“Trade & Other Receivables”

Q: How to compute the allowance for bad debt and bad debt expense?

Topic 1: “Trade Receivable & Allowances” Method 1 – percentage of ending AR

Step 1 – Compute for ending allowance:

Q: How to compute the accounts receivable balance? Ending balance of accounts receivable – gross XX
A: First, check if the given is the beginning balance and not the ending balance. The if Percentage of uncollectiblity X%
yes, do it using the “accounts receivable – gross” T –account. Balance of allowance for bad debt XX

Trade Receivable – gross

Step 2 – Compute for bad debt expense
Allowance for bad debt
Beginning balance XX Beginning balance of allowance
(a) Sale on account (a) Collection of accounts receivable
Accounts written off XX XX Recovery of accounts written off
(b) Recovery of written of receivables (b) Collection of recovery Bad debt expense
(c) Freight FOB shipping point, prepaid (c) Write off of accounts receivable
XX Ending balance of allowance
(d) Discount taken by customers
(e) Sales actually returned
(f) Other form of payment Squeeze
Ending balance (answer)
Method 2 – percentage of sales

Step 1 – Compute the bad debt expense:

Second. check if the given is the ending balance, it will be the unadjusted ending
accounts receivable that you have to adjust. Below are the usual adjustment to the Sales XX
unadjusted balance. Percentage of uncollectibility X%
Unadjusted accounts receivable XX Bad debt expense XX
1. Reversal of customers: postdated checks / NSF check / stale check XX
2. “netted” debit balance of customer’s account XX Step 2 – Compute the ending allowance:
3. Unrecorded sales return (XX)
4. Adjustment for goods sold still in-transit Allowance for bad debt
 FOB shipping point, (+) if not recorded, do nothing if recorded
XX Beginning balance of allowance
 FOB destination, (–) if recorded, do nothing if not recorded XX/(XX) Accounts written off XX XX Recovery of accounts written off
Adjusted accounts receivable (answer)
XX Bad debt expense
Ending balance of

allowance Answer

“Trade and Other Receivables” Page 1 of 7

 Method 3 – aging of accounts receivable Q: How to classify receivable into current and noncurrent
asset? Trade Receivable:
Step 1 – Compute the required ending allowance: ü Current asset, even if collectible beyond 12 months
ü Trade receivable arises from sale on account of goods or services from
AR Age AR Age AR Age Total customers in the ordinary course of business.
Category 1 Category 2 Category 3 ü Expected to be realized in cash within one year or within normal operating cycle,
AR balance XX XX XX
whichever is longer.
% per age category x% x% x%
Allowance per category XX + XX + XX X Non-Trade Receivable:

Step 2 – Compute the bad debt expense: ü Current asset, unless collectible beyond 12 months.
ü If silent, considered as current.

Allowance for bad debt

Subscription Receivable:
XX Beginning balance of allowance
Accounts written off XX XX Recovery of accounts written off ü Contra-equity – if silent, or collectible beyond 12 months.
ü Current receivable – if collectible within 12 months.
Bad debt expense
XX Ending balance of allowance
General Assumption (silent)
Current Noncurrent
Squeeze
(a) Trade receivable less allowances (1) Advances to affiliates
Q: How to compute the percentage of uncollectiblity? (b) Note receivable less note discounted (2) Advances to associates
Total write off over the period – total recovery over the period (c) Accrued income (3) Advances to subsidiary
= % of uncollectilibity i. Rent receivable
Net sales over the period
ii. Interest receivable
iii. Commission receivable
Q: What is the NRV of accounts receivable?
iv. Dividend receivable
 The question is the same as: (d) Postdated / NSF / Stale checks (4) Advances to officers
1. How much is the amortized cost of the accounts receivable? (e) IOUs (5) Advances to shareholders
2. How much is the carrying amount of the accounts receivable? (f) Loans receivable
3. How much is the book value of the accounts receivable? (g) Advances to employees
(h) Advances to personnel
Accounts receivable at December 31 XX (i) Advances to suppliers
(a) Allowance for doubtful accounts (XX) (j) Accounts receivable – assigned
(b) Allowance for estimated sales discount to be taken (XX)
(k) Accounts receivable – pledged
(c) Allowance for estimated sales to be returned (XX)
(l) Claims from insurance
(d) Allowance for freight (sold FOB destination, freight collect) (XX)
(m) Claims from common carrier
NRV of Accounts receivable at December 31 XX (n) Suppliers’ debit balance
“Trade and Other Receivables”
Page 2 of 7
Topic 2: “Notes Receivables”
• As accounting rule, all receivable and payable should be measured at present value IMPORTANT NOTES:
initially and subsequently. • If the interest is payable semi-annually:
• Theoretically short term notes should be measured at present value, but practically / ü effective interest is divided into half
usually / generally it is measured at face value since the discounting of less than one ü the period is doubled
year is considered immaterial. ü the basis of interest income is more than one, update the carrying amount at interest
• According to PFRS 9, note receivable should be initially measured at fair value plus payment date
transaction cost but notes do not incur transaction cost therefore the fair value is the 1.
initial measurement • if the note is serial note with equal principal payment:
• Fair value is equal to the present value. ü the principal is payable in equal periodic payment, use PV of annuity then.
What is the sales / revenue if the company received a note as a ü the interest is payable in unequal periodic payment (since it is based on decreasing
principal) use PV of 1 then.
consideration? Answer: Fair value of the note (also equal to present value)
ü nominal is based on the unpaid principal
What is the gain or loss on sale if the company received a note as a consideration?
2.
Answer: Carrying amount of the non-operating asset sold = XX • If the note is serial note with unequal principal payment:
Fair value of the note received + downpayment = (XX) ü the principal is payable in unequal periodic payment, use PV of 1 then.
Gain or loss on sale = XX ü the interest is payable in unequal periodic payment (since it is based on decreasing
principal) use PV of 1 then.
ü nominal is based on the unpaid principal
How to compute the: 3.
1. Fair value • If the cash price is given, the present value (fair value) of the note is equal to: Cash
2. Carrying amount price minus downpayment.
3. Interest revenue ü If the cash price minus downpayment is not equal to the face value of the note, it is
4. Interest receivable category 2 or 3 note.
5. Current portion ü If it is category 2 or 3 then the effective is not give, you can solve for the effective
6. Noncurrent portion interest by trial and error and interpolation is necessary.
(see next page)

“Trade and Other Receivables” Page 3 of 7

Category Classification Fair value* Interest revenue Interest receivable Carrying amount Current portion Noncurrent portion
1 Interest bearing Face amount / Principal Nominal interest Nominal interest Remaining unpaid Principal amount that Principal amount that
principal / face amount will be paid within 12 will be paid beyond
unpaid months 12 months.
Unpaid principal
x nominal interest Note – you will
Unpaid principal x # of mos. from last separate the note into
x nominal interest interest payment up to original principal current and non current
interest revenue December 31 / 12 mo less : principal payment only if it is a serial note
interest receivable unpaid principal or note were the
principal is payable on
installment.

2 Non-interest Present value of the Effective interest None Amortized cost Carrying amount, end Carrying amount, end
bearing principal less: noncurrent portion x effective interest + 1
current portion less: any principal pay.
Carrying amount at beg forever zero Fair value / beg CA noncurrent portion
Principal x PVF x effective interest x effective interest + 1
interest revenue less: any principal payment Note – it is easier if you Note – you will
use the effective interest in carrying amount at end compute first the separate the note
getting the PVF noncurrent portion then into current and non
the residual is the current only if it is a
current portion serial note or note
were the principal is
payable on
installment.

3 Interest bearing Present value of the Effective interest Nominal interest Amortized cost Carrying amount, end Carrying amount, end
with unrealistic principal plus present value less: noncurrent portion x effective interest + 1
nominal interest of nominal interest. current portion less: nominal interest
Carrying amount at beg Unpaid principal Fair value / beg CA less: any principal pay.
Principal x PVF x effective interest x nominal interest x effective interest + 1 Note – it is easier if you noncurrent portion
in case nominal + interest revenue x # of mos. from last less: nominal interest compute first the
is not equal to Principal x nominal x PVF interest payment up to less: any principal payment noncurrent portion then Note – separate only
effective December 31 / 12 mo carrying amount at end the residual is the if serial note or note
use the effective interest in interest receivable current portion on installment
getting the PVF

“Trade and Other Receivables” Page 4 of 7

Topic 3: “Loans Receivables”
• Notes receivable are receivables supported by promissory note, loans receivable are
receivables supported by promissory note as well, the main difference is that the note 3. – the present value of the new cash flow is your new carrying amount, it will be the
receivables are receivables by a non-financial institution arising from sale of inventory / basis of the subsequent interest income.
service / non operating assets. While loans receivables are receivables by a financial
institution arising from lending activities in the ordinary course of business. How to compute reversal of impairment?
• Loans receivable is a financial asset and it is initially measured at fair value plus Amortized cost or CA of new loan at the date of reversal XX
transaction cost. Present value of the new cash flow: after reversal
• Fair value is usually equal to the face amount / principal of the loan. New principal amount x PVF XX
New principal amount x new nominal interest x PVF XX XX
What is the initial measurement of loans receivable? or (choose the LOWER)
Face amount of the loan XX Amortized cost of the loan as if no impairment happened XX (XX)
Origination cost XX Reversal of impairment loss XX
Origination fee (XX)
Initial measurement XX ACCOUNTING FOR THE IMPAIRMENT LOSS
• Indirect origination cost should be recognized as outright expense. • we can use two methods to account impairment: (1) allowance method; (2) direct method
• If the transaction incurred origination cost or origination fee, it means the nominal
Journal entry to record impairment:
interest is different from the effective.
ü Incurred origination cost / origination fee = account same as note category 3. Direct method Allowance method
dr. Impairment loss dr. Impairment loss
ü No origination cost / origination fee = account same as note category 1. cr. Interest receivable cr. Interest receivable
How much is the impairment loss? cr. Loan receivable cr. Allowance for impairment
Carrying amount of the loan at impairment date XX
Accrued interest receivable XX Journal entry to record interest revenue:
Total carrying amount of receivable XX Direct method Allowance method
New principal amount x PVF (b) XX dr. Loan receivable dr. Allowance for impairment
New principal amount x new nominal interest x PVF XX (XX) cr. Interest income cr. Interest income
Impairment loss
FS presentation
Important note:
Direct method Allowance method
1. – if the problem states the company did not accrue the interest, then exclude it in the Loan receivable at amortized cost XX LR at new principal amount XX
computation. If the company accrue or recorded the interest receivable or if the Allowance for impairment 0 Allowance for impairment (XX)
problem is silent, then include it in the computation. CA to be presented in FS XX CA to be presented in FS XX
2. – use the original effective interest (interest at the date of loan). Also note that if the
problem is silent as to the effective interest at the date of loan assume the nominal
interest is the effective interest.
“Trade and Other Receivables”
Page 5 of 7
Topic 3: “Loans Receivables”
• To generate cash prior to the scheduled collection of receivable by either (1) using as a collateral from a loan; or (2) sold the receivable to a financial institution.
• Refer to the table below:
Used as a collateral Sold the receivable
1. Receivable is not derecognized 1) Receivable is derecognized
2. Liability is recognized 2) Liability is not recognized
3. No gain or loss 3) With gain or loss
4. Transactions: 4) Transactions:
i. Pledge a) Factoring without recourse
ii. Assignment – notification b) Factoring – with recourse
iii. Assignment – non notification c) Discounting – without recourse
iv. Discounting – with recourse, conditional sale
v. Discounting – with recourse, secured borrowing
PLEDGING Whether notification or non notification basis, the answer is same.
• Usually no accounting problem in this situation. • Interest is not deducted in advance from the amount of loan.
• Included in the total receivable, requires note disclosure. FACTORING
• Computation of net proceeds from factoring:
ASSIGNMENT
Amount factored XX
• Computation of net proceeds from the loan and assignment transaction. Service / commission / assessment / finance fee (XX)
Amount of loan granted (usually a portion of the assigned receivable) XX Factor’s holdback (XX)
Service / assessment / commission charge (XX) Interest charged ( i% x days / 365), if any (XX)
Net proceeds XX Net proceeds XX
• Service / assessment / commission charge is may be charged on (1) accounts
receivable assigned or (2) loans payable.  With and without recourse:
• Computation of ending balance of Accounts receivable assigned and loans payable. With recourse Without recourse
Accounts receivable assigned Loans payable Derecognize receivable Derecognize receivable
Balance XX Balance XX Recognize liability for recourse No recognition of recourse obligation
Collected (XX) Interest expense XX obligation
Sales discounts (XX) Remittances (XX) Recognize loss on recourse No recognition of loss on recourse
Sales returns (XX) Ending balance XX obligation obligation
Write off (XX)  Computation of cost of factoring:
Ending balance xxxx Service / commission / assessment / finance fee XX
• Computation of equity portion of receivable assigned. Interest charged ( i% x days / 365), if any XX
Ending balance of accounts receivable assigned XX Loss on recourse obligation (fair value of the recourse obligation) only if with recourseXX
Ending balance of loans payable (XX) Total cost of factoring XX
Equity balance – disclosures to financial statement XX
“Trade and Other Receivables” Page 6 of 7
DISCOUNTING
 Computation of net proceeds from discounting:
Maturity value [ face value + (face value x nominal interest x months from date of the note up to maturity date / 12 months)] XX
Discount charge by the bank (maturity value x discount rate x months date sold to bank up to maturity / 12 months) (XX)
Net proceeds from note discounting XX

 Computation of gain or loss from discounting:

Net proceeds from note discounting XX
Carrying amount of total receivable sold (face amount + accrued interest*) (XX)
Gain or loss XX
*face amount x nominal interest x months from date of the note up to date the note was sold to the bank.
 Journal entry; without recourse; with recourse conditional sale; with recourse secured borrowing:

To record discounting of the note to a bank:

Without recourse Conditional sale Secured borrowing
Cash Cash Cash
Loss on discounting Loss on discounting Loss on discounting
Note receivable Note receivable discounted** Liability on note discounted***
Interest income Interest income Interest income
**contra-asset account, presented as deduction to note receivable. Contingent liability is disclosed in the notes.
***liability account, included in the “trade and other payable” line item.

END

“Trade and Other Receivables” Page 7 of 7