ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 42  October 2021 CPA Licensure Exam  Week No. 3

FINANCIAL ACCOUNTING & REPORTING C. Uberita  G. Macariola  J. Binaluyo

FAR-4204: RECEIVABLES
Nature of receivables
Receivable represents financial asset arising from a contractual right to receive cash or another financial asset
from another company. It falls under one of four categories of financial instruments, namely Loans and
Receivables. Loans and Receivables are non-derivative financial assets with fixed maturity (including loan assets,
trade receivables, investments in debt securities and deposits held by banks) that are not quoted in an active
market other than those classified as “financial assets at fair value”. The reference to fixed maturity in the
definition means a contractual arrangement that defines the amounts and dates of payments to the holder such
as interest and principal payments. For most entities, they comprise trade receivables, loan assets, investments
in debt instruments. For banks and similar institutions, they constitute a significant proportion of their non-trading
assets, in particular loans and advances to customers.

Classes of receivables
Trade receivables – are claims arising from sale of merchandise or service in the ordinary course of business
operations; such as the following (a) accounts receivable and (b) notes receivable.

Non-trade receivable – are claims arising from sources other than from sale of goods and services in the normal
course of business; such as the following (a) advances to officers and employees (b) advances to subsidiaries (c)
dividends and interest receivable (d) deposits as a guarantee of performance or payment (e) deposits to cover
potential damages or losses (f) claims for; insurance, tax refunds, lawsuits, merchandise damaged or lost in
transit, returnable items, etc.

Presentation of receivables on the face of the statement of financial position or in the notes
Receivables are disaggregated into amounts receivable from trade customers, receivables from related parties
prepayments and other amounts (PAS 1 paragraph 75b)

Trade receivables should be presented on the face of the balance sheet as one line item and classified as
current assets but the detail of which will be disclosed in the notes. Non-trade receivables that are currently
collectible should be presented as one line item under the current asset section but the detail of which will be
disclosed in the notes.

Valuation of Loans and Receivables:

a. Initial recognition - loans and receivables are measured at fair value (transaction price). The fair value is
based on the total expected future cash inflows that an enterprise will realized.

The transaction price of short term receivables with no stated interest rate may be measured at the original
invoice amount. Therefore, accounts receivable is often valued at the exchange price agreed on by the buyer and
seller

Notes receivable should be stated at present value. The present value of a note receivable maybe its face value
(for notes that are short-term and interest bearing long-term notes) or discounted value (for long-term non-
interest bearing and long-term interest bearing but the stated/nominal rate is different than the prevailing rate
on interest for similar debt instruments.)

Nature of note receivable

A note receivable is a financial asset arising either from sale of goods or services (trade note receivable) or from
peripheral transaction (non-trade note receivable) or both, on account. A note receivable is evidence by a written
promise to pay amount in the future which is typically the principal amount and interest. The note receivable may
either be an interest-bearing note or a non-interest-bearing note.

A note receivable is said to be interest bearing when a specific interest rate is stated in the promissory note.
The stated rate is the nominal or face rate or coupon rate or contracted rate as part of the note which usually
corresponds to the market rate of interest of similar risk. The market interest rate or effective interest rate or
yield rate is the rate used in the market to determine the value of the note, which is actually the discount rate to
determine present value. When the stated and market rates are equal it means the notes were selling at face but
when the stated and market rates are different it means that the face of the note is differs from the present value
of the note. The difference would either be a discount or premium that is to be amortized over the term of the
note using the effective interest method as prescribed by the standard for financial instruments.

A note is said to be non-interest-bearing when there is no specific stated interest rate. The interest rate is
already imbedded in the face of the note and consequently the maturity value of a note is its face amount,
therefore, it is necessary to separate the interest from the note by discounting the note using the prevailing
market interest rate.

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To remember:
Interest bearing – the amount of principal and interest to be paid are both known. The amount of principal is
amount stated on the face of the promissory note while the amount of interest to be paid is based on the stated
interest rate on face of the promissory note. Hence, the total payment on maturity (which is also known as
maturity value) is the computed as follows:

Face value (Principal) P xx

Interest (Principal x nominal rate x time) xx
Maturity value P xx

Non-interest-bearing – the amount of principal and interest to be paid are both unknown. Meaning the face
value is also equals to maturity value.

Face value (Principal) = Maturity Value

An interest-bearing note “may” have an accrued interest receivable if the interest at year end was earned but not
yet received. However, for a non-interest-bearing note, no accrued interest can be recorded at year end.

Note Receivable issued at market rate of interest

If the note received is issued at market rate of interest, it means that the nominal rate is equal to effective rate
of interest hence, no resulting discount or premium is recognized and no amortization shall be done on the note.
Interest income is recognized based on its nominal interest.

Note Receivable issued other than market rate of interest

If the note received is issued other than market rate of interest, it means that the nominal interest is not equal
to effective rate of interest, hence, it will result in a discount or premium.

If the nominal rate is less than effective rate discount shall be recognized.
Note receivable (face value) xx
Accumulated depreciation xx
Discount on note receivable xx
Equipment xx
Gain on sale xx
*assuming an old equipment was sold resulting to a gain.

The present value of note is less than the face value of note when the note is issued at a discount. The discount
shall be amortized every “period”. The amortization of discount is added to previous carrying value to arrive at
notes new carrying value.

If the nominal rate is more than effective rate premium shall be recognized.
Note receivable (face value) xx
Accumulated depreciation xx
Premium on note receivable xx
Equipment xx
Gain on sale xx
*assuming an old equipment was sold resulting to a gain.

The present value of note is more than the face value of note when the note is issued at a premium. The premium
shall be amortized every “period”. The amortization of premium is subtracted from previous carrying value to
arrive at notes new carrying value.

b. Subsequent to initial recognition - loans and receivables are measured at amortized cost. The amortized
cost of a financial asset is the amount at which the financial asset is measured at initial recognition minus principal
repayments, plus or minus principal amortization using the effective interest method of any difference between
that initial amount and maturity amount and minus any reduction (directly through the use of allowance account)
for impairment or uncollectibility.

Impairment of Loans and Receivables:

Credit loss arises when a debtor fails to pay some or all of the contractual payments, including instances of late
payment. IFRS 9 adopts an expected loss model for the recognition of impairment losses on financial assets that
are measured at amortized cost and financial assets with contractual cash flows measured at fair value through
other comprehensive income. The general approach, the entity recognizes the expected loss for a financial asset
in accordance with the requirements for:

Stage 1 - when there has not been a significant increase in credit risk since initial recognition
Stage 2– when there has been significant increase in credit since initial recognition.
Stage 3 – when there is an objective evidence of impairment.

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The entity is required to recognize an allowance for the expected credit loss. The amount of the loss allowance
reflects the probability-weighted amount derived by considering the probability of a range of possible outcomes,
such as payment in full, default on the last tree payments and complete default. The journal entry to recognize a
loss allowance is ordinarily in the following form:

Impairment loss xx
Allowance for credit losses xx

The loss allowance is a contra asset account that reduces the carrying amount of the financial asset. However, in
the case of financial asset classified at fair value to other comprehensive income, the loss allowance is credited
to other income instead of recognizing a loss allowance as a reduction in the carrying amount of the financial
asset. Thus, although an expected credit loss is recognized, the carrying amount of the financial asset is not
reduced by a loss allowance, so that the financial asset continues to be measured at fair value.

For financial asset that is classified as Stage 1 - when there has not been a significant increase in credit risk since
initial recognition, the amount of credit loss allowance recognized is the expected loss for the next 12 months.

Applying the stages of impairment

An entity generates a loan receivable of P1,000,000 on January 1, 2021. The loan is fully repayable on December
31, 2030. The effective interest rate is 6% per year payable at the end of the year. Assume that the loan
eventually defaults on December 31, 2025 and the actual loss amounts to P250,000. Assuming that the probability
of default within the next 12 months is 1% when the loan was made.

Stages in expected credit loss model:

Stage 1: as soon as a financial asset is originated or purchased, 12-th month expected credit losses are
recognized in profit or loss allowance is established:
Loan receivable – amortized cost 1,000,000
Cash 1,000,000

Impairment loss 2,500

Allowance for credit losses 2,500
250,000 x 1% = 2,500; the expected credit losses for stage 1 is based on 12 month expected loss of the lifetime
expected credit loss.

Stage 2: If the credit risk increases significantly and the resulting credit quality is not considered to be low credit
risk, full lifetime expected losses are recognized. Lifetime expected credit losses are only recognized if the credit
risk increases significantly from when the entity originates or purchases the financial instruments but that do not
have objective evidence of a credit loss event

If at the end of 2021, there has been no significant deterioration in the credit quality or the loan is still considered
to be of low credit risk, the entity would continue to recognize 12-month expected credit losses. Suppose the
probability of default increases due to significant increase in credit risk of the borrower, and the lifetime credit
losses is estimated at P25,000;
Impairment loss (25,000 – 2,500) 22,500
Allowance for credit losses 22,500

Stage 3: If at the end of year 2022, there has been a deterioration of the credit quality and there is an objective
evidence of an impairment loss, the lifetime expected credit losses are recognized. If the expected credit losses
over the remaining period of the loan is estimated at P75,000, the entity recognizes the lifetime expected credit
losses as follows:
Impairment loss (75,000 – 22,500) 52,500
Allowance for credit losses 52,500

Interest income for the second year will continue to be calculated on the gross amount of the loan (1,000,000 x
6%)

If there is objective evidence that the receivables are impaired an impairment loss should be recognized. The
amount of the loss is the difference between the asset’s carrying amount/amortized cost and the present value
of estimated future cash flows discounted at the financial asset’s original effective interest rate. The carrying
amount of the receivables shall be reduced either directly or through use of an allowance account and the amount
of the loss shall be recognized in profit or loss.

When the asset becomes uncollectible, the carrying amount of the impaired financial asset is reduced directly or
if an amount was charged to the allowance account, the amount charged to the allowance account are written off
against the carrying value of the financial asset.

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To determine whether there is objective evidence that an impairment loss on financial assets has been incurred,
the Group considers factors such as the probability of insolvency or significant financial difficulties of the debtor
and default or significant delay in payments.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related
objectively to an event occurring after the impairment was recognized the previously recognized impairment is
reversed to the extent that the carrying amount of the asset does not exceed its amortized cost at the reversal
date. The amount of the reversal is recognized in the profit or loss.

For the assessment of objective evidence of loss events, accounts receivables are organized into two classes (1)
individually significant and (2) individually not significant. Assessment of impairment evidence for individually
significant accounts is carried out individually whereas for individually not significant accounts is done either
individually or collectively. However, if no impairment evidence is found individually assessed accounts, whether
significant or not, these accounts have to be grouped together by similar credit risks characteristics and assessed
collectively for impairment.

If the assessments reveal evidence of impairment, bad debts need to be recognized for the impaired receivable
balances. The amount of bad debt to be recognized is the difference between the carrying amount of the accounts
and the present value of estimated future cash flows (excluding future losses, credit losses that have not been
incurred) discounted at the effective rate of interest computed at initial recognition. An entity may use historical
experience in estimating future cash flows from impaired accounts but it is important that the entity adjusts the
experience to reflect the effects of current conditions. An entity may also use formula-based approaches or
statistical methods to estimate bad debts for a group of accounts receivable provided the methods consider the
effects of the time value of money, cash flows for all of the remaining life of an account and the age of the
accounts within the group.

Receivable Financing
Pledging and Assignment of Account receivable
1. Continue to recognize and report the receivable with appropriate disclosure.
2. Recognize the proceeds as a liability rather than as income
3. Charge interest on the carrying value of the liability
4. Any transaction cost incurred is a finance cost

Assignment of Account receivable

1. Continue to recognize and report the receivable with appropriate disclosure or transfer the account
receivable to account receivable assigned.
2. Recognized the proceeds as a liability and charge interest on the carrying value of the liability
3. Charge interest on the carrying value of the liability
4. Any transaction cost incurred is a finance cost

Factoring of Accounts receivable

Accounting for factoring of receivables:
1. If the receivables have been sold, then they will be removed from the statement of financial position and
replaced by cash. However, if the seller retains significant risks and benefits relating to the receivable
like, slow payment risks (time value of money), non-payment risks and the benefit of being paid more or
sooner than expected, the seller should continue to recognize the asset and the proceeds of sale will be
recognized as a liability in the statement of financial position.

2. If all the benefits and risks have been disposed of, then there has been a genuine sale and the receivables
will be derecognized. The difference between the net proceeds plus any amount retained by the factor
and the face value of the receivable factored will be charged to profit or loss. Any amount retained by the
factor (e.g., Factors’ holdback or Receivable from factor) is recognized and reported as current asset.

Discounting Notes Receivable

A holder of a note can readily convert it to cash by discounting it at a bank, either with or without recourse. The
bank accepts the note and gives the holder cash equal to its maturity value less a discount computed by a discount
rate to the maturity value. The bank gets its money back plus the discount when the note is paid by its maker at
maturity. If the note is not paid at maturity, the bank can collect from the original holder if it was discounted with
recourse. If the arrangement is without recourse, the bank must find another remedy.

For notes discounted with recourse, the original holder is contingently liable for paying the note. That is, it will
have to pay the note if it is defaulted. This type of liability is not disclosed in the balance sheet but should be
described in a footnote if it is material.

A five-step process is used in accounting for a discount on notes receivable:

1. Compute the maturity value.
2. Compute the discount (discount rate times maturity value).
3. Compute the proceeds (maturity value less discount).
4. Compute the net interest income or expense (proceeds less carrying value).
5. Prepare the journal entry.
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It is to be recorded as a borrowing when the payee has the option to repurchase the note or if the entity retains
substantially all the risks and rewards of ownership of the financial asset. An entity has retained substantially all
the risk and rewards of ownership of a financial asset if its exposure to the variability in the present value of the
future net cash flows from the financial asset does not change significantly as a result of the transfer (example –
because the company has sold the financial asset but subject to an agreement to buy it back at a fixed price or
the sales price plus a lender’s return.

If the note receivable is discounted without recourse it is treated as a sale, and a sale of financial asset requires
derecognition from the accounting records since there has been a transfer of contractual rights to receive the
cash flows of the financial asset, any gain or loss on derecognition is reported in the current period profit or loss.
The gain or loss is determined by the difference of the net proceeds on the sale of the asset and the carrying
value of the financial asset. The carrying value of the financial asset (note receivable) is the combined amount of
the present value or amortized cost of the note and any accrued interest on the date of sale.

However, if the discounting is treated as a borrowing (with recourse), the entity should continue to recognize the
financial asset with appropriate disclosure in the notes to financial statements. The proceeds from the discounting
are recognized as a financial liability. Any transaction cost incurred is treated as a finance cost.

Multiple Choices – Theories

1. Trade receivables are classified as current assets when they are reasonable expected to be collected
a. Within one year
b. Within normal operating cycle
c. Within one year or within the normal operating cycle, whichever is shorter
d. Within one year or within the normal operating cycle, whichever is longer

2. If a company employs the gross method of recording accounts receivable from customers, then sales
discounts taken should be reported as
a. a deduction from sales in the income statement.
b. an item of "other income and expense" in the income statement.
c. a deduction from accounts receivable in determining the net realizable value of accounts receivable.
d. sales discounts forfeited in the cost of goods sold section of the income statement.

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

a. Receivables from officers
b. Receivables from subsidiaries
c. Dividend receivable
d. Sale of goods on account to a customer

4. Which of the following accounts is not affected when an account receivable written off as uncollectible is
recovered?
a. Cash
b. Bad debts expense
c. Accounts Receivable
d. Allowance for bad debts

5. Which of the following transaction will decrease the recorded accounts receivable?
a. Sale of goods on account.
b. Collection of accounts previously written off.
c. Return of goods sold to a customer on account.
d. Cash discount availed using the net method.

6. Jedrick Company prepares an account receivable aging schedule with a series of computations as follows: 2%
of the total peso balance of accounts from 1-60 days past due, plus 5% of the total peso balance of accounts
from 61-120 days past due and so on. How would you describe the total of the amounts determined in this
series of computations?
a. It is the amount of uncollected accounts expense for the year.
b. It is the amount that should be added to the allowance for uncollectible accounts at year-end.
c. It is the amount of the desired credit balance of the allowance for uncollectible accounts to be reported
in the year-end financial statements.
d. When added to the total of accounts written off during the year, this new sum is the desired credit balance
of the allowance account.

7. When the allowance method of recognizing uncollectible account expense is used, the entries at the time of
collection of an account previously written off would
a. Increase profit.
b. Increase the amortized cost of accounts receivable.
c. Decrease profit.
d. Decrease the amortize cost of accounts receivable.

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8. Courage Company, which has an adequate amount in its allowance for doubtful accounts, write-off as
uncollectible an account receivable from a bankrupt customer. This action will:
a. Have no effect on total current assets
b. Reduce net income for the period
c. Reduce total current assets
d. Reduce the amount of total equity

9. A non-interest-bearing note receivable:

a. Cause no interest revenue to be recorded.
b. Includes a specified principal amount plus specified interest
c. Includes a specified principal amount but an unspecified interest
d. Includes an unspecified principal amount and unspecified interest

10. On July 1 of the current year, an entity received a one-year note receivable bearing interest at the market
rate. The face amount of the note receivable and the entire amount of the interest are due on June 30 of next
year. On December 31 of the current year, the entity should report in the statement of financial position
a. No interest receivable
b. A deferred credit for interest applicable to next year
c. Interest receivable for the interest accruing this year
d. Interest receivable for the entire amount of the interest due on June 30 of next year

11. The amortization of discount on note receivable will:

a. Increase the amount of interest received to arrive at interest income.
b. Decrease the amount of interest received to arrive at interest income.
c. Decrease the carrying value of the note receivable.
d. Increase the face value of the note receivable.

12. If the note has a nominal interest of 10% and was issued at a market rate of interest of 12%, the note:
a. was issued at market rate of interest.
b. was issued resulting to a discount.
c. was issued resulting to a premium.
d. was a non-interest bearing note

13. How would the interest-bearing note collectible in installment shall be reported in the statement of financial
position?
a. the entire carrying value is always reported as non-current asset.
b. the carrying value maybe reported as partly current and partly non-current.
c. the entire carrying value is always reported as current asset.
d. the carrying value is not reported in the statement of financial position.

14. The total interest on a non-interest-bearing note is equal to?

a. The excess of the face value over the present value
b. The excess of the present value of over the face value
c. The excess of the market value over the present value
d. Zero

15. Ding Belle Inc. received a three-year, non-interest-bearing note for P50,000 on January 1, 2020. The current
interest rate at that time was 15% for similar notes. Ding Belle recorded the receipt of the note as follows:

Notes Receivable 50,000

Sales 50,000

The effect of this accounting for note receivable on Ding Belle’s profit for the years 2020, 2021 and 2022 and
its retained earnings at the end of 2022, respectively shall be
A. overstate, overstate, understate, no effect
B. overstate, understate, understate, understate
C. overstate, understate, understate, no effect
D. no effect on any of these

16. The proceeds on discounting notes receivable is:

a. Reduced by the amount of interest up to maturity value.
b. Reduced by the amount of discount
c. Increased by the total interest earned by the company
d. Increased by any protest fee

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17. Statement 1: When a notes receivable is discounted on a with recourse basis, the transaction is treated as
borrowing.
Statement 2: The amount of finance charge (interest expense) recognized on a discounting of notes receivable
is always equals to the amount of discount.
A. Only statement 1 is true
B. Only statement 2 is true
C. Both statements are true
D. Both statements are false

18. Which of the following is deducted from the principal loan amount when a loan was made to arrive at its initial
amortized cost?
a. direct origination costs.
b. direct origination fees.
c. discount on loan receivable.
d. premium on loan receivable.

19. Statement 1: The loan after the effect of direct origination costs and fees shall have a new effective interest.
Statement 2: The loan receivable shall be amortized using the original nominal interest.
a. only statement 1 is true
b. only statement 2 is true
c. both statements are true
d. both statements are false

20. Which of the following indicator should be present to shift the expected credit loss from stage 1 to stage 2?
a. an increase in credit risk.
b. a significant increase in credit risk.
c. an objective evidence of impairment.
d. financial difficulties of the borrower.

21. Where there is an objective evidence of impairment, the amount of interest income should be?
a. computed based on the gross carrying value of the loan.
b. computed based on the net carrying value of the loan.
c. no interest shall be recognized.
d. no correct answer.

22. When the company assessed the loan on stage 1 expected credit loss:
a. the amount of impairment loss is based on lifetime ECL.
b. the amount of impairment loss is based on lifetime ECL multiplied by the % of default over the life of the
loan.
c. No impairment loss shall be recognized.
d. the amount of impairment loss is based on lifetime ECL multiplied by the % of default for the next 12
months.

Multiple Choices – Problems

1. Ube Company has four operating segments, one segment is into wholesaling of groceries, other segment
deals in the trading of household equipment and office equipment, the other segment is into servicing. The
other segment is into car rental. The following items were taken from the books of the different segments
pertaining to their Receivables as of December 31, 2021:
Arising from sale of groceries P650,000
Arising from sale of old grocery store equipment 600,000
Arising from sale of household and office equipment 580,000
Arising from sale of service 550,000
Arising from sale of old service equipment used in servicing segment 500,000
Arising from rental of cars 420,000
Claim from insurance for damage rental cars 370,000
Arising from sale of old cars 330,000
Arising from the accrual of interests on above receivables 280,000
Arising from employee advances 150,000

In the consolidated December 31, 2021 statement of financial position what total amount of trade receivables
should Ube Company report?
a. P2,200,000
b. P2,530,000
c. P3,030,000
d. P3,630,000

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2. On January 1, 2021, Boss Company accounts receivable has an outstanding balance of P500,000. Below are
the transactions in its accounts receivable during 2021:
Total Sales (including a P500,000 cash sales) P8,000,000
Account receivable written-off 60,000
Total Sales returns (of which P30,000 were sales on a cash basis) 80,000
Amount received from credit customers 5,100,000
Sales discount and allowances granted 70,000
Amount received representing recovery (not included in P5.1M) 120,000

What is the amortized cost of the accounts receivable on December 31, 2021, assuming that the company’s policy
is to provide 5% allowance based on outstanding balance?
a. P2,470,000
b. P2,584,000
c. P2,973,500
d. P3,087,500

3. The December 31, 2020 statement of financial position of Leon Company showed accounts receivable balance
of P500,000 and Allowance for Bad Debts of P48,000. Following is a summary of accounts receivable
transactions recorded by the company in 2021:
Credit sales during the year P3,120,000
Total accounts collected from customers during the year 3,020,160
Accounts written off as uncollectible 42,000
Recoveries of accounts written off in the previous year 2,160

On December 31, 2021, an aging of accounts receivable indicated the following:

% of total Probability
Age group receivable amount of collection
Less than 60 days 60% 99%
Between 61 and 120 days 22 88
Between 121 and 180 days 15 45
Over 180 days 3 20

Question 1: The adjusted gross balance of accounts receivable is?

a. P560,000
b. P562,160
c. P570,000
d. P604,160

Question 2: The balance of allowance for bad debts as of December 31, 2021 is?
a. P77,484
b. P77,324
c. P77,784
d. P77,544

Question 3: The bad debt expense for the year 2021 is?
a. P69,324
b. P69,624
c. P69,664
d. P69,124

Question 4: The net realizable value (or amortized cost) of the accounts receivable as of December 31, 2021 is?
a. P480,356
b. P480,516
c. P482,456
d. P482,216

Question 5: Assuming that the over 180 days account is 100% uncollectible, how much is the balance of
allowance for bad debt at year end?
a. P43,244
b. P64,344
c. P44, 684
d. P58,924

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4. You are given the following data for Heat Company:

Cash Credit Total
Cost of sales P500,000 P 4,500,000 P 5,000,000
Cash received from customers 650,000 5,850,000 6,500,000

Merchandise were mark to sell as follows: Cash sales, 30% above cost and credit sales at 40% above cost, all of
which are collectible. The balance of accounts receivable at the end of the year was:
a. P1,475,000
b. P1,350,000
c. P450,000
d. P125,000

5. On January 1, 2021, Exo Company received a P200,000 cash and a 4-year, 3%, P500,000 note to be collected
on December 31, 2024. Interest on this note is to be collected at the end of each year. The note was received
from sale of an equipment with original cost of P1,000,000 and accumulated depreciation of P400,000 on
date of sale. Interest effective on the note is 5%.

Question 1: How much is the amount of gain (loss) on sale recognized on January 1, 2021 from sale of
equipment?
a. (P63,240)
b. P52,460
c. P64,540
d. (P135,460)

Question 2: How much is the amount of interest income recognized in its statement of comprehensive income
for the period ending December 31, 2022?
a. P23,227
b. P23,638
c. P24,070
d. P24,524

6. Twice Incorporated sold a building which is no longer used in its operation on August 1, 2020. The building
has estimated useful life of 5 years with an original cost of P15,000,000 and carrying value of P9,500,000 on
date of sale. Twice received a P6,000,000, 3-year noninterest bearing note to be collected in equal annual
installment of P2,000,000 every July 31 of each year starting 2021. There is no available fair value for the
building but on August 1, 2020, interest effective was at 6%. On December 31, 2021, interest effective was
increase to 7%.

Question 1: How much is the amount of interest income recognized in its statement of comprehensive income
for the period ending December 31, 2021?
a. P320,761
b. P133,651
c. P220,007
d. P278,781

Question 2: How much is the current portion of the note receivable reported in its December 31, 2021 statement
of financial position?
a. P1,779,993
b. P1,824,493
c. P1,886,792
d. P1,933,962

7. On January 1, 2021, Arezzo Company received a 10%, P14,000,000, note collectible in installment plus
interest every December 31 of each year until December 31, 2025. The note is collectible in principal as
follows:
December 31, 2021 P4,000,000
December 31, 2022 3,500,000
December 31, 2023 3,000,000
December 31, 2024 2,500,000
December 31, 2025 1,000,000

The interest effective on January 1, 2021 is at 14%, on December 31, 2021 is at 15%.

Question 1: How much is the initial present value of the note receivable when received on January 1, 2021?
a. P12,921,826
b. P12,098,192
c. P11,326,352
d. P10,226,392

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4204
Week 3: RECEIVABLES

Question 2: How much is the carrying value of the note on December 31, 2021?
a. P13,330,882
b. P11,512,041
c. P9,330,882
d. P8,391,939

Question 3: How much of the carrying value of the note receivable is reported as non-current as of December
31, 2022?
a. P6,137,206
b. P3,346,414
c. P6,002,891
d. P3,129,324

8. On October 31, 2021, Hagrid Corp. engaged the following transactions:

• Obtained a P500,000, 6-month loan from Citibank, discounted at 12%. The company pledge P600,000 of
the accounts receivable as a security for the loan.
• Factored P1,000,000 of accounts receivable without recourse on a notification basis with Nahum Finance
Company. Nahum Finance charged a factoring fee of 5% of the amount of receivable factored and withheld
10% of the receivable factored.

What is the total cash received from the financing of receivables and the amount of loss, respectively?
a. P1,320,000 and P50,000
b. P1,320,000 and P150,000
c. P1,420,000 and P50,000
d. P1,420,000 and P150,000

9. On April 1, 2021, Lunar Company loaned P20,000,000 to Eclipse Company. The loan is to repayable after 5
years. Interest on this loan is 3% annually every April 1 of each year starting 2022. Direct origination cost of
P478,991 was paid by Lunar and direct origination fee was deducted to the proceeds received by Eclipse
Company. The interest effective on this loan is 5% after the origination costs and fees.

Question 1: How much is the direct origination fee?

a. P2,178,271
b. P2,008,899
c. P2,210,782
d. P2,190,792

Question 2: How much is the interest income recognized in its 2022 income statement?
a. P925,163
b. P913,410
c. P929,081
d. P941,442

Question 3: What is the carrying value of the loan on December 31, 2022?
a. P18,581,620
b. P18,828,431
c. P18,910,701
d. P19,169,852

10. Details for one of the loans of Cebuano Company that is probably impaired during the period is as follows:
a. The company made a loan of P40,000,000 to a customer with similar credit risk to Cebuano Company on
January 1, 2021.
b. Interest is receivable on this loan at the end of each year at 2% per annum for the next five years.
c. The loan was properly recorded and classified as amortized cost.
d. The company made and initial assessment of the loan and the total expected credit losses over the life of
the loan was P1,000,000. The discount rate applicable was at 2%.
e. On January 1, 2021, the probability of default over the next 12 months was 5%.

At December 31, 2021, there was a significant increase in the credit risk on the loan made by Cebuano Company,
the expert assessed that the total expected credit losses over the life of the loan was increase to P2,200,000. The
discount rate applicable was at 2%.

Question 1: How much is the total impairment loss recognized by Cebuano Company in its Statement of
Comprehensive income for period ending December 31, 2021?
a. P1,947,321 b. P1,946,416 c. P1,987,173 d. P1,986,268

Question 2: How much is the balance of the allowance for credit losses as of December 31, 2021?
a. P2,032,460 b. P1,992,608 c. P2,011,835 d. P1,987,927

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