The arrangement of having collateral transferred to a secured party is inventories . 30,000
known as a pledge.
d. Secured pai^es are never permitted to sell collateral held under a pledge. (2) At December 31,2021, the correct total ofMavericks current net receivables is
a. > P57,786.
40. When calculating interest on a promissory note with the maturity date stated in b. P61,000.
terms of days,the c P87,000.
a. maker pays more interest if 365 days are used instead of 360. d. P91,000.
b. maker pays the samef Interest regardless if365 or 360 days are used,
c. payee receives less interest if360 days are used instead of 365.
d. payee receives more interest if360 days are used instead of365.

110 Ill

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Chapter 5 Chapter 5
Trade and Other Receivables
Trade and Other Receivables

C. Presented below is the composition of the Accounts Receivable for Jazz (7) Pelicans Inc. made a P15,000 sale on account with thefollowing terms: 2/10,
Enterprise as of December 31,2021: n/30. Ifthe company uses the net method to record sales made on credit, what
is/are the debit(s) in thejournal entry to record the sale?
Advances to officers, P320,00 due in April 2022 1,200,000
a. DebitAccounts Receivablefor P14,700.
Deposit to customer for bidding projects 440,000
b. Debit Accounts Receivablefor P14,700 and Sales Discountsfor P300.
Debit balance on supplier's account for inventory purchased c. DebitAccounts Receivablefor P15,000.
on account 40,000
d. Debit Accounts Receivablefor P15,000 and Sales Discountsfor P300.
Merchandise sales through credit cards 600,000
Other trade receivables - unassigned 280,000
Trade payables 520,000 Pistons Company, a VAT-registered company, sold an item on credit for
Trade receivables 1,420,000 PS,000,000 less multiple trade discounts of20% and 5%.
Additional information: (8) The correct entry'to record this sale is
a. Accounts Receivable 5,600,000
• The trade receivables account is net of P160,000 credit balance in
Trade Discount 1,200,000
customer's accounts, including P12,000 accounts receivable to customer
Sales 5,000,000
which is definitely uncollectible, and includes dividend receivable of ^
Output Tax 600,000
P60,000 and assigned trade accounts of P400,000.
• The trade payables account is net of P120,000 debit balance in supplier's Allowancefor Sales Discounts 1,200,000
accounts b. Accounts Receivable 5,600,000
Sales 5,000,000
(3) How much is the total trade receivables as ofDecember31,2021? Output Tax 600,000
a. P680,000
b. Pl,708,000 c. Accounts Receivable 3,800,000
c. PI,988,000 Sales 3,800,000
d. P2,388,000 d. Accounts Receivable 4,256,000
Sales 3,800,000
(4) How much should be presented in the statement offinancial position as total Output Tax 456,000
trade and other receivables as ofDecember 31,2021?
cr. PI,708,000
b. PI,928,000 The following relate to a single sale of goods made by Spurs in 2021:
c. P2,868,000 Selling price P500,000
d. P2,928,000 Freight costs 5,000
Terms 3/15, n/30
D.
■

Shippingdate December 28, 2021

The following independent cases relate,to accounting for cash discounts. ^ Date goods received by the customer January 3, 2022
(5) Pelicans Inc, made a P15,000 sale on account with thefollowing terms: 1/15, Date payment is received by Spurs January 5, 2022
n/30. If the company uses the net method to record sales made on credit, how
much should be recorded as revenue? [9] Ifthe term is FOB destination, how much sales should be recorded by Spursfor
a. P14,700 theyear ended December 31,2021?
b. P14,850 a. PO
c. P15.000 b. P490,000
d. P15,150 c. P495,000 '
d. P500,000
(6) Pelicans Inc. made a P15,000 sale on account with thefollowing terms: 1/15,
l\. ; ;•: : n/30. If the company uses the gross method to record sales made on credit, (10) Ifthe term is FOB shipping point,freight collect, how much net cash did Spurs
[ './i/H what is/are the debit(s)in thejournal entry to record the sale? receive on January s, 2022?
a. Debit Accounts Receivablefor P14,850. a. P480,000
(.
b. Debit Accounts Receivablefor P14,850 and Sales Discountsfor P150. b. P485,000
c. Debit Accounfs Receivablefor PI5,000. c. P490,000
d. Debit Accounts Receivablefor P15,000 and Sales Discountsfor P150. d. P495,000

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 Chapter 5 Chapter 5
Trade and Other Receivables
Trade and Other Receivables

(11) If the term is FOB destination,freight collect, how much net cash did Spurs Cash refunds given to cash customers for sales returns and
receive on January 5,2022? 16,972
allowances
a. P480,000
Recoveries on accounts written off as uncollectible in prior
b. P485,000 periods (not included in cash collections stated above) 6,615
c. P490,000
d. P495,000 An aging of the receivables indicates that P17,300 of the accounts receivable
balance are deemed uncollectible.
(12) Ifthe term is FOB shipping point,freight prepaid, how much net cash did Spurs
receive on January 5,2022? The following balances were taken from the December 31, 2020 statement of
a. P480,000 financial position.
b. P485,000
c. P490,000 Accounts Receivable - P95,842 Allowance for Bad Debts - P9,740
d. P495,000
(15) What are the balances of Accounts Receivable and Allowance for Bad Debts
(13) If the term is FOB destination,freight prepaid, how much net cash did Spurs that would be shown in the December31,2021 statement offinancial position?
receive on January 5,2022? a. P120,987 and P17,300
a. P480,000
b. P120,987 and Pll,400
' c. P120,987 and P9,740
b. P485,000
c. P490,000
d. P120,987 and P5,900
d. P495,000
(16) What is the amount of bad debts expense reported in profit or lossfor the year
ended December 31,2021 ?
G. Cavaliers Company uses the net price method of accounting for cash discounts. a. PIZSOO
In one of its transactions on December 31, 2021, Cavaliers Company sold b. Pll,400
merchandise with a list price of P4,000,000 to a client who was given a trade c. P9,740
discount of20% and 10%. Credit terms given by Cavaliers Company were 5/10, d. P5,900
n/30. The goods were shipped FOB destination, freight collect. Total freight
charge paid by the client was P100,000. On December 20, 2021, the client
1. Bucks Company's terms of sale is 3/10, 1/20, n/60 and it provides for
returned damaged goods originally billed at P400,000. uncollectible accounts based on aging of its receivables at year-end. The balance
of selected accounts taken from the December 31, 2020 statement of financial
(14) What is the net realizable value of this accounts receivable on December 31,
position of Bucks Company are as follows:
2021?
a. P2,636,000 Accounts Receivable - P674,000 Allowance for Bad Debts - P24,000
b. P2,S92,000
c. P2,492,000 The following transactions (in summary) affecting accounts receivable occurred
d. P2,380,000 during the year ended December 31, 2021:
Sales on account 3,000.000
H. Thunder Company is engaged in the sale of various home and office furnishings. Cash received from customers 3,200,000
It caters to both cash and credit customers. The following transactions affecting Cash received includes the following:
the accounts receivable of Thunder Company took place during the year 2021: Customers paying within the 10-day discount period 1,746,000
Customers paying within the 20-day discount period 990,000
Sales (cash and credit) 591,050
Recovery of accounts written off 6,000
Cash received from cash customers 205,175 Customers paying beyond the discount period 7

'n Cash received from credit customers (P281,300 was received

Accounts receivable written off as worthless 22,000
from customers who took _ advantage of the discount 12,000
Credit memoranda for sales returns
Ii
'•1 • '
f- .-ft/ feature of the company's, credit terms 3/10, n/30 320,800
Accounts written off as worthless , 4,955 An aging of the accounts receivable and estimate of uncollectible accounts at
Credit memoranda issued to credit customers for sales December 31, 2021 revealed the following:
returns and allowances 26,275

•a 114 115
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Chapter 5
Trade and Other Receivables
Chajpter 5
Trade and Other Receivables

Age Amount Probabilitv of non-collection

(20) How much is Celtics Company's net accounts receivable at December 31, 2021?.
Less than 30 days 150,000 2%
a. 81,660,000
31-90 days 120,000 8%
b. 81,685,000
91-120 days 86,000 15%
c. 81,825,000
More than 120 days Balance 30%
d. 81,850,000
'd
(17) What are the balances of accounts receivable and the related allowance
account at December 31, 2021?
Warriors Company prepared an aging of its accounts receivable at December 31,
a. P376,000 and P25,300
2021 and determined that the estimated uncollectible on that date was P85,200.
b. P376,000 and P33,300
During 2021,some customers'accounts were written off.
c. P382,000 and P25,300
d: P382,000 and P33.300 Additional information is available as follows:

(18) How much is the bad debts expensefor the year 2021? Allowance for Bad Debts, December 31, 2020 '63,000
a. P41,300 Bad debts expense reported in profit or loss 18,000
b. P33,300 Accounts Receivable, December 31, 2021 607,500
c. P31,300 Uncollectible accounts recovery during 2021 12,000
d. P25,300
(21) How much were the accounts written offduring 20217
a. 86,000
J. Maverick Company operates in an industry that has a high rate of bad debts. On b. 87,800
December 31, before the preparation of an aging schedule and any year-end c. 818,000
adjustments, the balance of Maverick's Accounts Receivable account was P3.5 d. 822,200
million and the Allowance for Bad Debts account had a beginning-of-the-year
balance of P400,000. Out of the P50,000 accounts written off during the year,
P15,000 was recovered. Additionally, the accounts that are more than 365 days M. You are given the following information relating to Suns Trading:
outstanding are to be written off on December 31. The year-end balance of the
Allowance for Bad Debts that will be reported in the statement of financial Gross profit rate based on sales 25%
position will be based on the aging schedule as follows: Accounts Receivable, December 31, 2020 P120,000
No. of davs outstanding Amount Probabilitv of collection Collections on accounts receivable during 2021 545,000
Less than 30 days 1,500,000 98% Cost ofgoods available for sale during 2021 690,000
Merchandise Inventory, December 31, 2021 150,000
31-90 days 750,000 80%
91-150 days , 600,000 75% Of the total sales during the year, eighty percent (80%) were made on account.
151-250 days' 300,000 ' 50%
251-365 days 200,000 20% (22) What was the company's Accounts Receivable balance at December 31, 2021 ?
More than 365 days 150,000 0% a. 8115,000
(19) What is the bad debts expensefor Maverick Companyfor the year? .' *■: b. 8151,000
a. P275,000 c. 8159,000
U d. 8295,000
b. P425,000
c. P440,000
d. 8640,000 N, Kings Company has the following data relating to accounts receivable for the year
ended December 31, 2021:
;

K. Celtics Company had the following data relating to its accounts receivable.
Accounts Receivable, January 1 P 325,000
Accounts Receivable, December 31,2020 Pl,300,000 Allowance for Bad Debts, January 1 18,400
Credit sales for 2021 5,400,000 Sales during the year, all on account, terms: 5/10, 3/15, n/30 2,800,000
Collections from customers during 2021,including recoveries 4,750,000 Cash received from customers during the year 2,260,000
Accounts written off on September 30,2021 125,000 Accounts written off during the year 17,500
Recoveries of accounts previously written off in prior years 25,000 Sales returns and allowances 14,280
Estimated uncollectible receivables per aging, December 31,2021 165,000

116 117
 Chapter 5
Chapter 5 Trade and Other Receivables
Trade and Other Receivables
(25) What is the accrued interest receivable on December 31, 2021 arisingfrom the
An analysis of cash received from customers during the year revealed that data?
PI,140,000 was received from customers availing the 10-day discount period, a. P275,000
P873,000 was received from customers availing the 15-day discount period, b. P245,600
P12,000 represented recovery of accounts written off, and the balance was c. P154,600
received from customers paying beyond the discount period. d. PUS,600

Kings Company's year-end balance of allowance for bad debts was estimated to
be 5% ofthe outstanding accounts receivable as at December 31,2021, based on On January 1, 2021, Grizzlies Corporation sold a piece of equipment that was
the aging ofthe accounts.
acquired ten years ago for P350,000. At the time of sale, the equipment had an
accumulated depreciation ofP240,000. Grizzlies received a non-interest bearing
(23) Accounts receivable balance at December 31, 2021 is
note for P300,000 in exchange for the equipment The note is due on December
a. P770,220
31, 2022. There is no readily available market value for the equipment, but the
b. P758,220
current market rate of interest for comparable notes is 12%. The present value
of PI at 12% for two periods is 0.7972.
c. P746.220
d. P742,620 (26) How much is the gain on the sale ofequipment?
a. P129,160
(24)Bad debts expensefor theyear ended December31,2021 is b. P90,000
a. P3Z911 c. P50,000
b. P3Z311 d. PC
c. P25.011
d. P24,411 (27) How much is the interest revenue in 2021 and 2022, respectively?
a. P36,000 and P24,840
Timber Company had the following long-term receivable account balances at b. P30,420 and P30,420
December 31, 2020: c. P28.699 and P32,141
d. P60,840andP0
Notes receivable from May Company 3,000,000
Notes receivable from officer 1,500,000
On January 1, 2021, Hornets Company sold land that originally cost P400,000 to
Transactions during 2021 and other information relating to Timberwolves the Egi Company. As payment,Egi gave Hornets a P600,000 note. The note bears
Company's long-term receivables were as follows: an interest rate of8% and is to repaid in three annual installments of P200,000
plus interest on the outstanding balance. The first payment is due on December
* The P3,000,000 notes receivable, dated October 1, 2020 bears interest at 31, 2021. The market price of the land is not reliably determinable. The
10%. Principal payments ofP1,000,000 plus appropriate interest are due on prevailing interest rate for notes of this type is 8%.
October 1,2021, 2017,and 2018. The first principal and interest payment
were made on October 1, 2021. (28) How much is the gain on the sale ofland?
a. P400,000
b. P200,000
* Pl.500,000
8/0 and is due onnotes receivable
January 1,2018.isInterest
dated January 1, 2020,
is payable bears
annually on interest
December at c. P103,105
31 and all interest payments were made on their due dates. d. P66,667

* ofnnn"n^ under an'timber soldsale

onecontract.
of its divisions (29) How much is the interest revenuefor the year 2021?
P1,000,000 installment Bucksto Bucks
made Companycash
a P370,000 for
a. P48,000
signed a five-ryear, 12% note for the b. P32.000
Pb , UU balance. The equal annual payments of principal and interest on c. P16,000
the note will be Pl75,000 on January 1,2017 through January 1,2021. d. PO
Chapter 5 Chapter 5
Trade and Other Receivables Trade and Other Receivables

[30] Assume the samefactsgiven in the problem, butchange the prevailing interest (34) The interest revenuefor 2021 is '
ratefor notes of this type to 12% (instead of8%). At how much should the a. P72,000
note be recorded on January 1,2021? b. pszeoo
a. P600,000 c. P51,840
b. P560J38 d. P14,400
c. P480,360
d. P42Z080 (35) How much is the amortized cost ofthe notes receivable at December31,2021?
a. P483,840
(31) Howmuch is the interest revenuefor theyear 2021? b. P432,000
a. P6Z217 c. P363,840
b. P5Z643 d. P236,540
c. P51,250
d. P48,000
On January 1, 2021, Rockets Corporation sold equipment costing P380,000 with
(32) Using the assumption of No. (30), what is the amortized cost of the note accumulated depreciation of P160,000 on the date of sale. Rockets received as
receivable at December 31,2021? consideration for the sale, a P400,000, non-interest-bearing note, due January 1,
a. P600,000 2024. There was no established exchange price for the equipment and the note
b. P400,000 had no ready market. The prevailing rate of interest for a note of this type at
c. P379,355 January 1,2021 was 10%. Thepresentvalueof1 at 10% for three periods is 0.75.
d. P290,003 .
(36) In the 2021 profit or loss, how much should be reported as interest revenue?
a. P40,000
Nuggets Company sells equipment with a book value of P800,000, receiving a b. P33,000
non-interest-bearing note due in three years with a face amount of PI,000,000. c. P30,000
There is no established market value for the equipment The interest rate on d. P13,500
similar obligation is estimated at 12%. Round off present value factor to three
decimal places. (37) What is the note's canying amount at December 31, 2021?
a. P340,000
(33) Nuggets should report gain (or loss) on the sale and interest revenue, b. P330,000
respectively,for thefirstyear at c. P300,000
a. P200,000 and P288,000 d. P135,000
. b. P200,000 and P96,000
c. ' P(88,000) and P120,000 (38) Assuming that the equipment was sold and the note described in the problem
d. P(88,000) and P85,440 was received on July 1,2021, all other data being the some, whatis the interest
revenuefor the year ended December 31, 2021?
a. P15,000
On January 1, 2021, Pelicans Company sold an equipment to Hornets Company
b. P16,500
which had a carrying value on Pelicans' books ofP100,000. Hornets gave Pelicans
c. ■ P20,000
a P600,000,non-interest-bearing note, payable in five equal annual installment of
d. P30,000
P12a,000 with the first payment due on December 31, 2021. There was no
established price for the equipment and the note has no ready market value.
Grizzlies Company accepted a P400,000 face value, sbc-month, 10% note dated
The prevailing rate of interest for a similar note at January 1, 2021 was 12%. May 15 from a customer. On thatsame date, Grizzlies discounted the note at PRIA
Present value ffV) future value (FVJ factors for 5 periods at 12% are: Bank at a 12% discount rate.
PV of PI-0.57 PV of an annuity of PI - 3.60
FV ofPl - 1.76 FV of an annuity of PI - 6.35 (39) How much cash should Grizzlies receivefrom the bank on May 15? .
a. P400,000
b. P396,000
c. P394,800 ' '
d. P38Z200 ; \
 Chapter 5 Chapters
Trade and Other Receivables Trade and Other Receivables

(40)Assume that Grizzlies discounted the notefour months prior to its maturity accounts less finance chcU'ge of 5% based on the amount advanced. During
date, whatis the proceedsfrom the note discounting? December, Lakers collected'P200,000 which was remitted to the bank on
a. P386,400 December 31. This amount was applied first to pa3mient ofinterest at the rate of
b. P400,000 1% per month based on the outstanding balance and the remainder of the
c, P403,200 collection was applied to the principal.
d, P411,600
A customer's 10%, 120-day note for P300,000 dated September 20, 2021 was
discounted with Banco Filipinas on November 4,2021. The bank uses a discount
V. Nuggets Company accepted a P400,000 face value, six-month, 10% note dated rate of12% and a 360-day year.
May 15 from a customer. After holding the note for two months. Nuggets
I
discounted the note without recourse at PRIA Bank at a 12% discount rate and )'''4 Additional information is as follows:
appropriately accounted the discounting as a sale. Accrued interest was
appropriately recorded prior to discounting. Allowance for Uncollectible Accounts, December 31,2021
(before adjustment) P32,000
(41) What was the gain or loss recognized by Nuggets on the sale of notes Accounts Receivable(not including factored and assigned
receivable? accounts); December 31,2021 500,000
a. P3,466.67loss Estimated uncollectible, December 31,2021
b. P3,466.67gain (based on accounts receivable balance) 5%
c. P3,200.00 loss
d. P3,200.00gain (43) How much is the equity ofLakers Company in assigned accounts at December
31,2021, after its remittance to the bank?
W. On October 31,2021,Spurs Company engaged in the following transactions: i a.
b.
P145,500
P150,000
• Obtained a P500,000,6-month loan from PRIA Bemk,discounted at 12%. The c. P195,500
company pledged P600,000 accounts receivable as security for the loan. d. P254,500
• Factored P1,000,000 ofaccounts receivable without recourse on a notification
basis with Easy Finance Company. Easy Finance charged a factoring fee of5% (44) How much is the uncollectible accounts expensefor theyear 2021?
of the amount of receivables factored and withheld 10% of the receivables a. P55,000
factored. b. P45,000
c. P23,000
(42) What is the total cash received from the financing of receivables and the d. P13,000
amountofloss, respectively?
a. Pl,320,000 and P50,000 (45) How much was the netproceedsfrom the discounting ofnotes?
b. Pl,420,000 and P50,000 a. P305,350
c. Pl,320,000 and P150,000 b. P302,250
d. Pl,420,000 and P150,000 c. P302,500
d. P310,000
. ■

X. During the year 2021, the management of Lakers Company is looking into
possible alternatives ofobtaining additional financing. After considering several
options. Lakers decided to use its receivables as a means of obtaining cash to
continue operations.
On July 16, 2021, Lakers factored Pl,200,000 of its accounts receivable to High
Finance Company. Factoring fee was 15% of the receivables purchased and the
finance company withheld 10% of the purchase price as protection against sales
returns and allowances.
On November 30, 2021, accounts receivable amounting to P600,000 were
assi^ed to Manila Bank as collateral. The bank advanced 75% of the assigned
Y. Magic Finance Company reports a loan receivable from Blue Company in the
amount of P5,000,000. The initial loan's repayments include a 10% interest rate
plus annual principal payment ofP1,000,000 on Januaiy 1 ofeach year. The loan
was made on January 1, 2020. Blue made the P500,000 interest pa3anents for
2020 but did not make the P1,000,000 principal payment nor the P500,000
interest payment in 2021. Blue is having financial difficulty and Mapc has
concluded that the loan is impaired. Analysis of Blue's financial condition on
December 31,2021 indicates that the principal and interest currently due can be
collected but it is probable that no further interest can be collected. The probable
amounts and timing of collection are determined as follows:

122 123

■ dii?:
 Chapter 5
Trade and Other Receivables

December 31,2022 PI,750,000

December 31,2023 2,000,000 Debt Investments
December 31,2024 1.750.000
Total P5.500.000

Learning Outcomes
The present value factors at 10% are as follows:
1 period - 0.909; 2 periods - 0.826; 3 periods - 0.751 After reading this chapter, you should be able to:
(46) How much is the impairment loss on the receivables? (a) define investments;
a. P943,000 (b) define investments in debt securities and give examples;
b. P455J00 [cj measure debt investments at the date of initial recognition;
c. P443,000 (d) account for transactions affecting debt investments subsequent to
d. PO acquisition;
(e) measure debt investments at the end of the reporting period;
(47) How much is the interest revenue reported for the year ended December 31, (Q acquire proficiency and accuracy in answering theoretical questions and
20227 solving problems relating investments in debt securities.
a. P550,000
b. P455,700
Investment Defined
c. P375,000
d. PO
> An asset held by an enterprise for purposes of accretion of wealth through
distribution of interest, royalties, dividends, and rentals or for capital
Z. On December 31, 2021, the Metro Finance Company had a P5,000,000 note appreciation or other benefits to be obtained.
receivable from Multi Company. The note bears 10% interest. The books
Asset that is not directly related to the central revenue producing activities of
reported accrued interest ofP500,000 on this date. Because offinancial distress
being suffered by Multi Company, Metro Finance agreed to the restructuring and the enterprise but are acquired for any of the following purposes:
modification of the terms as follows: For other sources ofincome
• Reduction of principal amount to P4,000,000; To establish long-term relationship with suppliers and customers
• Reduction ofinterest to 8% payable annually beginning December 31, 2022; To acquire control or significant influence over another company
• Accrued interest on December 31,2021 is condoned; and To accumulate funds for future use
• Principal payment was reset to December 31, 2024. For^appreciation in value
(48) How much is the impairment loss recognized by Metro Finance on December > Investments are expected to contribute to the success of the business either by
31,2021 as a resultofthe restructuring? exercising certain favorable effects upon sales and operations or by making an
a. P 300,000 independent contribution to earnings over the long term.
b. P 540,000
c. Pl,500,128
Debt Investments
d. PI,698,992

(49) At what amount should the restructured notes receivable be reported at Investments in financial instruments issued by an entity that typically have
(a) a maturity value;(bj an interest rate and (c) a maturity date.
December 31,2022?
a. P3,801,008
b. P3,861,109 Classes of debt investments
c. P4,000,000
d. P5,000,000 The classification of debt securities shall be made on the basis of both (1),
the business model for managing the financial asset; and(2)the contractual
cash flow characteristics of the financial asset. Classification is as follows:

debt investments at amortized cost (called as held to maturity

securities or HTM under PAS 39)

124

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