AC 3 - Intermediate Acctg' 1 (Ate Jan Ver)

COLLEGE OF BUSINESS AND ACCOUNTANCY
Topic: Cash and Cash Equivalents
- Nature of Cash
- Recognition and Measurement
- Presentation in the Financial Statement
- Components of Cash & Cash Equivalents
- Summary of Business Transactions affecting cash
Learning Outcomes:
At the end of this module, the student should be able to:
a. Describe the nature of cash and identify items considered as cash and
cash equivalents
b. Know the recognition and measurement standards applicable to cash and
cash equivalents in the Statement of Financial Position.
c. Determine how cash and related items are accounted for and reported in
the financial statements.
Biblical Values Integration
In our life, we often don’t know how to face adversity when it comes upon us.
Please remember: God is our refuge.
The LORD also will be a refuge for the oppressed, a refuge in times of
trouble. And they that know your name will put their trust in you: for you,
LORD, have not forsaken them that seek you.
-Psalm 9: 9-10
Introduction: AD
liquidity
lability to
settle so financial obli.
ability to items
convert cash
to
Cash, the most Cliquid of assets, is the standard medium of exchange and the
basis for measurement and accounting for all other items. Another reason that
cash is so important is that businesses, individuals and even governments must
maintain an adequate liquidity position that is, they must have a sufficient
amount of cash on hand to pay obligations as they come due if they are to remain
viable operating entities.
An important element of the objective of financial reporting is assessing the

amounts, timing and uncertainty of cash flows. Reporting on the sources, uses
and change in cash balance helps investors, creditors and others know what is
happening to a company's most liquid resource.
The promulgated accounting standards for cash are, at present, rather minimal.
The only real guidance is that offered in PAS 1 Presentation of Financial

Statements and PAS 7 Statement of Cash Flows, Importance of Cash and Cash
Equivalents.
and
cash
Liquidity The IASB and FRSC have identified the need to report information on cash and
important.
*
liquidity as one of the key objectives of financial reporting and this emphasis
I of led to requirement of providing a Statement of Cash Flows as one of the primary
statementflows financial statements.
cash
Because cash is the most liquid of all assets, it is also the one that needs to
be safeguarded the most. Thus, time will be spent in discussing cash and its
equivalents as well as the most common safeguard - a bank reconciliation often
employed to ensure the proper accounting for cash.
↳ bank recon
proofo fcash
GEN‐FM‐018 Rev 0 Effective Date 01 Jun 2021

FIOW cash
of
-
↳"cradi to grave cycle"
INFONS OUTFIOMS
-in
① purchases -
⑧
I
revenue for pPE
S912/
&
payroll and
& sale OFPPE-CaSH other OPEX
③ issuance
LI dest
of
③ LonE
cradle to grave
↳ bumabalik
cash to cash
Body:
ACCOUNTING FOR BUSINESS TRANSACTIONS AFFECTING CASH
The activities of a business enterprise can be grouped into three categories,

namely:
a) Operating activities - These are the principal revenue - producing activities

E or-
of an enterprise and include producing purchasing and delivering goods for
sale and providing services.
b) Investing activities - These activities include acquisitions' and->

disposition- acquisition
-
I
of property, equipment and other long-term assets as well as investment in debt disposition
OF LTAS12TS
and equity securities. investment in debt
& equity securities
-
c) Financing activities - These activities include obtaining resources or funds
from owners as well as creditors and repayments of the amount borrowed.
CF-FYI al CER
RECOGNITION AND MEASUREMENT OF CASH converted
amounts -
Breian
~
c
pesO
AD recognition and measurementoffinancial instruments are T
In accordance with PFRS 9, CASH being a financial asset should be recognized at

FAIR VALUE which is the amount payable on demand or to be collected as at end
of the period reported on or the Statement of Financial Position date. For
example, cash in Philippine currency is recognized and measured at- face value,
while cash in foreign currency is measured in Philippine pesos using the current
exchange rate as of the Statement of Financial Position date while cash in bank
under receivership should be shown at its estimated recoverable amount.
Underlying the definition of fair value is a presumption that an entity is a

going concern without any intention or need to liquidate, to curtail materially
of its operations or to undertake a transaction on adverse term. Fair value the
credit quality of the instrument and not the amount that an entity receive or
pay in a forced transaction, involuntary liquidation or distressed sale.
PRESENTATION
MAGIGING CPA AKO CORPORATION (Partial)

Statement of Financial Position
As of December 31, 2020
Assets
Current Assets
Cash and Cash Equivalents (Note 5) P45,000,000
Note 5:
Cash on hand & Cash in bank P20,000,000 -breakdown

Cash Equivalents 25,000,000
I amounts
of
in the note
P45,000,000
COMPONENTS OF CASH AND CASH EQUIVALENTS

cash equivalents
At the end of the reporting period, the balance of Cash andA may consist of
the following:
Cash on Hand and in Banks
Cash in common practice (i.e. ., coins, currency, checks encashment) includes

cash on hand as well as current and maintained with banks. As an asset, cash
includes all of types of individual assets:
a. Petty Cash
b. Demand Deposits in Checking Account
c. Deposits in Savings Account

d. Undeposited Negotiable Checks
e. Foreign Currencies
f. Bank Drafts
g. Money Orders
SD For minor expenditures
Petty cash refers to cash balances kept on hand at various locations to pay for
minor expenditures such as postage kept on and hand other at various small out-
of-pocket expenditures.
&D cash in bank
Demand deposits represent amounts on deposit in checking or savings.
AD possessed by the entity butn ot yetin cashed.
Undeposited checks are to the checks payable to the enterprise or bearer which
are not yet presented to the bank for payment.
Foreiancash
Foreign
converted currencies converted to their peso values are also included in the
tope so definition of cash.
S Bank drafts are commitments by banking institutions to advance funds on demand

From bank by the party to whom the draft was directed. (bankers check)
From others
- Money orders are financial instruments that are similar to bank drafts but are
drawn generally from authorized post offices or other financial institutions.
Deposits in foreign banks that are subject to immediate and unrestricted

tricxclteduded withdrawal generally qualify as cash and reported at their Philippine peso
equivalents as of the date of the statement of financial position. However,
Red e CA
La CAM
-
when cash in foreign banks is restricted as to use or withdrawal, it should be
ineed
segregated and designated as current or noncurrent asset, depending on the
t
unves period of restriction. The same principle applies to cash balances specially
designated by management for special purposes (e.g., cash set aside for the
purpose of retiring a bond issue in the future.
Additional Considerations
Bank Overdrafts. PAS 7 Statement of Cash Flows, paragraph 8 states that when
bank overdrafts are repayable on demand, they form an integral part of an
entity's cash management. In these circumstances, bank overdrafts are included
as a component of cash and cash equivalents. A characteristic of such banking
arrangements is that the bank balance often fluctuates from being positive to
overdrawn.
Compensating balances. These are cash amounts that are not immediately
·areat
accessible by the owner and maintained as a minimum amount of cash on deposit
-
excluded the
en pursuant are viewed to borrowing by the debtor, arrangements the fact is with
that lender. Regardless of how these for unrestricted use and compensatory
balances are not available for unrestricted use and penalties will result if
they are used. Therefore, the portion of the entity’s cash account that is a
pwedera compensatory balance must be segregated and shown as noncurrent assets if the
nindiGalatin
*
*
bang tira
ma related borrowings are noncurrent liabilities. If the borrowings are current
nedaccount
*
sa
liabilities, it is acceptable to show the compensatory balance as a separately
captioned current assets but under no circumstance should these be included in
the caption “Cash and Cash Equivalent.” The compensating balance amount and
nature of the arrangements should be disclosed in the notes to financial
statements.
Components disclosed or of reported cash restricted separately as and to

classified use or withdrawal as an investment, should be disclosed or reported
separately and classified as an investment, a receivable, or other asset.
The objective of the disclosure is to provide the user of financial statements

with information to assist in evaluating the entity's ability to meet
obligations (i.e., its liquidity and solvency) and in assessing the
effectiveness of cash management.

CASH EQUIVALENTS
jD madalinconvert
te
Cash equivalents are short-term and highly liquid investments that are readily
convertible into cash and so near their maturity that they present insignificant
risk of changes in value because of changes in interest rates. Only highly
liquid investments that are acquired three months before maturity can qualify
as cash equivalents. Examples of cash equivalents are:
1. Three-month month time commercial deposit, or money market

instrument;
2. Three-month time deposit;
3. Three-month BTr treasury bills;
4. Three-month BTr Treasury bills purchased 3 months before
maturity date
These items are not included in CASH account but are often presented in the
Statement of Financial Position together with cash, with the title cash and
cash equivalents.
SUMMARY OF BUSINESS TRANSACTIONS AFFECTING CASH

+ Debit
CASH
-
credit
Debits to Cash arising from: Credits to cash arising from:
Operating Activities
1. Cash Sales 1. Cash purchases of Goods/RawMaterials/Services
2a. Payments for purchases of goods (merchandise/

2. Collection of Credit Sales or receivables raw materials) on account or credit
2b. Payment of Direct Labor and Factory overhead

for manufacturing companies
2c. Payment of Selling and Administrative Expenses
3. Receipt of interest, rent, dividend

3. Payment of interest expense, income taxes
from investments and other income
Investing Activities Scapital expenditure)
1a. Sale of property, plant, and equipment on cash

1a. Purchase of PPE for cash
basis.
1b. Collection of receivables arising from 1b. Payment of liability arising from purchase
sale of PPE on account. of PPE on account.
2. Sale of investments in securities, debt 2. Purchase of investment securities, debt and

and equity equity
3. Collection of loans, granted to other

3. Loans to other entities (non-trade receivables)
entities (non-trade receivables)
issue - nanghtang
Financing Activities (acquiring funds)
nag
1. Issuance of debt (notes & bonds) instruments. 1. Paymentof debt (notes or bonds)at maturity
2. Issuance of entity's equity shares 2a. Retirement of equity shares
2b. Purchase of treasury shares
2c. Payment of cash dividends
3. In case of sole proprietorship and partnership: 3. Withdrawal by owner or partners

a. Initial as well as additional investments made
by the owners.

Summary/Conclusion:
 Cash and cash equivalents refers to the line item on the balance sheet
that reports the value of a company's assets that are cash or can be
converted into cash immediately.
 Cash equivalents include bank accounts and marketable securities such as
commercial paper and short-term government bonds.
 Cash equivalents should have maturities of three months or less.
References:
Intermediate Accounting Part IA and Part IB (2021 Edition) by Zeus Vernon B.

Millan
Financial Accounting Volume 1 (2021 Edition) by Conrado T. Valix, Jose F.

Peralta, and Christian Aris M. Valix
PAS 7 Statement of Cashflows
PAS 1 Presentation of Financial Statements

Topic: Cash and Cash Equivalents
- Rationale for Managing Cash Effectively

- Cash Planning and Control
 Bank Reconciliation
 Proof of Cash
 Imprest Cash System
- Petty Cash Fund
Learning Outcomes:
a. Understand the basic effective cash management principles.

b. Describe some key elements of an internal control system for cash receipts
and disbursements.
c. Know how to prepare bank reconciliation and proof of cash.
d. Know how to use the imprest fund system and fluctuating fund system for
petty cash.
The greatest truth you can ever know about God (next to hearing and receiving
the message of salvation) is His sovereignty. Because when you know that God is
in control—even of those things that appear to be out of control—you are able
to move through life benefiting from the blessings of assurance, peace and self-
control.
Introduction:
In accounting, cash refers to money (currency) that is readily available for

use. It may be kept in physical form, digital form, or invested in a short-
term money market product. In economics, cash refers only to money that is in
the physical form.
Cash is the lifeblood of a business. For a company to cover its operating

expenses, it needs to have sufficient money on hand to pay its employees,
contractors, vendors, and suppliers. Companies also need money to fund capital
expenditures and invest in long term growth projects.
If companies don’t have enough cash on hand, they may need to finance their
OpEx and CapEx by borrowing money (debt) or issuing shares (equity).
Body:
RATIONALE FOR MANAGING CASH EFFECTIVELY
Cash is an asset that is quite familiar and important to all of us. We generally
think of cash as the currency and coins in our pockets and the money we have in
our checking accounts. To a business, cash also includes checks received from
customers, money orders and bank cashier's checks.
Because it plays such a central role in operating a business, cash must be

carefully managed and controlled. As noted earlier, a business entity must
maintain sufficient cash for current operations and for paying obligations as
they come due. Any excess cash should be invested temporarily to earn an
additional return for the owner(s). Effective cash management also requires
controls to protect cash from loss by theft or fraud.
Since cash is the most liquid asset, it is particularly susceptible to

misappropriation unless properly safeguarded. A business should have a system
of internal control - a set of procedures designed to ensure proper accounting
for transactions, safeguarding of assets, promoting operational efficiency and
encouraging managerial effectiveness.

Effective cash management is very important to every company. A business entity
must maintain sufficient cash for current operations and for paying obligations
as they come due. Any excess cash should be invested temporarily to generate
additional return for the shareholders. In other words, proper cash management
requires investment of idle funds and the estimation of the timing of cash
inflows and outflows to ensure the availability of cash to meet the company's
needs.
CASH PLANNING AND CONTROL
Effective cash management includes planning and control aspects.
OPS Cash Planning Systems consist of those methods and procedures adopted to ensure
that a company has adequate cash available to meet maturing obligations and
that it invests any unused cash. The major component of a cash planning system
is the cash budget. The cash budget is a plan of cash activity that projects
cash inflows and outflows, and identifies the timing of potential cash surpluses
and shortages. The cash budget is primarily a management accounting technique
and is outside the scope of this book.
CCMS
Cash Control and Monitoring Systems require adequate internal control measures.
Internal control refers to the process adopted by an entity to enhance the
reliability of its financial reports, promote the effectiveness and efficiency
of its operations (including safeguarding its assets), and ensure its compliance
with applicable laws and regulations.
PRIMARY ACTIVITIES FOR EFFECTIVE CONTROL AND MONITORING OF CASH
The following are the primary activities for effective control and monitoring
of cash:
1. Adopt an effective system of internal control of cash transactions
The following procedures may be put into place:
1. Provide physical protection of cash by using bank

accounts.
2. Responsibilities and duties of employees will be divided.
For example, the person receiving the cash, whether at the
register or by opening the mail, will not record this
information into the accounting records. The accountant
will not be handling the cash receipts.
3. All cash receipts will be deposited into the bank the same
day and form they arrive or in the morning of the following
banking day.
4. All cash payments will be made by check (except those
payments involving small amounts which can be paid from
the Petty Cash Fund).
5. The owner will sign all checks after receiving
recommendation to pay from the departments concerned.
6. At time of payment, all supporting invoices or documents
will be stamped paid. The stamp will show the invoice or
document is paid as well as the number of the check used.
7. All checks will be pre-numbered. This will control the use
of checks and make it difficult to use a check fraudulently
without it being revealed at some point.
8. Employees will be rotated. This practice allows employees
to become acquainted with the work of others as well as to
prepare them for a possible changeover of jobs.
9. Use of Internet online banking may also be considered.
10. A regular, preferably monthly, reconciliation should be
done between the balance per bank statement and the balance
per depositor's records.

2. Manage accounts receivable
Increase the rate at which accounts receivables are collected.
3. Manage inventory levels
Keep inventory levels as low as possible without losing any sales.
4. Manage accounts payable
Evaluate trade-off involved in delaying the payment of account payable
versus the reduced purchase price that results from timely payment.
5. Invest excess cash
Maintain only a sufficient amount of cash necessary to cover the company's
day to day needs, any excess amounts should be invested in an effort to
earn an adequate rate of return on this asset.
CASH MONITORING
A company can adopt the following tools to monitor and control its cash:
1. Statement of Cash Flows

niamantic
e
This statement identifies the company's cash inflows and cash outflows,
segmenting them into the three business activities of operating, investing and
financing.
While having some cash is important to enable a company to pay its employees
and its supplies on a timely basis, having to mush cash may indicate that
company is not maximizing the return on its assets.
2. Regular preparation of bank reconciliation statement and proof of cash.
3. Adoption of the Imprest Cash System
PREPARATION OF BANK RECONCILIATION STATEMENT
Bank Statement
A statement of account issued by a bank to each depositor once a month is called

bank statement. Figure 1 is a bank statement for a checking account. The
statement shows:
1. The balance at the beginning of the period. beginning

2. Deposits and other amounts added during the period. increases
3. Checks and other amounts subtracted during the period. decreases
4. The balance at the end of the period. ending
With the bank statement, the depositor receives cancelled checks (the
depositor's checks paid by the bank during the period) and any other forms
representing items added or deducted.
Figure 1: Bank Statement of AS A FRIEND CORPORATION
FARAWAY NATIONAL BANK

125 Cold St.,
Baguio City, Philippines
AS A FRIEND CORPORATION Account Number: 27-31020558

321 Kapt. Pepe Statement Date: November 30, 20x6
AAV (increases) (decreases)
Deposits and Credits Checks and Debits Daily Balance
Date Amount Number Date Amount Date Amount
November November November
1
1 -4,200.00
1
1
&
56,403.00
60,603.00
I beginning
2 -
6,300.00 149 2 - 1,250.00 2 65,653.00
I running
-
154 3 -5,625.00 3 65,090.50 balance
7 C
5,608.00 157 7 &2,332.50 60? ,
- 7 354.00 RT 7 68,011.90
156 8 - 3,151.00 8 64,860.90
10 -
4,802.50 155 10 - 1,350.00 10 68,313.40
158 11 - 271.40 11 68,042.00
14 -
5,250.00
-
14 73,292.00
160 15 3,153.70 15 70,138.30
17 C
2,702.50 161 17 - 764.00 17 70,076.80
159 18 2,750.00 18 69,326.80
21
C
6,402.00 162 21 3,256.00-1250

163 21 -
4,500.00
165 21 -
657.00 21 67,315.80
164 23 -
2,390.00 23 64,925.80
26 3,000.00 CM 26 50.00 DM
26 -4,750.00 26 72,625.80
166 28 -
4,824.30
169 28 -2,600.00 65,201.50
30 -
4,714.00 30 100.00 SC
170 30 -1,225.00
2,250 171 30 -3,701.00 30 64,889.50
Beginning Balance + Deposits & Credits - Checks and Debits = Ending Balance
P56,403.00 + P47,729.00 - P39,242.50 = P64,889.50
Item Codes:
EC - Error Correction DM - Debit Memo
SC - Service Charge OD - Overdraft
IN - Interest Earned CM - Credit Memo
RT - Returned Item
BANK RECONCILIATION
On any given day, it is unlikely that the balance in the cash account on the
depositor's books (the book balance) will be the same as on the bank's book
(the bank balance). This is caused by timing differences and sometimes, errors.
When the bank statement is received, the depositor compares the book and bank
balances to identify the items that explain the difference between the two
balances. This process of bringing the book and bank balances into agreement is
called preparing a bank reconciliation.
A bank reconciliation is a schedule that (1) accounts for all differences

between the ending cash balance on the bank statement and the ending cash
balance in the Cash account in the company's general ledger and (2) determines
the reconciled cash balance as of the end of the month. The employee preparing
the bank reconciliation needs access to the bank statement, the general ledger,
cash receipts records, and cash disbursements records to prepare the
reconciliation.
Purpose of Bank Reconciliation
The balance of a checking account reported on the bank statement rarely equals
the balance in the depositor's accounting records. This is usually due to
information that one party has that the other does not. We must therefore prove
the accuracy of both the depositor's records and those of the bank. This means
we must reconcile the two balances and explain or account for any differences
in them. to reconcile the balances oft he
books and the bank
Bank Reconciliation Structure
Figure 2 outlines the structure of a company's bank reconciliation. The bank

reconciliation is really two schedules prepared side by side. The schedule on
the left includes bank items, and the schedule on the right includes items
related to the company's general ledger.
Ending Cash Balance in the Cash

Ending Balance on the Bank Statement
Account in General Ledger
+ +
Items recorded as Cash Receipts by CM naconsider na

Deposits Not Yet Recorded by the Bank
DIT Bank, but not yet recorded in Company hi bangko poro
and Corrections
Journals and Ledger and Correction ninaipa ng
↓ company
notyet
- -
recorded by
the bank oc outstanding Items recorded as Cash Disbursement DM
butrecorded naibaxxas na ni by Bank, but not yet recorded in

Checks not yet recorded by the bank company a cash Company Journals and Ledger and
by the compat
and Corrections ei
niaPerein
Correction
my
= =
overstated in the
bank (cash)
Reconciled Cash Balance at Period End Reconciled Cash Balance at Period End
Two
Reconciled
Amounts
must be
equal

The schedule on the left begins with the ending cash balance from the bank
statement (the month-end balance according to the bank's records). The entity’s
employee preparing the reconciliation adds (1) deposits not yet called deposits
in transit, and (2) any corrections not yet increase the bank balance. The
preparer then subtracts (1) by the bank, called outstanding checks, and (2) any
corrections not yet made by the bank that will decrease the bank balance. The
resulting total is the reconciled cash balance at the end of the month.
The schedule on the right begins with the ending balance in the cash account in
the company’s general ledger. The entity employee adds (1) items by the bank
but not yet recorded in the company's journals and (2) any corrections not yet
made by the company that will increase the general ledger cash balance. The
preparer subtracts (1) items recorded as cash disbursement by the bank but not
yet recorded in the company’s journal and (2) any corrections not yet made by
the company that will decrease the general ledger cash balance. The resulting
total is the reconciled cash balance at the end of the month. The total of the
two schedules should be the same.
REASONS FOR THE DIFFERENCE BETWEEN BANK AND BOOK BALANCES Creconciling items)
In summary, among the factors causing the bank statement balance to differ from
the depositor's book balance are these:
bank 1. Outstanding checks. Checks issued during the period that have not been
reconciling
presented to the bank for payment before the statement is prepared.
bank 2. Deposits in transit. Deposits that have not reached or been recorded by
reconciling
the bank before the statement is prepared.
3. Service charges. Bank charges for services such as check printing and
processing.
4. Collections. Collections of promissory notes or charge accounts made by
company
the bank on behalf of the depositor.
5. Not sufficient funds (NSF) checks. Checks deposited by the depositor that
comany are not paid because the drawer did not have sufficient funds.
O 6. Errors. Errors made by the bank or the depositor in recording cash
either
transactions. Isino ba and nakamaci)
STEPS IN PREPARING THE BANK RECONCILIATION
The following three steps are generally used in preparing the bank
reconciliation:
STEP 1: Identify deposits in transit and any related errors.
STEP 2: Identify outstanding checks and any related errors.
STEP 3: Identify additional reconciling items.
Illustrative Case 1: Bank Reconciliation
Using the Bank Statement of AS A FRIEND Corporation in Figure 1, the accounting

staff of the AS A FRIEND Corporis tasked to prepare the November 30, 20X6, bank
reconciliation. She uses the following procedures to reconcile the November 30
bank statement balance of P64,889.50 to the November 30 general ledger Cash
account balance of P46,726.90.
1. Trace outstanding items on the bank reconciliation for the previous month
to the current bank statement. Any items on the previous bank
reconciliation that have still not been processed by the bank must appear
on the current bank reconciliation. The October 31 reconciliation included
the following:
Deposit in Transit P4,200.00
Outstanding Checks Number 149 P1,250.00
Number 154 5,625.00
Number 155 1,350.00
The November 30 bank statement includes the P4,200.00 deposit and all
three checks listed above. Therefore, none of these items will appear in
the November 30 bank reconciliation.

2. Compare the deposits made during the month to the deposits on the bank
statement. The AS A FRIEND CORPORATION made the following deposits during
November:
November 2 P6,300.00 November 21 P6,402.00

November 7 5,608.00 November 26 4,750.00
November 17 2,702.50 =>
3. Compare the checks issued during the month to the checks on the bank
statement. The AS A FRIEND CORPORATION issued the following checks during
November:
Number 156 P3,151.00 Number 165 P 657.00

Number 157 2,332.60 Number 166 4,824.30
Number 158 271.40 Number 167 3,046.60
Number 159 7,250.00 Number 168 1,495.00
Number 160 3,153.70 Number 169 2,600.00
Number 161 764.00 Number 170 1,225.00
Number 162 3,256.00 Number 171 3,701.00
Number 163 4,500.00 Number 172 4,500.00
Number 164 2,390.00 Number 173 2,405.00
For the checks – number 167, 168, 172 and 173 – do not appear on the bank
statement. These four checks will appear on the left side of the Nov. 30
bank reconciliation as outstanding checks.
4. Scan the bank statement for charges and credits not yet reflected in the
general ledger. The AS A FRIEND Corporation's bank statement contains a
charge of P354.00 for a returned item, a debit memo of P50.00, and a
ninaiA
narecord service charge of P100.00 in the checks and other debits column. The - hinai
my company deposits and other credits column contains a credit memo for P3,000.00 nacapture
ng compat
supplemental information sent by the bank with the bank statement reveals ny
that the bank charged a P354.00 NSF check against AS A FRIEND's account,
collected a P3,000.00 note for AS A FRIEND and charged a P50.00 collection
fee, and that the service charge for the month of November was P100.00.
These four items have not yet been recorded AS A FRIEND Corporation.
Therefore, they must be listed on the right side of the bank
reconciliation.
5. Check for errors. The AS A FRIEND Corporation recorded check number 159
as P7,250.00. The correct amount of P2,750.00 appears on the bank
statement. The check was written to pay for office supplies. The
correction of the transposition in the amount of P4,500 must be listed on
the right side of the bank reconciliation.
After the five preceding procedures have been completed, the November 30
bank reconciliation for the Corporation appears as shown in Figure 3.
Note that both the left side and the right side of the reconciliation end
with a reconciled cash balance and that the two amounts are the same.
This reconciled cash balance is the amount that will appear on the
November 30 balance sheet for the company.

Figure 3
AS A FRIEND CORPORATION
Bank Reconciliation
November 30, 20x6
Ending Balance from Balance from General
P64,889.50
C
48,726.90
Bank Statement Ledger P46,726.90
&D niraicheani
Add: Check 159 for
consider dahil sobra
enin ompany
2,750 recorded as D
Yuna haibawas
Add: DIT 2,250.00 7,250 4,500.00 niya sa
cash nina
Collection of Note P3,000.00
67,139.50 Less: Collection Fee 50.00 2,950.00
P56,176.90
subnaibawas
O0
Less: OC
No. 167
No. 168
No. 172
P3,016.60
1,495.00
4,500.00
in the
ledgers but
notin BS
Less: NSF Check
Service Charge C 354.00
100.00 454.00
No. 173 2,405.00 11,416.00

Reconciled Cash balance P55,722.90 Reconciled Cash balance P55,722.90
bank perspective
Before AS A FRIEND CORPORATION prepares its financial statements for November,

AS A FRIEND must make journal entries to bring the balance in the Cash Account
into agreement with the reconciled cash balance on the bank reconciliation.
Figure 4 shows the entries that incorporate the items on the company’s side of
the bank reconciliation.
Nov-30 eb dani,understandalone the
Cash 4,500.00
Office Supplies Expense 4,500.00
*To correct the recording error on check no. 159
#
Cash 2,950.00
Miscellaneous Expense 50.00 -Sintrae
nacollect
Notes Receivable 3,000.00 p and pantang
*To record a note collected by the bank, less collection fee.

#
Accounts Receivable 354.00
Cash 354.00
*To reclassify an NSF Check as an account receivable.
#
Miscellaneous Expense 100.00
Cash 100.00
*To record the bank service charge.
#
PROOF OF CASH (+NOMon,recon
Another type of reconciliation is the Proof of Cash. This is a type
reconciliation that incorporates the monthly cash receipts and payments to test
the internal control over cash and provides additional evidence of the accuracy
of the cash balance. Therefore, the proof of cash identifies the sources of
differences between the company records and the bank statement (such as receipts
and disbursement). There are several forms of a proof cash (sometimes called a
four-column reconciliation); and, our discussion shall focus on the form of a
proof of cash begins with the reconciliation made by the previous month and
accounts in summary form, for all the receipts and payments that have transpired
during the current month. In essence, the proof of cash provides four separate
reconciliations:
1. The reconciliation of the bank and book balance for the previous. month.
2. The reconciliation of the receipts recorded by the bank for month with
the receipts recorded on the books. receipts
3. The reconciliation of the payments recorded by the bank for month with
the payments recorded on the books. disbursements
4. The reconciliation of the bank and book balances for the current month.

Illustrative Case 1: Proof of Cash
The following data pertain to Baguio Corporation. Prepare the Proof of Cash for the
month of June, 20x7.
1. May 31, 20x7 bank balance P272.348.40 balances

2. May 31, 20x7 book balance 289,630.40
3. DIT received by the bank June 2, 20x7 24,803.00
4. DIT received by the bank July 3, 20x7 22,857
5. Totatl receipts recorded by the bank during June, 20x7 528,423.40
6. Undeposited cash collection, June 30, 20x7 6,548.00
7. Total Payments recorded by the bank during June, 20x7 551,548.80
8. OC on May 31, 20x7 naibawas nung June na
-
#781 3,263.00
#782 4,258.00
9. Total Receipts per books during June, 20x7 508,785.80
10. Total payments per books during June, 20x7 549,657.40
11. OC, June 30,20x7
#862 1,923.80
#864 2,943.60
#865 5,265.00
12. Bank Service Charge for June 300.00
13. Customer's NSF check returned by the bank on June 25,20x7 2,762.80
14. Error by the company in recording check #843 check understated by 1,440.00
15. Notes and Interest Collected by the bank in June 24,240.00
Solution:
BAGUIO CORPORATION
Proof of Cash
June 30, 20x7
previous
month
-
Reconciliation May 31,20x7
I
June Receipts -
June Payments
Reconciliation
-
June 30,20x7
Balance per Bank P272,348.40 P528,423.40 P551,548.80 P249,223.00
DIT:
May 24,803.00 (24,803.00)
June
Undeposited Cash Gdapat
22,857.40
6,548.00
->
dapat
June pa
22,857.40
6,548.86
OC:
I
pang may sina matatang gap
May 31,20x7 pang may dapatna

mosa
#781
#782
&(3,263.00)
(4,258.00)
bayarin nindi pa
naddeposit
(3,263.00)
(4,258.00) Ainadagdan
disbursements
b mo
June 30,20x7 -o
#862 1,923.80 (1,923.80)
#864 2,943.60 (2,943.60)
#865 5,265.00 (5,265.00)
Adjusted Balance P289,630.40 P533,025.80 P554,160.20 P268,496.00
Balance per books P289,630.40 P508,785.80 P549,657.40 P248,758.80

June service charge 300 (300.00)
NSF check
(DM) 2,762.80 (2,762.80)
Error in recording check understated by
#843 1,440.00 xS (1,440.00)
Note and Interest collected (c) 24,240.00 24,420.00
Adjusted Balance P289,630.40 P533,025.80 P554,160.20 P268,496.00
IMPREST CASH SYSTEM
To accomplish better management and control of cash, an imprest cash system may para maimasan
and pagka-
be adopted by a business enterprise. This system requires that all collections WAIG.
for the day should be deposited immediately the following banking day and all
payments must be made by checks except those involving small amounts.
To avoid time and cost of writing checks for small amounts, a company may set
up a Petty Cash Fund. Small payments required for items such as postage, delivery
fees, minor repairs and low-cost supplies are referred to as petty cash
disbursements. Petty cash activities are part of an imprest system which
designates advance money to establish the fund, to withdraw from the fund and
to reimburse the fund.

OPERATING A PETTY CASH FUND
Establishing a Petty Cash Fund
To establish a petty cash fund, a check is written to the petty cash custodian
for the amount that is to be set aside in the fund. The amount may be P500,
P1,000, P2,000, or any amount considered necessary. The journal entry to
establish a petty cash fund of P1,000 would be as follows.
Petty Cash Fund 1,000

Cash in Bank 1,000
The custodian cashes the check and places the money in a petty cash box. For
good control, the custodian should be the only person authorized to make
payments from the fund. The custodian should be able to account for the full
amount of the fund at any time.
Petty cash is an asset that is included in the account "Cash on hand and in
banks" on the balance sheet.
MAKING PAYMENTS FROM THE PETTY CASH FUND
A receipt called a petty cash voucher (Figure 5) should be prepared for every
payment from the fund. The voucher shows the name of the payee, the purpose of
the payments, and the account to be charged for the payment. Each voucher should
be signed by the custodian and by the person receiving the cash. The vouchers
should be numbered consecutively and should be accounted for.
PETTY CASH PAYMENTS RECORD
When a petty cash fund is maintained, a formal record is often kept of all
payments from the fund. The petty cash payments record (Figure 6) is a special
multi-column record that supplements the regular accounting records. The
headings may vary depending on the types of expenditures.
The petty cash payments records of Lang Leav, a business consultant, is shown
in figure 6. A narrative of the petty cash transactions shown in figure 6
follows:
Dec. 1 Leav issued a check for P2,000 payable to Bong Ga, Petty cash
custodian. Ga cashed the check and placed the money in a
secured cash box.
A notation of the amount received is made in the description column of the petty
cash payments record.
During the month of December, the following payments were made from the petty
cash fund:
Dec. 5 Paid P320.80 to Joy's Auto for servicing the company automobile.
Voucher No.1 (320.80)
8 Reimbursed Leav P150.75 for the amount spent in entertaining a
client at lunch. Voucher No. 2
(150.75)

9 Gave Leav P300 for personal use. Voucher no. 3. -3007
There is no special Distribution column for entering amounts
withdrawn by the owner for personal use. Therefore, this P300 payment
is entered in the amount column at the extreme right of the petty
cash payments records.
15 Paid P280.25 for typewriter repairs. Voucher no. 4. (280257

17 Reimbursed Leav P140.50 for travel expenses. Voucher no. 5 (1x0.507
19 Paid P80.00 to Carlos Car Care for washing the company automobile.
Voucher no.6. 180.00)
22 Paid P90.50 for mailing a package. Voucher no. 7. (90.5)

29 Paid P300 for postage stamps. Voucher no. 8. (300)
PETTY
CASH FOR THE MONTH OF DECEMBER, 20x1 Page 1
PAYMENTS
Distribution of Payments
Date Particulars Check/Voucher No. Auto Expense Post Exp. Travel Exp. Misc. Exp. Others Balance
Amount Forwarded
1 Received in Fund P2,000 2,000.00
5 Automobile Repairs 1 320.80 1,679.20
8 Client lucheon 2 150.75 1,528.45
9
15
Lang Leav, Personal Use
Typewriter Repairs
3
4 280.25
C
300.00 1,228.45
948.20
17 Travel Expense 5 140.50 807.70
19 Washing Automobile 6 80.00 727.70
22 Postage Expense 7 90.50 637.20
29 Postage Stamps 8 300.00 337.20
400.80 390.50 291.25 280.25 300.00
1,662.80
31 Balance P337.20
31 Replenished fund 1,662.80
Total 2,000.00 2,000.00
REPLENISHING THE PETTY CASH FUND
The petty cash fund should be replenished whenever it runs low, and at the end
of each accounting period so that the accounts are brought up to date. The petty
cash payments record is proved by footing all of the amount columns. The sum of
the footings of the Distribution columns should equal the footing of the Total
Amount column. After proving the footings, the totals are entered and the record
is ruled as shown in Figure 6.
The information in the petty cash payments record is then used to replenish the
petty cash fund. On December 31, a check for P1,662.80 is issued to the petty
cash custodian. The journal entry to record the replenishment of the fund is as
follows:
20x1
Dec. 31
Automobile Expenses 400.80
e
Postage Expenses 390.50
an Travel and Entertainment Expenses
Miscellaneous Expense
291.25
280.25 o
total nagastos
Lang Leav, Drawing 300

Cash in Bank 1,662.80
*Replenishment of Petty Cash Fund.
Note two important aspects of the functioning of a petty cash fund.
1. Once the fund is established by debiting Petty Cash Fund and crediting
Cash in Bank, no further entries are made to Petty Cash. Notice in the
journal entry to replenish the fund that the debits are to appropriate
expense accounts and the credit is to Cash in Bank. Only if the amount of
the fund itself is being changed would there be a debit or credit to Petty
Cash Fund.

2. The petty cash payments record is strictly a supplement to the regular
accounting records. No posting is done to this record. method lang
falag a sing
na cash
CASH SHORT AND OVER monitoring
Businesses generally must be able to make change when customers pay for goods
or services received. Thus, a Change Fund is usually established to be used for
this purpose. An unavoidable part of this change-making process is that errors
can occur. It is important to know whether such errors have occurred and how to
account for them.
Businesses commonly use cash registers with tapes that accumulate a record of
the day's receipts. The amount of cash according to the tapes can be compared
with the amount of cash in the register to determine the existence and amount
of any error. For example, assume a cash shortage is identified for June 19.
Receipts per register tapes P9,630

Cash Count 9,610
Cash Shortage P 20
Similarly, assume a cash overage is identified for June 20.
Receipts per register tapes P8,140

Cash Account 8,150
Cash overage P 10
We account for such errors by using an account called Cash Short and Over. The
register tapes on June 19 showed receipts of P9,630, but only P9,610 in cash
was counted. The journal entry on June 19 to record the revenues and cash
shortage would be:
20x1 e
June 19 sub nasal

Cash 9,610
sobrapbased
a
Cash Short and Over 20 -D
Service Fees 9,630

# Lep tiered as
sale/
The entry on June 20 to record the revenue and cash overage would be:
20x1
June 20
Cash 8,150
Service Fees 8,140
Cash Short and Over 10
#
The Cash Short and Over account is used to accumulate cash shortages and overages
throughout the accounting period. At the end of the period, a debit balance in
shortat
the account (a net shortage) may be treated as Miscellaneous Expense.- A credit 192bit)
bal
balance in the account (a net overage) is treated as Miscellaneous Income. Some
business enterprises however, charge cash shortages as receivable from the
FLUCTUATING FUND SYSTEM FOR PETTY CASH FUND (PCF)

↳
Cashier or Custodian while overage is recognized as Miscellaneous Income.
overage
Corance)
SD pwedeumaba
This system called "fluctuating fund system" is one where the replenishment of
the fund does not necessarily equal the actual disbursements from the fund nor
does it necessarily bring the petty cash balance to its original account.
Petty cash disbursements are immediately recorded as reductions from the petty
cash fund balance and the amount to be replenished is left to the discretion of
the custodian.
The pro-forma entries to record the PCF transactions under this system are as
follows:

1. To establish the fund:
Petty cash fund xx

Cash in Bank xx
2. To record disbarments from the fund:

-
-
disbursements
-
Expenses xx
Petty cash fund xx
3. To replenish or increase the fund:
Petty Cash Fund xx

Cash in Bank xx
4. To reduce the fund balance:
Cash in Bank xx
Petty cash fund xx
Summary/Conclusion:
 A bank reconciliation statement summarizes banking and business activity,

reconciling an entity’s bank account with its financial records.
 Bank reconciliation statements confirm that payments have been processed
and cash collections have been deposited into a bank account.
 All fees charged on an account by a bank must be accounted for on a
reconciliation statement.
 After all adjustments, the balance on a bank reconciliation statement
should equal the ending balance of the bank account.
 A proof of cash is more complicated to complete than a bank
reconciliation. However, it provides a greater degree of detail, and
so makes it easier to locate errors than a bank reconciliation. Thus,
it may be cost-effective to use a proof of cash when you expect to
find a large number of different cash-related errors within an
accounting period.
 Petty cash is a nominal amount of money readily accessible for paying
expenses too small to merit writing a check or using a credit card.
 In larger corporations, each department might have its own petty cash
fund.
 A petty cash fund can be used for office supplies, cards for customers,
flowers, paying for a catered lunch for employees, or reimbursing
employees for expenses.
 Petty cash's main advantages are that it's quick, convenient, and easy to
understand and use.
 Disadvantages of petty cash funds include their vulnerability to theft
and misuse, and the need to monitor and balance them periodically.
References:

Millan

PAS 7 Statement of Cashflows
https://www.investopedia.com/terms/b/bankreconciliation.asp
https://www.accountingtools.com/articles/2017/5/17/bank-reconciliation
https://www.investopedia.com/terms/p/pettycash.asp

Topic: Receivables
- Definition and Classification of Receivables

- Recognition and Measurement of Receivables
- Estimating Uncollectible Accounts Receivable
- Accounting for Uncollectible Accounts Receivable
Learning Outcomes:
a. Define receivables and identify different types of receivables.

b. Know the rules in the recognition and measurement of receivables in
accordance with PFRS.
c. Adjust accounts receivable for trade and cash discount, sales returns and
allowances, and uncollectible accounts. /For the ending balance)
d. Describe the accounting treatment of anticipated uncollectible accounts
receivable and the application of the estimated credit losses (ECL) model. Sconservatism)
e. Apply the appropriate valuation concepts and principles in reporting the
different types of short-term notes receivables.
When the cares of my heart are many, your consolations cheer my soul.
– Psalm 94:19 (ESV)

Introduction:
Like cash, receivables are also financial assets. Receivables represent

financial assets arising from a- contractual right to receive cash or another
financial asset from another entity.
Examples of Receivables:
Cep riant quaranteed
by a contract
oral
Accounts Receivable ~informal
or
1. (ex. sales contracts)
2. Notes Receivable ~promissory note, postdated
check
3. Loans Receivable ~Financial institutions
4. Advances bumabale
-
recanized
men
-receivable
5.
6.
7.
Accrued Income
Deposits -
Claims Receivable -
3
Financing
A
receivables from reimbursable
deposits
( coverpotentafe
ex
B agencies,
From insurance
Body: lawsuit
and the like
normal operating
*Please refer to pages 150-191 of your textbook. Cycle OF
an
entity
-
the time
CLASSIFICATION by the acquisition

ofassets
for processing
For non-financial institutions, receivables are classified as the realization
cash
in cash or
D sale ofgoods/services ofbusiness
in the Ord. course
a. Trade receivables -
equivalents
b. Non-trade receivables -> Financial inst.
Note that for Mnon-financial institutions, they do not need to classify their
receivables as trade or non-trade because their financial statement is presented
-
based on liquidity. Shortterm
obligations
operating cycle OF
D the business or
FS PRESENTATION I near, whichever
is 10n9er
Cpage 151
Trade and non-trade receivables that are currently collectible are
combined and presented on the statement of financial position in a single
C
currentation in line item described as “Trade and other receivables”
 All details related to the breakdown of Trade and other receivables are
- -
-
O
also disclosed in the notes to financial statements.

ACCOUNTING FOR ACCOUNTS RECEIVABLES
credit
Accounts Receivable - Trade
1. Sales on Account 1. Collection of receivables from sales of

goods on account
Accounts Receivable
Sales
xx
xx
Cash
Account Receivables
xx
collection
xx
recovery 2. Recovery of receivables previously written

derecognising a receivables
2. Sales returns and allowances
sales
off return
~D normal bal:debit and allow.
Accounts Receivables xx Sales returns and allowances xx
Allowance for Doubtful Accounts xx Accounts Receivables xx
3. Write-off of uncollectible accounts hindina talaga

cash X
X
1
-
sure no may nassense no hindina matatang up maybabayad
Allowance for Doubtful Account xx yung other
alr XX
Accounts Receivable xx entity
*(Allowance Method)
doubtful palang =
Nalang entry
record kapad write
/
Bad Debt Expense Wala na xx
OFF
-
Accounts Receivable +al 999 xx

*(Direct Write-off Method)
4. Impairment of Receivables
Loss on Impairment of Receivables xx

Accounts Receivables xx
ABNORMAL BALANCES IN ACCOUNTS there should impairment

never be a debit notes receivables
Credit Balance in Accounts Receivable
barance in
Example: 966 etc
XYZ Co. has an outstanding receivable of P10,000 from Customer A. Subsequently,

Customer A remits P16,000 to XYZ Co. representing payment for the existing
delivery of goods. In a daily transaction basis, XYZ Co. will record the
collection as follows:
balances
CoFEs?)
Cash 16,000 creat
in customer's presented as
Accounts Receivable 16,000 -
D liabilities
current
accounts
# and are offset
not
↓ againstacc/rec
Accounts Receivable - Customer A receivables
beg bal. 10,000 ex. overpayments
customers
16,000 collection From
&
Creditbalance)
abnormal balance
(6,000) end bal. D
Accounts receivable – Customer A 6,000

Advances from Customers liability
6,000
-
# nai2
Accounts Receivable - Customer A

beg bal. 10,000
AJE 6,000 16,000 collection
- end bal.

Debit balance in accounts payable -
XYZ Co. has an outstanding receivable of P12,000 from Supplier B. Subsequently,
XYZ Co. pays P17,000 Supplier B representing settlement of the existing payable
and the excess as advance payment for future purchase of goods. In a daily
transaction basis, XYZ Co. will record the payment as follows:
Accounts Payable – Supplier B 17,000 debit balances

Cash 17,000 in suppliers
# do not x accounts
OFFSet
Accounts Payable - Supplier B
12,000 beg bal.
ag ainst
payables ↓
current
asset
payment 17,000
-
end bal.(5000)
CD debitb alance to abnormal balance
Advances to Suppliers 5,000

Accounts Payable – Supplier B 5,000
Gen
current #
asset
Accounts Payable - Supplier B
12,000 beg bal.
payment 17,000
5,000 AJE
end bal. -
Illustration 1:
Information from Squid Game Co. is shown below:

160,000
 Accounts Receivable – net of P32,000 credit balance -
⑧ -
-
50,000
in customer’s accounts current
 Notes Receivable (Trade) -B amount ⑳
-
16,000
 Notes Receivable (non-trade) – P16,000 due in 1 year
 Dividends receivable D current -
- 80,000
-3,200
subscription to met
 Subscription Receivable - 6,400
 Advances to officers (due in 18 months) 12,800
 Accounts payable – net of P19,200 debit balance in 9,600
-
-
Suppliers’ account -A currentasset
O
Compute for (a) total trade receivables and (b) total current receivables. C
Solution:
Trade receivables:
Accounts receivable
O
160,000
Add back credit balance in customers' accounts C

32,000
Adjusted accounts receivable 192,000
Notes receivable (trade) ⑳16,000
Total trade receivables - Requirement (a) -

208,000
- -
-
trade
Non-trade receivables currently collectible:
Notes receivable (current portion only) -

16,000
Dividends receivable -3,200
Advances to suppliers (from debit balance in accounts payable) -

19,200
total current
Total current non-trade receivables -
38,400
-
-
balances
Trade and other receivables - Requirement (b) -

246,400
-
-

INITIAL RECOGNITION OF ACCOUNTS RECEIVABLE
PFRS 9 Financial Instruments provides that an entity shall recognize

unconditional receivable as a financial asset on its statement of financial
> -
-
·C
position when, and only when, the entity becomes a party to the contractual
provision of the instrument and has a legal right to receive cash. Accounts
-
receivable are normally recognized when the criteria for revenue recognition
are fulfilled. narender na yung service
a
nadeliver no yung goods
-
Revenue is recognized when realization has occurred (i.e. ., a noncash resource
is exchanged for cash or a near cash resource) and the revenue is earned (i.e.
., the earnings process is complete or virtually complete). Normally, the sale
of goods and services on credit results in the creation of an asset called a
trade receivable (account receivable or note receivable) and the recognition of
revenue at the time of sale.
PFRS 15 provides guidance on when to recognize revenue from contracts with

customers.
MEASUREMENT
For initial measurement purposes, PFRS 9 classifies receivables into trade and
others.
An entity shall measure trade receivables at their transaction price (as defined
in PFRS 15) if the trade receivables do not contain a significant financing
component or when the entity applies the practical expedient (for receivables
that have a maturity of one year or less).
Transaction price is the amount of consideration to which an entity expects to

be entitled in exchange for transferring promised goods or services to a
customer, excluding amounts collected on behalf of third parties.
An entity shall measure other receivables at their fair value plus transaction
costs that are directly attributable to their acquisition.
The fair value of a financial instrument on initial recognition is the price

that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date.
The initial recording of the receivables is based on the total future cash
flows. However, since there is a time value of money, there is a difference
between the maturity of receivables and the present value. The longer the time
period until the maturity, the greater the difference between the two.
Short-term receivables with no stated interest rate are usually measured at the
original invoice amount which is their maturity value and not their present
value because the effect of the discounting is not material under normal
circumstances.
However, if part of the consideration given or received is for something other

than the financial instrument, the fair value of the financial instrument is
estimated, using a valuation technique. For example, the fair value of a long-
term loan or receivable that carries no interest can be estimated as the present
value of all future cash receipts discounted using the prevailing market rate(s)
of interest for a similar instrument (similar as to currency, term, type of
interest rate and other factors) with a similar credit rating. (Any additional
amount lent is an expense or a reduction of income unless it qualifies for
recognition as some other type of asset).
VARIABLE CONSIDERATIONS
In certain cases, the price of a good or service is influenced or affected by

future events. These future events often included such items as freight,
discounts, returns and allowances credit for each sales and so forth.
The amount of accounts receivable is typically one of the largest current assets
on a company's statement of financial position and the amount of sales or
revenues is always the largest items on the income statement. The large
magnitude of these two account balances should not, however, cause us to
disregard some additional aspects of credit sales transactions.

These items include:
a
a. Freight Charges - transorat gosee

b. Discounts - Discounts are offered at the time of sale or at the time of
payment. bulk manna hagbayad
- or
c. Sales Returns and Allowances - Returns and allowances can occur subsequent
to the sales and can occur before or after payment has been made.
d. Credit Card Sales
e. Bad Debts or Uncollectible Accounts - Once a credit sale is made, the
issue of collection remains. Accounts receivable being a financial asset
is subject to review for impairment due to non-collection.
TERMS OF SALES CONTRACT 157
page
is buyer upon shipment
other
1. FOB Shipping Point -
receipt ni buyer
2. FOB Destination D - upon
*FOB stands for “free on board”

SF?
and hagbayad ng
ACCOUNTING FOR FREIGHT CHARGES sino
paid SF
a. Freight Prepaid - seller
b. Freight Collect -
buyer paid SF
Illustration 2:
On December 27, 20x1, Nairobi Co. received a sale order for a credit sale of
goods with the selling price of P1,600. The goods were shipped by Nairobi Co.
on December 31, 20x1 and were received by the buyer on January 2, 20x2. The
S F
related shipping costs amounted to P50. Nairobi Co. collected the receivable on
January 5, 20x2. receipt Geo
sphipment
Requirement: Provide the journal entries under each following shipment terms:
ownership/shipping fee
- FOB shipping point, freight collect B/B
- FOB destination, freight prepaid S/S
- FOB shipping point, freight /s
destination
- FOB destination, freight collect s/B
Solution:
a. FOB shipping point, freight collect buner no may ari, bunernagbayad
Dec. 27, -
20x1 No entry
nakareceive palang no sales order
Dec. 31, Accounts receivable 1,600

20x1
Sales 1,600
to record sale on account
Jan. 2, -
20x2 No entry
Jan. 5, Cash 1,600

20x2
Accounts receivable 1,600
to record settlement of accounts receivable

b. FOB destination, freight prepaid seller nagbayad SF
seller mayar,
Dec. 27,
20x1 No entry -
Dec. 31, Prepaid freight 50

20x1
Cash 50
to record prepayment of freight to the carrier
Jan. 2, Accounts receivable 1,600

20x2
Sales 1,600
to record sale on account
Jan. 2, Freight-out -
exen.Ensure 50
the
20x2
Prepaid freight 50
to charge the prepaid freight to expense
Jan. 5, Cash 1,600

20x2
to record settlement of accounts receivable
c. FOB shipping point, freight prepaid buyer may-ari, seller nagbayad of
Dec. 27,
20x1 No entry -
Dec. 31, Accounts receivable 1,650

20x1
Sales 1,600
Cash (naa-abono siya na sF) 50

to record sale on account and freight paid on
behalf of the buyer
Jan. 2, -
20x2 No entry
-
Jan. 5, Cash 1,650

20x2
to record collection of account receivable
inclusive of reimbursement for the freight paid
d. FOB destination, freight collect seller may-ari, buyer nagbayad IF
Dec. 27,
20x1 No entry -
Dec. 31, -
20x1 No entry
-
Jan. 2, Accounts receivable 1,550

20x2 Freight-out D 50
nag-abonosi bue the
-
Sales 1,600
to record sale on account and freight
accommodated by the buyer

Jan. 5, Cash 1,550
20x2
to record collection of account receivable net
of reimbursement for the freight
TRADE DISCOUNTS & CASH DISCOUNTS

2D l encourages
Trade Discount ese urinases Cash Discount promptpayments
 Given to encourage orders in  Given to encourage prompt

large quantities or to avoid payment.
frequent charges in catalogs, to
alter prices for different  Deducted from the invoice price
quantities purchased, or to hide when determining the net amount
the true invoice price from collectible within the discount
competitor. period.
 It is usually quoted in
percentages.
*Invoice Price = List Price – trade

discount
ACCOUNTING FOR CASH DISCOUNTS
1. Under the Traditional Generally Accepted Accounting Principle (GAAP) /5

1.1 Gross Method gross mac-> of
1.2 Net Method Codebitcount

Go record net of
amount -
cash discounts
↳ contra ofhome acc
Illustration 3: to revenue
credited to era
↳binabanas yung dc-D cas t aken
not by the buyer sales as Forfeited
Binance Co. sold goods with a list price of P100,000 on a credit term of 10%,
3/10, n/45 amt is to be paid within dans
3%ac within 10 days v Go you have
Requirements: to settle
(p -Ta 100,000 -
10%
Customer)
=
inx price 90,000

=
a. Traditional GAAP – Provide the journal entries under the gross method
and net method. Use the assumptions below:
90,000 3%-
 Within the discount period

87,300
=
 Beyond the discount period

b. PFRS 15
Additional Information:
In accordance with PFRS 15, Binance Co. estimates 80% of the available
cash discount will be taken by the customer. Provide the journal
entries. Assume (1) Binance Co. does not use a sales discount account;
and assume (2) Binance Co. uses a sales discount account. Assume
further that the estimate coincides with the actual result.
Solution:
Requirement (a): Traditional GAAP
Gross method Net method
1. Sale on account
Accounts receivable
Sales
C
90,000
90,000
Accounts receivable
Sales
C
87,300
87,300
(₱100,000 x 90%) (₱100,000 x 90% x 97%)
2. Collection is made within the discount period

trade disc
Cash 87,300 ->after
Cash 87,300
cash disc
Sales discounts (90K x 3%) 2,700 - A
3. Collection is made beyond the discount period.

income
other
~
e
inassume makukuna
yung dis-
Cash 90,000 Cash ↳ count
90,000 No mindmat t
Accounts receivable 90,000 Sales discount forfeited 2,700

Malang sales discount Accounts receivable 87,300
macclaim danithad umabot
no
Requirement (b.1): PFRS 15

Invoice amount (100,000 x 90%) 90,000
Multiply by: 3%
Total available discount 2,700
Multiply by: 80%
① Discount expected to be taken 2,160
Invoice amount 90,000

Less: Discount expected to be taken (2,160)
② Transaction price 87,840
90,000
1. Sale on account bakit
yung
ainamit?
Revenue 87,840
anmamit
ninai
unc
dis
2. Portion collected within the discount period
Cash -
(90,000 x 80% x 97%) 69,840
count
3. Portion collected beyond the discount period

Cash (90,000 x 20%) or (87,840 – 69,840) 18,000
Requirement (b.2): PFRS 15
1. Sale on account
Accounts receivable (100K x 90%) 90,000
Revenue 90,000
Sales discount 2,160
Allowance for sales discount 2,160
2. Portion collected within the discount period

Cash on hand (90,000 x 80% x 97%) 69,840
Allowance for sales discount 2,160
Accounts receivable (90,000 x 80%) 72,000
3. Portion collected beyond the discount period

Cash on hand [(90K x 20%) or remaining balance] 18,000
SUBSEQUENT MEASUREMENT OF ACCOUNTS RECEIVABLES
Accounts receivables are subsequently measured at recoverable historical cost

(net realizable value).
0
NRV = Transaction Price – Subsequent repayments – reduction relating to
uncollectibility or impairment
SALES DISCOUNTS
When discounts are made available to customers, the amount of consideration may
not be wholly recoverable when it is probable that customers will avail of the
cash discount in the future.
As illustrated above, the entity considers any discounts that are expected to
be taken by customers when recognizing accounts receivable. At the reporting
date, the entity updates the measurement of the accounts receivable. Any
adjustment is accounted for prospectively as an adjustment to revenue.
ALLOWANCE FOR DOUBTFUL ACCOUNTS nindi singerise
Once a credit sale is made, the issue of collection remains. Accounts receivable
being a financial asset is subject to review for impairment due to non-
collection.

Allowance for doubtful accounts
Allowance for bad debts
Allowance for uncollectible accounts
Allowance for probable losses on receivables
Loss Allowance
Treated as contra-asset (deduction) to accounts receivables when determining

the net realizable value.
ACCOUNTING FOR BAD DEBTS

may allowance
-
a. Allowance Method -
-D
Nalang allowance
b. Direct write-off method
Allowance Method
 Doubtful – Allowance must be recognize.

 Certain – Write-off of accounts receivable.
* When accounts previously written-off are subsequently recovered, the previous

entry to record write-off is reversed or reestablished and the collection is
To
recorded in the customary way. Failure to reverse the write-off before recording
the recovery results to a credit balance in customer’s accounts.
or cash
or acc. receivable
Direct Write-off Method -> D generally

FOU FR
notaccepted
entities
TA/LEOF3M
Bad debts expense is directly written-off from the balance of accounts

receivable only when the accounts are deemed worthless.
No entry is made for accounts that are merely doubtful of collection.

certain na dapat
bado; write-OFF
*When accounts previously written-off are subsequently recovered, the
collection is simply recognized as gain.
Illustration 4:
The balances of Berlin Co.’s accounts receivable and allowance for bad debts at
the beginning of the period were P120,000 and P9,000, respectively. The
following transactions occurred during the period:
a. Sales on account, P250,000

b. Collections of sales on account, P220,000
c. The collectability of P30,000 accounts receivable was found to be
doubtful
d. P15,000 accounts receivable were deemed worthless.
e. P8,000 previously written-off accounts receivable was subsequently
collected (not included in the collection above).
Requirements:
1. Prepare the journal entries (use the ‘allowance method’)

2. Determine the ending balances of accounts receivable and allowance for
bad debts using T-accounts.
3. Determine the carrying amount of the accounts receivable at year-end.
Solution:
Requirement (a):
(a)
Sales 250,000
(b)
Cash 220,000

d. (c)
Bad debt expense
Allowance for doubtful accounts
30,000
30,000
(d)
Allowance for doubtful accounts 15,000
Cp
Nala na talagang
Matatang9aD
(e)
Allowance for doubtful accounts 8,000
Cash 8,000
CD dani nacollect
na
Requirement (b):
Accounts receivable
beg. -
-
120,000
Sales on account 250,000 220,000 Collections, excluding recoveries
15,000 Write-offs
Recovery 8,000 8,000 Collection on recovery -> pwedeng ninai
na Isama
135,000 end. -
D creat balance
and recoveries
because
Write-off 15,000
9,000
30,000
-
-
>
beg.
Bad debts
i end bal
re
Man
8,000 Recovery
end. 32,000
end bal
Requirement (c):
Accounts receivable, acc receivable -allowance for bd -
carrying
amount
end. 135,000 <end ball send ball
Allowance for bad debts,

end. (32,000)
Carrying amount, end. 103,000
ESTIMATING DOUBTFUL ACCOUNTS
Bad debts expense is recognized when loss becomes probable and can be measured
reliably. There are three methods to estimate doubtful accounts, namely:
apply ofnet creat sales
~i
Debts Expense
118 o Percentage of Net Credit Sales Bad J recoveries)
-
iba
dipinapansin yunq
LP
not matching SFP

+HO
o Percentage of Receivables required allow. For ba
-A BDE
LD ending x balance
o Aging Receivables end bal
of NRY
Percentage of Net Credit Sales and Percentage of Receivables
Illustration 5:
The records of Kio Co. show the following information:

Accounts Receivable, Jan. 1 P180,000
Allowance for Bad debts, Jan. 1 (Cr) Y
12,000 sales return
on creditsales
Sales on account 900,000
Write-offs
- 90,000
- 90,000
Recoveries 2,600 Write OFFS (5,000

Collections, excluding recoveries 781,000

Requirements: Compute for the (1) bad debt expense, (2) ending balance for
allowance of bad debts, and (3) Carrying amount of accounts receivable on Dec.
31 under each of the following scenarios:
Davidbondent
Plesuncan -
a. Percentage of*
-
Net Credit Sales 2%

b. Percentage of ending receivables 8%
expense
(a) Percentage of net credit sales

12,600 beg.
Write-offs 15,800 2,600 Recoveries
-
16,200 (1) Bad debts [900K – 90K) x 2%]
(2) end. 15,600
bakitinyung dahil debit

recoveries? nag credit
Accounts receivable kinikilala had
because sa tas A IR
beg. 180,000 siya kand
Net credit sales 810,000 15,800 Write-offs mismond
na AR
pay
recoveries
781,000 Collections, excluding recoveries
C193,200 end.
SD ending balance
no
allowance
Accounts receivable, Dec. 31 193,200
Allowance for bad debts, Dec. 31 (15,600)
(3) Carrying amount, Dec. 31 177,600
(b) Percentage of ending receivable

12,600 beg.
Write-offs 15,800 2,600 Recoveries
16,056 (1) Bad debts (squeeze)
-
(2) end. (193.2K x 8%) 15,456
- maccompute
natin dito ay yung
for
ending ball
Allowance for bad debts, Dec. 31 bad debts (15,456)
hang al
dependadatareceivable
matagal
Aging of Receivables Sprovision Matrix) mas
nababayaran,
mataas yung
mas
The following pertains to Bogota Co.’s accounts receivable rate ad
uncollectibility
Days Outstanding Amount % Uncollectible
0-60 190,000 1%
61-90 240,000 3%
91-120 30,000 7%
Over 120 10,000 10%
Total P470,000
The allowance for bad debts account has a beginning balance of P10,100. Lakland
wrote-off P4,600 accounts and recovered P200 accounts during the period.
Requirements: Compute for the (1) bad debt expense, (2) ending balance of
allowance for bad debts, and (3) ending carrying amount of accounts receivable.
1. Solution:
Days outstanding Amount % uncollectible Required allowance
0 – 60 190,000 1% 1,900
61 – 90 240,000 3% 7,200
91 - 120 30,000 7% 2,100
Over 120 10,000 10% 1,000
Totals 470,000 12,200

debts
expense
D and
-
classification
administrative
expense
10,100 beg.
Write-offs Recoveries
4,600 200
⑧
6,500 - (1) Bad debts
(squeeze)
(2) end.
12,200

Allowance for bad debts, Dec. 31 (12,200)
Method Amount computed How about debts How ending

by applying expense are balance of
percentage computed allowance
computed
Percentage of Net Bad debt expense % x net credit By preparing T
Credit Sales account
sales
Percentage of Required balance Squeezed from T By applying
Receivables of allowance account Percentage
Aging Method Required balance Squeezed from T By applying
Lp mas prefer ni Ma'am
of allowance account Percentage
Summary/Conclusion:
Accounts receivable refers to money due to a seller from buyers who have not
yet paid for their purchases. The amounts owed are stated on invoices that
are issued to buyers by the seller. The issuance of an invoice implies that
the seller has granted credit to a customer. The total amount of accounts
receivable allowed to an individual customer is typically limited by a credit
limit, which is set by the seller's credit department, based on the finances
of the buyer and its past payment history with the seller. Credit limits may
be reduced during difficult financial conditions when the seller cannot
afford to incur excessive bad debt losses.
Accounts receivable may be further subdivided into trade receivables and non
trade receivables, where trade receivables are from a company's normal
business partners, and non trade receivables are all other receivables, such
as amounts due from employees. The amount of non trade receivables is usually
quite small.
References:

Millan

PFRS 9
https://www.accountingtools.com/articles/2017/5/7/accounts-receivable

Topic: Notes Receivable
Learning Objectives:
1. State the initial and subsequent measurements of notes receivable.
2. Compute for present value factors and apply them properly.
3. Prepare amortization tables.
4. Compute for the effective interest rate.
Core Values/Biblical Principles:
Above all, keep loving one another earnestly, since love covers a multitude of
sins. – 1 Peter 4:8 (ESV)
Introduction:
NOTES RECEIVABLE
Notes receivable is a claim supported by a formal promise to pay a certain
sum of money at a specific future date usually in the form of a promissory note.
A note can be a negotiable instrument that a maker signs in favor of a
designated payee who may legally and readily sell or otherwise transfer the
note to others.
piedebententity in
Body:
MEASUREMENT FU+T2
Financial assets are initially recognized at fair value plus transaction
costs.
Fair value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants
at the measurement date.
Transaction costs are incremental costs that are directly attributable to
the issue of a financial liability. An incremental cost is one that would not
Cor
have been incurred if the entity had not issued the instrument.
asset
CLASSIFICATION OF NOTES RECEIVABLE
TYPES OF RECEIVABLES Initial Measurement Subsequent Measurement

① Face Amount Istated rate)
page-243 ② Present Value (w/ significant ① Recoverable Historical Cost
Short Term financing) ② Amortized Cost
trade and ③ Transaction Price (Trade Rec. w/③ Transaction Price (PFRS 15)
Non Trade
practical expedient)
Long-term bearing
reasonable interest Face Amount Recoverable Historical Cost
rate Cep pasoksa market rate
Long-term
noninterest-bearing Present Value Amortized Cost
receivables
Long-term bearing
unreasonable interest Present Value Amortized Cost
rate Cp mas mababa sa current
m arketrate
If the initial measurement is cash price equivalent of the non-cash asset given up, the
subsequent measurement is amortized costs.
PFRS 15: Exceptions on trade receivables

1. Trade receivables that do not have a significant financing component
shall be measured at their transaction price.
2. As a practical expedient, a trade receivable may not be discounted if
it is due within 1 year. A immaterial -
Cash price equivalent is the amount that would have been paid if the
transaction was settled outright on cash basis, as opposed to installment
basis or other deferred settlements.
Recoverable Historical Cost (Net Realizable Value)

Represents the amount of cash expected to be recovered from the
principal amount of the receivable. It is computed as the face amount of the
receivable minus subsequent repayments of principal and minus any reduction
(directly or through the use of allowance account) for impairment or
uncollectability.

Amortized Cost
the amount at which the financial asset or financial liability is measured
at initial recognition minus the principal repayments, plus or minus the
cumulative amortization using the effective interest method of any difference
between that initial amount and the maturity amount and, for financial assets,
adjusted for any loss allowance.
Effective interest rate (imputed rate of interest, current market rate or yield
rate) more determinable of either:
a. The prevailing interest rate for a similar instrument of an issuer
with a similar credit rating; or
b. A rate of interest that discounts the face (nominal) amount of the
receivable to the current cash sales price of the goods or services.
Stated interest rate (nominal rate, coupon rate, or face rate)

stated The rate appearing on the face of an interest-bearing note.
exclusively
The difference between the present value and the face amount of the
receivable is initially recognized as unearned interest and subsequently
amortized as interest income under the effective interest method.
Effective Interest Method is a method of calculating the amortized cost of

financial asset or financial liability and of allocating the interest income or
interest expense over the relevant period.
always
decimal
I
TIME VALUE OF MONEY

-o vave,of an assetorcanapesifiedpeace
team traan In
-
1. Future Value of an Amount vs. (FV of ₱1) 1.rxX =
 The FV of ₱1 and PV of ₱1 are opposites.

 The FV of ₱1 answers the question “If I invest ₱100,000 today at 10%
interest, how much money do I have in three-years’ time?”
 FV of ₱1 = (1 + i) n = (1 + 10%)3 = 1.331
Answer: (₱100,000 x 1.331) = ₱133,100
current worth or (₱100,000 x 110% x 110% x 110%) = ₱133,100
s aEnturesumam ofcash flows given a specified rate of in
of
number of return
2. Present Value of Future Amount (PV of ₱1) 1. n panments =
throughout =
 The PV of ₱1 answers the question “If I want to have ₱133,100 in

three-years’ time, how much money do I have to invest today (at 10%
interest)? period
bun
I multiply
 PV of ₱1 = (1 + i) = (1 + 10%) = 0.751315
-n -3 ↳ You
bun
Answer: (₱133,100 x 0.751315) = ₱100,000 rate divide
↳non
 In the second example, the ₱133,100 to be received in 3-years’ time

includes an unspecified principal and unspecified interest. These
elements are separated through present value computations.
₱100,000
₱133,100 PV
₱33,100
Therefore, assuming the ₱133,100 is a receivable, it should be recorded
today only at ₱100,000 (the present value) because the ₱33,100 is unearned
interest. The interest will be recorded only when it is earned, i.e.,
through passage of time.
Time Value of Money Factor

1. PV of ₱1 is used when the cash flow is lump sum or when cash flows are
non-uniform.
PV of ₱1 = (1 + i)-n
after I period ofthe apposit
~D 1stinstallment made
-
2. PV of ordinary annuity ₱1 is used when the cash flows are in installments

and the first installment does not begin immediately.
~D istinstallment
-
paid immediately atthe beginning
3. PV of an annuity due of ₱1 is used when the cash flows are in installments

and the first installment begins immediately.

TIME VALUE OF MONEY APPLICATION
Present Value of ₱1 (PV of ₱1) Future cash flow is lump sum.
Future cash flows are in installments
Present Value of ordinary annuity ₱1
and the first installment does not
(PVOA)
begin immediately.
Future cash flows installments and
Present Value of an annuity due of ₱1
the first installment begins
(PVAD)
immediately.
PV OF ₱1 AMORTIZATION TABLE
Date Interest income Unearned interest Present value

(a) = (c) x EIR (b) = previous bal. - (a) (c) = previous balance + (a)
↓
1/1/x1
12/31/x1
paprincipal
PV OF ANNUITY AMORTIZATION TABLE
Interest Present
Date Collections income Amortization value
↓
(d) = prev. bal.
(a) (b) = (d) x EIR (c) = (a) - (b) - (c)
1/1/x1
paO
ILLUSTRATION 1: Initial measurement at face amount
ABC Co. received the following notes receivable on Jan. 1, 20x1
9-month, 10% note from Alpha Company ⑧5,000

6-month, noninterest bearing note from Beta Inc. (the
effect of discounting is immaterial) ⑳
10,000
14%, 3-year note from Charlie Corp.
Market rate of interest on Jan. 1, 20x1
C
20,000
10%
- -
-
Requirement: At what amount will be the notes be initially recognized?

Solution: (5,000 + 10,000 + 20,000) = 35,000
ILLUSTRATION 2: Simple Interest
On April 1, 20x1, ABC Co. received a P1,500,000, 10%, 3-year note receivable in
exchange for land with carrying amount of P850,000. Principal, in three equal
0
installments, plus interest rate are due annually starting April 1, 20x2.
Current market rates as of April 1, 20x1, December 31, 20x1, and December 31,
20x2 are 10%, 12% and 13%, respectively.
-
-
04/01/20x1 Notes Receivable 1,500,000

Land 850,000 180x)
Gain on Sale 650,000 -D
-
68,000
#
12/31/20x1 Interest Receivable (1.5M x 10% x 9/12) 112,500

Interest Income 112,500
To
#
04/01/20x2 Cash 650,000
Notes Receivable (1.5M/3) 500,000
Interest Income (1.5M x 10% x 3/12) 37,500
Interest Receivable 112,500
#

ena"nc
al
~
12/31/20x2 Interest Receivable (1M x 10% x 9/12) 75,000
04/01/20x3 Cash 600,000

Interest Income (1M x 10% x 3/12) 25,000
ra
~ Detonate
12/31/20x3 Interest Receivable (500k x 10% x 9/12) 37,500
04/01/20x4 Cash 550,000

Interest Income (500k x 10% x 3/12) 12,500
ILLUSTRATION 2: Compounded Interest
On January 1, 20x1, ABC Co. extended a P1,000,000 loan to one of its officers.
The note received is due on January 1, 20x4 and bears 10% interest compounded
annually. ↳ lump sum
01/01/20x1 Notes Receivables 1,000,000
Cash 1,000,000
12/31/20x1 Interest Receivable (1M x 10%) 100,000

ob considered, andthe
12/31/20x2 Interest Receivable (1.1M x 10%) 110,000
12/31/20x3 Interest Receivable (1.21M x 10%) 121,000

01/01/20x4 Cash 1,331,000

Notes Receivable 1,000,000
Interest Receivable (100k +110k + 121k) 331,000
ILLUSTRATION 3: Noninterest-bearing note – lump sum
On January 1, 20x1, Candle Co. received a 3-year noninterest-bearing note of

P133,100 in exchange for land with carrying amount of P100,000. The-
note is due
on December 31, 20x3. The effective interest rate is 10%.
-Dump sum
Requirements:
a. Prepare the amortization table
b. Provide all necessary journal entries
Initial measurement:
Future Cash flows 133,100 -100,000 33,100
=
PV of ₱1 @10%, n= 3 = .751315
Present Value of Notes Receivable 100,000
Requirement (a):
Date Interest income Unearned interest Present value
1/1/x1 33,100 100,000
↓
12/31/x1 10,000 23,100 110,000
12/31/x2 11,000 -
12,100 121,000
12/31/x3 12,100 int
- 133,100
- pao
33,100

Requirement (b):
1/1/x1 Note receivable 133,100
Unearned interest 33,100
Land 100,000
#
12/31/x1 Unearned interest 10,000

Interest income 10,000
#
#
#
12/31/x3 Cash 133,100

Note receivable 133,100
ILLUSTRATION 4: Noninterest-bearing note – installments
1M On January 1, 20x1, Stand Co. received a 3-year noninterest-bearing note of

AD
=
HC
P300,000 in exchange for equipment with historical cost of P1,000,000 and
accumulated depreciation of P700,000. The note is due in three equal annual
instalments of P100,000 every December 31. The effective interest rate is 10%.
Requirements:
a c. Prepare the amortization table
D d. Determine the current and non-current portion of the note on December
31, 20x1
C e. Determine the balance of unearned interest income (discount on notes
receivable) on December 31, 20x1.

d f. Provide all necessary journal entries
e g. What is the effect of the transaction in Stand Co.’s 20x1 profit or

loss.
Future Cash flows ₱100,000
PV ordinary annuity of ₱1 @10%, n=3 2.486852
Present Value of Notes Receivable ₱248,685
Requirement (a): 300,000

Date Collections Interest income Amortization Present value (248,685)
1/1/x1 248,685 -Tis15
12/31/x1 100,000 24,869 75,131 173,554
12/31/x2 100,000 17,355 82,645 90,909
12/31/x3 100,000 9,091 90,909 0
-
5
Requirement (b):
Current portion = 82,645 (see table above)
Noncurrent portion = 90,909 (see table above)
Requirement (c):
Outstanding balance of face amount (100K x 2) 200,000
Carrying amt. on 12/31/x1 (173,554)
Unearned interest on 12/31/x1 26,446

OR
Unearned interest on 12/31/x1 = Interest income in 20x2 and 20x3: (17,355
+ 9,091) = 26,446

Requirement (d):
01/01/20x1 Note receivable 300,000
Accum. depreciation 700,000
x) Loss Unearned interest (300,00051,315
– 248,685) 51,315
Paubenta Equipment 1,000,000
mona #
~
qulpment L historical
cost
[
#
Cash 100,000
#
[
#
Cash 100,000
#
S
#
Cash 100,000
#
Requirement (e): For
Interest income 24,869 20x1
Loss on sale of equipment (51,315)

Net effect on P/L - decrease (26,446)
ILLUSTRATION 5: Noninterest-bearing note – installment in advance
On January 1, 20x1, Otters Co. received a 3-year noninterest-bearing note of

P1,200,000 in exchange for equipment with historical cost of P2,000,000 and
accumulated depreciation of P700,000. The note is due in three equal annual
instalments beginning on January 1, 20x1 and every January thereafter. The
effective interest rate is 10%.
Requirements:
a. Prepare the amortization table
b. How much is the interest income in 20x1?
c. How much is the carrying amount of the receivable on Dec. 31, 20x1?
Initial Measurement ↳ 3egments

Future Cash flows (1.2M ÷ 3) = 400,000;
PV of an annuity due of ₱1 @10%, n=3 = 2.735537
Present Value of Notes Receivable 1,094,215
Requirement (a):
Date Collections Interest income Amortization Present value
1/1/x1 1,094,215 1200000 105785
=
DialPatente
-
1/1/x1 400,000 ~
- 400,000 694,215
1/1/x2 400,000 69,422 330,578 363,637
1/1/x3 400,000 -
36,363 363,637 (0)
105,785
Requirement (b):
69,422 – See table above.
Requirement (c):
Carrying amt. on 1/1/x2 363,637
Add back: Collection on 1/1/x2 400,000
G manbabaanapanababawas
Carrying amt. on 12/31/x1 763,637

ILLUSTRATION 6: Noninterest-bearing note – semi-annual cash flows
On January 1, 20x1, ABC Co. sold machinery with historical cost of P2,000,000
and accumulated depreciation of P1,100,000 in exchange for a 3-year P1,200,000
noninterest-bearing note receivable due in equal semi-annual installments every
July 1 and December 31 starting on July 1, 20x1. The prevailing rate of interest
for this type of note is 10%.
Initial Measurement
Future Cash flows (1.2M ÷ 6) = e 200,000;
PV of an annuity due of ₱1 @10%, n=3 = 5.075692
Present Value of Notes Receivable 1,015,138
Subsequent Measurement
"
b
O
I
n
Le
01/01/x1 1,015,138
07/01/x1 200,000 50,757 149,243 865,895
12/31/x1 200,000 43,295 156,705 709,190
07/01/x2 200,000 35,460 164,540 544,650
12/31/x2 200,000 27,233 172,767 371,883
07/01/x3 200,000 18,594 181,406 190,477
12/31/x3 200,000 9,523 190,477 0
01/01/20x1 Note Receivable 1,200,000

Accumulated Depreciation 1,100,000
Machinery 2,000,000 nakula dezina
- Unearned Interest Income by
184,862 -a an
e credit
C
historical
Cost
Gain on sale of machinery 115,138 pad 1011 debit
I
↳ mas
malaki
debit,
Discounting semiannual cash flows and
credit gain
When discounting cash flows that are due in semiannual installments, the
and
“n” (period) used in the present value factor is multiplies by 2 because mas malaki
there are two semiannual installments per year. Furthermore, the credit, debit
10/1
effective interest rate is divided by 2 because interest rates are
normally expressed on a per annum basis.
ILLUSTRATION 7: Noninterest-bearing note – non-uniform cash flows
On January 1,20x1, ABC Co. sold machinery costing P2,000,000 with accumulated
depreciation of P1,100,000 in exchange for a 3-year, P1,200,000 noninterest-
bearing note payable due as follows:
DATE AMOUNT OF INSTALLMENT

December 31, 20x1 600,000
December 31, 20x2 400,000
December 31, 20x3 200,000
TOTAL 1,200,000
The prevailing rate of interest is 10%
Initial Measurement
Date Cash flows PV of P1 at 10%, n=1 to 3 Present value
12/31/x1 600,000 X 0.90909 n 1 = =
545,454
12/31/x2 400,000 X 0.82645 n 2 = - 330,580
12/31/x3 200,000 X 0.75131 n 3 = - 150,262
TOTAL 1,200,000 1,026,296
01/01/x1 1,026,296
12/31/x1 600,000 102,630 497,370 528,926
12/31/x2 400,000 52,893 347,107 181,819
12/31/x3 200,000 18,181 181,819 0

Accumulated Depreciation 1,100,000
Machinery 2,000,000
Unearned Interest Income 173,704
Gain on sale of machinery 126,296
#
12/31/20x1 Cash 600,000
Notes Receivable 600,000
Discounting non-uniform cash flows

Annuity factors are applicable only when the series of cash flows are uniform or
equal. When the cash flows vary, the PV of P1 should be used. A cash flow that is
due one period from initial recognition is discounted using an “n” of 1. A cash
flow that is due two periods from initial recognition is discounted using an “n”
of 2, and so on.
ILLUSTRATION 8: Receivable with cash price equivalent
On January 1, 20x1, ABC Co. sold an inventory costing P800,000 with a list price
of P1,100,000 and a cash price of P1,000,000 in exchange for a P1,200,000
noninterest-bearing note due on December 31, 20x3.
01/01/20x1 Note Receivable 1,200,000 A rate to presentin

Sales 1,000,000
TRIAL AND ERROR APPROACH PX Factor PV

FU x =
First Trial: (using random rate of 10%)

Future Cash flows 1,200,000 We need a substantially higher amount
PV of 1 @10%, n=3 0.751311 of present value. Therefore, we need
Present value - 1/1/x1 901,578 to decrease substantially the
interest rate.
Second Trial: (trial rate of 6%)
Future Cash flows 1,200,000 We need a slightly lower amount of
PV of 1 @6%, n=3 0.839619 present value. Therefore, we need to
Present value - 1/1/x1 1,007,543 increase slightly the interest rate.
Third Trial: (trial rate of 7%)

Future Cash flows 1,200,000 In here, we need to perform
interpolation. Looking at the values
PV of 1 @7%, n=3 0.816298 derived, we can reasonably expect
Present value - 1/1/x1 979,558 that the Effective Interest Rate is
a rate between 6% and 7%.
To perform interpolation, we will use the following formula:

na
rate num
~Blower and denom
𝑥% 6% 1,000,000 1,007,543 7,543
o
-
na
𝟎. 𝟐𝟔𝟗𝟓 rate
7% 6% 979,558 1,007,543 27,985 hila
Cp higher rate
because
aita Eit
denom
+ (e% nasana 49
an has a
The effective
Unearned interest rate
Date Interest income Present value
Interest Income is 6.2695%
1/1/20x1 200,000 1,000,000
12/31/x1 62,695 137,305 1,062,695
12/31/x2 66,626 70,679 1,129,321
12/31/x3 70,679 0 1,200,000
12/31/20x1 Unearned Interest Income 62,695


01/01/20x1 12/31/20x1 12/31/20x2 12/31/20x3
Notes Receivable 1,200,000 1,200,000 1,200,000 1,200,000
Unearned Interest (200,000) (137,305) (70,679) 0
Income
Carrying Amount 1,000,000 1,062,695 1,129,321 1,200,000
ILLUSTRATION 9: Note with below-market rate of interest – simple interest

(Principal due at maturity, interests due periodically)
On January 1, 20x1, ABC Co. sold a machinery with historical cost of P2,000,000
and accumulated depreciation of P950,000 in exchange for a 3-year, P1,000,000,
⑳
3% note receivable. Principal is due on January 1, 20x4 but interest is due
annually every January 1. The prevailing interest rate for this type of note is
12%. lump (PDF)
as mababa principal one: sum
yung interestdue:
installments
(PVOA)
Initial Measurement
raternetrate
Future Cash flows PV Factors Present value
Principal
Interest
1,000,000
30,000
00
PV of 1 @12%, n=3
PVOA of 1 @12%, n=3
711,780
72,055
TOTAL 783,835
Collections on Interest
Date Amortization Present value
interests income
01/01/x1 783,835
01/01/x2 30,000 94,060 64,060 847,895
01/01/x3 30,000 L 101,747 71,747 919,642
01/01/x4 30,000 110,358 80,358 1,000,000
-,165
01/01/20x1 Notes Receivable 1,000,000
Accumulated Depreciation 950,000
Loss on sale of machinery 266,165
H no
-
Machinery 2,000,000
Unearned interest income 216,165
12/31/20x1 Interest Receivable 30,000 -p payment

amort
Unearned Interest income 64,060 -
Interest income 94,060 -

intgome
01/01/20x2 Cash 30,000 because narecy

I no yung
interestreceivable

(Principal due at maturity, interests is due semi-installments)
Use the same information in Illustration 9 except that the interest is payable
semi-annually.
Initial Measurement

Principal 1,000,000 PV of 1 @6%, n=6 704,961
Interest 15,000 PVOA of 1 @6%, n=6 73,760
TOTAL 778,720
Collections on Interest
Date Amortization Present value
interests income
01/01/x1 778,720
07/01/x1 15,000 46,723 31,723 810,443
01/01/x2 15,000 48,627 33,627 844,070
07/01/x2 15,000 50,644 35,644 879,714
01/01/x3 15,000 52,783 37,783 917,497

07/01/x3 15,000 55,050 40,050 957,547
01/01/x4 15,000 57,453 42,453 1,000,000
(Principal and interests collectible in
installments)
3% note receivable. Principal is due in three equal annual installments.
Interests on the outstanding principal balance are also due annually and are to
be collected together with the principal. The prevailing interest rate for this
type of note is 12%.
equal installments
principal:Three
11
interest:
Initial Measurement
Collection
Interest on
s Total cash PV of 1 Present
Date outstanding
on flows @12%, n=3 Value
Principal balance
Principal
12/31/x1 (1.2 M x 3%) =
400,000 436,000 0.892857 389,287
36,000
12/31/x2 (800k x 3%) =
400,000 424,000 0.797194 338,009
24,000
12/31/x3 (400k x 3%) =
400,000 412,000 0.711780 293,253
12,000
TOTAL 1,272,000 1,020,549
Collections
Date Interest income Amortization Present value
01/01/x1 1,020,549
01/01/x2 436,000 122,466 313,534 707,015
01/01/x3 424,000 84,842 339,158 367,857
01/01/x4 412,000 44,143 367,857 0

Accumulated Depreciation 950,000
Loss on Sale of machinery 29,451
Machinery 2,000,000
12/31/20x1 Cash 436,000

Unearned Interest (400k – 313,534) 86,466
Note Receivable 400,000
12/31/20x2 Cash 424,000

12/31/20x2 Cash 412,000


ILLUSTRATION 12: Note with below-market rate of interest – compound interest
(Principal and interests due at maturity)
note receivable. Principal and interests at 3% are due on January 1, 20x4. The
prevailing interest rate for this type of note is 12%.
Initial Measurement
Face amount of note 1,000,000 Future Cash flows 1,092,727
FV of ₱1 @3%, n=3 1.092727 PV of ₱1 @12%, n=3 .711780
Future Cash flows 1,092,727 Present Value of Notes 777,781
interest
FV OF 1 atbelow market rate of
t he prevailing into rate

PY OF1 at

Accumulated Depreciation 950,000 1000000
- 777,781
Loss on sale of machinery 272,219
M
-
Machinery 2,000,000
Cumulativ PV of
Unearned
Interest Present e notes
Date Interest
income value interest receivabl
Income
rec. e
01/01/x1 777,781 777,781
12/31/x1 93,334 871,115 30,000 841,115
IGNORED
12/31/x2 104,534 975,649 60,900 914,749
12/31/x3 117,078 1,092,727 92,727 1,000,000
Amortization table that shows all of the amounts needed when preparing journal
entries:
Present
Cumulative
Interest value Unearned PV of notes
Date interest Amortization
income of future interest receivable
rec.
CF
a = EIR x b b = prev.bal + a c = NR x OB d = a – c e = prev.bal - d f = prev.bal + d
01/01/x1 777,781 222,219 777,781

12/31/x1 93,334 871,115 30,000 63,334 158,885 901,115
12/31/x2 104,534 975,649 60,900 73,634 85,251 1,036,549
12/31/x3 117,078 1,092,727 92,727 85,251 0 1,000,000
12/31/20x1 Interest Receivable 30,000

Unearned Interest 63,334


01/01/20x4 Cash 1,092,727

Notes Receivable 1,000,000

ILLUSTRATION 13: Total Interest Income over the life of note
ABC Co. received a P100,000, 8%, 5-year note that requires five equal annual
year-end payments. The effective interest rate on the note is 9%.
Requirement: Compute for the total interest revenue to be earned over the term
of the note?
Solution:
Cash Flows x PVF = Present Value
CF x PVOA = PV
CF x 3.992710 = 100,000
CF = 100,000 / 3.993710
CF = 25,046 (equal annual year-end payments)
Total Cash Flows (25,046 x 5 years) 125,225

LESS: (PVOA @9%, n=5)(25,046) 97,420
Total Interest revenue over the life of the note 27,805
DEFERRED ANNUITIES
A deferred annuity is an annuity in which periodic cash flows begin only

after two or more periods have passed.
Future Value of Deferred Annuity – the deferral period is simply ignored because
there is no accumulation of cash flows on which interest may accrue.
Present Value of Deferred Annuity – recognizes interest that accrues during the
deferral period.
ILLUSTRATION 14: Present value of a Deferred annuity
An entity has developed a patent. On January 1, 20x1, the patent was sold in
exchange for a P60,000 noninterest-bearing note collectible in six annual
installments of P10,000 each beginning on January 1, 20x6 and every January 1
thereafter. The last installment is due on January 1, 20x11. The appropriate
discount rate is12%.
Requirement: What is the present value of the note received by ABC Co.?
Solution: The full term is 10 years and the deferred period is 4 years
PV of OA of P1@12%, n = 10 5.650223
PV of OA of P1@12%, n = 4 (3.037349)
PV factor for the payment period 2.612874
Annual Cash flows 10,000
PV factor for the payment period 2.612874
Present Value of Notes Receivable 26,129
Collections PV of P1
Date Present value
@12%, n = 5 to 10
01/01/x6 10,000 0.56743 5,674
01/01/x7 10,000 0.50663 5,066
01/01/x8 10,000 0.45235 4,524
01/01/x9 10,000 0.40388 4,039
01/01/x10 10,000 0.36061 3,606
01/01/x11 10,000 0.32197 3,220
TOTAL 26,129
ILLUSTRATION 15: Present value of a Deferred annuity
On January 1, 20x1, ABC Co. sold a used equipment in exchange for a P3,000,000
noninterest-bearing note due in three annual installments as follows:
Jan. 1, 20x4 1,500,000

Jan. 1, 20x5 1,000,000
Jan. 1, 20x6 500,000

TOTAL 3,000,000

The current market rate of interest on January 1, 20x1 is 12%.
Requirement: Compute for the present value of the note on January 1, 20x1.
Initial Measurement
Present
Date Cash flows PV of P1 PV Factors
value
PV of P1 @
01/01/x4 1,500,000 0.711780 1,067,670
12%, n=3
PV of P1 @
01/01/x5 1,000,000 0.635518 635,518
12%, n=4
PV of P1 @
01/01/x6 500,000 0.567427 283,713
12%, n=5
1,986,902
Interest Present
Date Collections Amortization
income value
01/01/x1 1,986,902
01/01/x2 238,428 238,428 2,225,330
01/01/x3 267,040 267,040 2,492,370
01/01/x4 1,500,000 299,084 1,200,916 1,291,454
01/01/x5 1,000,000 154,974 845,026 446,429
01/01/x6 500,000 53,571 446,429 0
Pre-acquisition Accrued Interest

When an interest has accrued before the acquisition of an interest-bearing
receivable, the subsequent receipt of interest is allocated between the pre-
acquisition and post-acquisition periods. Only the portion pertaining to the
post-acquisition period is recognized as interest income.
ILLUSTRATION 16: Pre-acquisition Accrued Interest
On March 1, 20x1, ABC Co. received a P500,000, 12%, one-year note dated January
1, 20x1 from XYZ, Inc. in exchange for a P500,000 past due account.
03/01/20x1 Notes Receivable 500,000

Interest income (500k x 12% x 2/12) 10,000
Accounts Receivable 500,000
Gain on receipt of note 10,000
07/01/20x1 Cash 530,000

Notes receivable 500,000
The interest that has accrued prior the acquisition period is not recognized as
interest income but a gain.
Summary:
A written promise from a client or customer to pay a definite amount of money

on a specific future date is called a note receivable. Such notes can arise
from a variety of circumstances, not the least of which is when credit is
extended to a new customer with no formal prior credit history. The lender uses
the note to make the loan legal and enforceable. Such notes typically bear
interest charges. The maker of the note is the party promising to make payment,
the payee is the party to whom payment will be made, the principal is the stated
amount of the note, and the maturity date is the day the note will be due.
--------------------------------Nothing follows------------------------------
References:
INTERMEDIATE ACCTG 1A [by: Millan, Zeus Vernon B. (2021)]

Financial Accounting Volume 1 [by: Valix, C. T., Peralta, Jose F., Valix, C A
M. (2015)

Topic: Loans Receivable and Impairment of Receivables
1. State the initial and subsequent measurements of loans receivable.
2. Explain the accounting for origination costs and fees.
3. Account for the impairment of receivables.
Core Value/Biblical Principles:

Ecclesiastes 3: 1-8
1 There is a time for everything, and a season for every activity under the heavens: 2
a time to be born and a time to die, a time to plant and a time to uproot, 3 a time to
kill and a time to heal, a time to tear down and a time to build, 4 a time to weep and
a time to laugh, a time to mourn and a time to dance, 5 a time to scatter stones and a
time to gather them, a time to embrace and a time to refrain from embracing, 6 a time
to search and a time to give up, a time to keep and a time to throw away, 7 a time to
tear and a time to mend, a time to be silent and a time to speak, 8 a time to love and
a time to hate, a time for war and a time for peace.
Learning Activity:
In today's world, credit is integrated into everyday life. From renting a car to reserving
an airline ticket or hotel room, credit cards have become a necessary convenience.
However, using credit wisely is critical to building a solid credit history and
maintaining fiscal fitness. While most students have a general idea about the advantages
and disadvantages of credit, this lesson provides an opportunity to discuss these issues
in more detail.
Introduction:
The term loan refers to a type of credit vehicle in which a sum of money is lent to
another party in exchange for future repayment of the value or principal amount. In many
cases, the lender also adds interest and/or finance charges to the principal value which
the borrower must repay in addition to the principal balance. may interest!!!
Body:
LOANS RECEIVABLE Financial institutions

Loans receivable are obligations supported by a formal promise to pay a certain
amount of money at a specific future date(s). It is similar to note receivable, however,
the term “loans payable” is more appropriately used by entities whose main operations
involve lending of money, such as banks, financing companies, pawnshops, non-bank
intermediaries like savings and loans associations, credit cooperative, and the like.
MEASUREMENT
Receivables are initially recognized at fair value plus transaction costs.
- Loans transactions usually involve transaction costs compare to notes. Transaction
costs include fees and commissions paid to agents, advisers, brokers and dealers, levies
by regulatory agencies and security exchanges, and transfer taxes and duties. initial measurement
may transac- -
FV + +2
subsequentmeasurement
tion costs. Dung
Origination Costs and Fees -
amort.cost/ EIR
Notes NaIA
Lenders usually incur costs in originating loans. These costs are either direct
MaxadO
origination costs (transaction costs) or indirect origination costs. The lenders recover
these costs from borrowers by charging them origination fees.
 Direct origination costs are added to the carrying amount of a loan receivable.
 Origination fees are deducted from the carrying amount of a loan receivable.
charged
paramapa"has
an
e
 Indirect origination costs are not included in measurement of receivables they
are expensed when incurred.
nivd
Direct origination costs and origination fees are included in the calculation of
the effective interest rate over the expected term of the loan receivable, meaning, on
transaction date, the direct origination costs and origination fees are treated as
adjustment to the effective interest rate.
When you recognize origination
costs
Carry ing
amountis affected,
ILLUSTRATION 1: Origination Costs and Fees and fees,
and so, the EIR is also affected
On January 1, 20x1, ABC Bank extended a 10%, P1,000,000 to XYZ Co. The principal is due
principal- PUOFA on January 1, 20x4 but interests are due annually starting on January 1. ABC Bank
interests -
PUOA incurred direct loan origination costs of P12,000 and indirect loan origination costs
of P8,000. In addition, ABC Bank charged XYZ a -6-point nonrefundable loan origination
fee.
b. 6%
=
Requirements:
1. Initial Carrying amount of loan receivable
2. Interest income in 20x1

Requirement 1: Initial Carrying amount of loan receivable
Initial Measurement:
Principal Amount 1,000,000
Direct origination costs 12,000
dean? IOrigination Fee (1M x 6%) (60,000)
Carrying Amount of Loan, 01/01/20x1 952,000
01/01/20x1 Loans receivable 1,000,000

Cash 940,000
Unearned interest income 60,000-origination
Fee
Unearned interest income 12,000 - airect
Cash 12,000 orialnation
Administrative expense &indirect

8,000
Cash 8,000 origination
Cost
Requirement 2: Interest income in 20x1
TRIAL AND ERROR APPROACH
First Trial: (using random rate of 11%)

Principal 1,000,000 PV of 1 @11%, n=3 731,191
TOTAL 975,562
Second Trial: (using random rate of 12%)

Principal 1,000,000 PV of 1 @12%, n=3 711,780
TOTAL 951,963
The effective interest rate is 11.985489% or 12%.
Interest Interest Present
Date Amortization
Payments Expense value
01/01/x1 952,000
12/31/x1 100,000 114,240 14,240 966,240
12/31/x2 100,000 115,949 15,949 982,189
12/31/x3 100,000 117,863 17,812** 1,000,000
**squeezed
12/31/20x1 Interest receivable 100,000

Comparison between Discount and Premium

DISCOUNT PREMIUM
Carrying Amount < Face Amount Carrying Amount > Face Amount
Effective Interest Rate > Nominal Rate Effective Interest Rate < Nominal Rate
ILLUSTRATION 2: Day 1 Difference
On January 1, 20x1, ABC Co. extended a P1,000,000, zero-interest loan to one of its
directors. The loan matures in lump sum on January 1, 20x4. The prevailing interest rate
for this type of loan is 10%.
Case 1: Loan proceeds equal to present value

Assume that the loan proceeds extended to the director is equal to the present value of
the loan receivable.
loan proceeds
Future cash flow 1,000,000 -
PV of P1 @10%, n=3 0.751315 presentvalue

Present value of loan receivable 751,315
Face amount 1,000,000

difference by
theFace intere Unearned interest income
an
248,685
the loan

-
jo
preform entries:
Principal Amt Oextended the loan
add:Direct OC Loan Receivable
less:Oria Feel Ca1
Initial P y
& Charged fees to issuer ofthe loan
cal
add:directorigination costs
unearned Interestincome
deduct:origination feel
⑧
Incurred costs on Extending the Loan
(payment)
unearned Interest Income
Cal
⑭ Collection ofLoans Receivable
cal
Loan Receivable
⑧ Amortication ofu nearned InterestIncome
unearned Interest Income
Interest Income
01/01/20x1 Loan receivable 1,000,000
Cash 751,315
Unearned interest 249,685

Transaction price (cash paid) 751,315
Difference 0
There is no accounting problem in this case because the transaction price (price
paid) is equal to the fair value at initial recognition (present value).
Case 2: Loan proceeds equal to face amount

Assume that the loan proceeds extended to the director is equal to the face amount of
the loan receivable.
loan proceeds
01/01/20x1 Loan receivable 1,000,000 -
Unrealized loss - “day 1 difference” 248,665 Face amount

Cash 1,000,000

Transaction price (cash paid) 1,000,000
Difference - Unrealized loss (248,665)
The “day 1 difference” is recognized immediately in profit/loss on initial

recognition. The “Unearned interest income” is amortized using the effective interest
method.
IMPAIRMENT OF RECEIVABLES
Under old model, an entity recognizes impairment only when there is objective
evidence of a loss event. Under the new model, an entity will always estimate expected
credit losses using “multi-factor” and “holistic” analysis of credit risk that considers
only past events but also forward-looking information on current conditions and forecasts
of future economic conditions. Which means that impairment loss is recognized before the
occurrence of any credit event. These impairment losses are referred to as expected
credit losses (‘ECL’).
The expected credit losses (ECL) shall be applied to all debt instruments that
are not classified as Fair Value through Profit/Loss (FVPL). 19pag FX-TC, *
non lang inapply

Definition of terms: and impairment
• Loss allowance – is the allowance for expected credit losses on financial assets
that are within the scope of the impairment requirements of PFRS 9.
• Expected credit losses – is the weighted average of credit losses with the
respective risks of a default occurring as the weights.
• Credit loss – is the difference between all contractual cash flows that are due
to an entity in accordance with the contract and all the cash flows that the
entity expects to receive (i.e., all cash shortfalls), discounted at the original
effective interest rate (or credit-adjusted effective interest rate for purchased
or originated credit-impaired financial assets).
• 12-month expected credit losses – The portion of lifetime expected credit losses
that represent the expected credit losses that result from default events on a
financial instrument that are possible within the 12 months after the reporting
date.
• Credit risk – The risk that one party to a financial instrument will cause a
financial loss for the other party by failing to discharge an obligation.
&
Ilfetime
• -
Lifetime expected credit losses – The expected credit losses that result from all
OF In
e possible default events over the expected life of a financial instrument.
Financial
instrument
Three approaches to impairment
Type of asset/exposure Approach

Trade receivables, contract assets and
Simplified approach
lease receivables
Originated or purchased credit-impaired Changes in lifetime expected credit
financial assets losses approach
Other assets/ exposures General approach

Simplified Approach
To assist entities that have less sophisticated credit risk management systems,
IFRS 9 introduced a simplified approach under which entities do not have to track changes
in credit risk of financial assets (IFRS 9.BC5.104).
Instead, lifetime expected credit losses (ECL) are recognized from the date of
initial recognition of a financial asset.
The simplified approach is required for trade receivables or contract assets that
result from transactions that are within the scope of IFRS 15 and do not contain a
significant financing component. For trade receivables or contract assets that do contain
a significant financing component, it is the entity’s choice to apply simplified
approach. Similarly, the entity can choose to apply simplified approach to lease
receivables accounted for under IFRS 16 (IFRS 9.5.5.15).
PFRS 9 does not require specific procedures in estimating lifetime expected credit
losses under simplified approach. Instead, PFRS 9 allows practical expedients and refers
to the example of a provision matrix (e.g., the aging method, singles loss rate approach).
Changes in Lifetime Expected Credit Losses Approach (Specific approach for purchased or
originated credit-impaired financial assets)
upon initial recog,
they've been IFRS 9 sets out a specific approach for purchased or originated credit-impaired
neeseung
credit impaired
na
financial assets (‘POCI’ assets). Originated or purchased credit impaired financial
assets are those that are credit-impaired on initial recognition.
For these financial assets, the loss allowance recognizes only the cumulative
& cumulative
changes changes in lifetime expected credit losses (ECL) since initial recognition of such an
asset.
When discounting cash flow for purposes of measuring expected credit losses, the
entity shall use a credit-adjusted interest rate.
Credit-adjusted effective interest rate is the rate that exactly discounts the
estimated future cash payments or receipts through the expected life of the financial
asset to the amortized cost of a financial asset that is purchased or originated credit-
impaired financial asset.
General Approach (Three-stage or three-bucket approach)
Stage 1 Stage 2 Stage 3

Credit risk has not increased Credit risk has increased
Credit risk has increased
significantly since initial significantly since initial
significantly since initial
recognition. recognition. recognition plus there is
Low credit risk expediency objective evidence of
impairment.
Recognize 12-month expected Recognize Lifetime expected Recognize Lifetime expected
credit losses. credit losses. credit losses.
Interest revenue is computed Interest revenue is computed Interest revenue is computed
on the gross carrying amount on the gross carrying amount on the net carrying amount of
of the asset of the asset the asset.
*Gross CA less Loss allowance
Change in credit risk since initial recognition
improvement IMPROVEMENT deterioration
DETERIORATION
ILLUSTRATION 3: 12-month vs. Lifetime expected credit losses
ABC Co. issues a 3-year, interest bearing loan of P1,000,000 on August 1, 20x1. ABC
Co. makes the following estimates of risks and default losses:
Risk of default in: Loss from

Date
Next 12 months Remaining mos. Default
08/01/x1 2.00% 5.00%
400,000
3.00% 12.00%
12/31/x1 350,000
1.00% 3.00%
12/31/x2 250,000
Requirements: Compute for the amount of loss allowance on the following dates:
a. August 1, 20x1
b. December 31, 20x1
c. December 31, 20x2
Requirement a: Initial recognition

08/01/20x1 Impairment loss 8,000
Loss Allowance 8,000

On initial recognition, ABC Co. shall recognize 12-month expected credit losses of
P8,000.
*400,000 x 2% = P8,000
Requirement a: December 31, 20x1
- At each reporting period, ABC Co. shall determine whether there has been a
an increase -
significant increase in credit risk since initial recognition. This assessment is made
is deemed as follows:
significantw hen
the change is about
double the prey Risk of default in: Loss from
rate
Date Next 12 months Remaining mos. Default
(a) (b) (c) = (a) + (b)
08/01/x1 2.00% 5.00% 7.00%
12/31/x1 3.00% 12.00% 15.00%

Loss Allowance (52,500 – 8,000) 44,500
The total risk increases from 7% to 15%. Accordingly, ABC Co. shall measure the loss
allowance equal to the lifetime expected credit losses of P52,500.
*350,000 x 15% = P52,500
Requirement a:
D December 31, 20x2
Risk of default in: Loss from

Date Next 12 months Remaining mos. Default
(a) (b) (c) = (a) + (b)
08/01/x1 2.00% 5.00% 7.00%
12/31/x1 3.00% 12.00% 15.00%
12/31/x2 1.00% 3.00% 4.00%
12/31/20x1 Loss Allowance (52,500 – 2,500) 50,000

Impairment loss 50,000
The total risk decreased to 4% which is lower than 7% total risk in initial recognition.
Therefore, ABC Co. shall revert to measuring the loss allowance from the lifetime
expected credit losses to 12-month expected credit losses. ABC shall measure the loss
allowance equal to 12-month expected credit losses of P2,500.
*250,000 x 1% = P2,500
Measurement of Expected Credit Losses

Expected credit losses shall be measured in a manner that reflects:
1. Unbiased and probability weighted amount that is determined by evaluating a range
of possible outcomes.
2. The time value of money.
3. Reasonable and supportable information that is available without undue cost or
effort at the reporting date about past events, current conditions, and forecasts
of future economic conditions.
Stage Nature of instrument Measurement of credit losses
Present value of the difference between:

Stages 1 Financial asset that is a. The contractual cash flows due under
& 2 not credit-impaired the contract, and
b. The cash flows expected to be received
The difference between:

Financial asset that is a. The asset’s gross carrying amount, and
Stage 3 credit-impaired (but not b. The present value of estimated cash
POCI) flows discounted at the original
effective interest rate.
Credit-impaired financial assets

deterioration A financial asset is credit-impaired when one or more events that have a
in the detrimental impact on the estimated future cash flows of that financial asset have
creditworthines, occurred.
ofan entity
Evidence that a financial asset is credit-impaired includes observable data about the
following events:
a. Significant Financial Difficulty of the issuer or the borrower
b. A Breach of Contract, such as a Default or Past Due event
c. The Lender(s) of the Borrower, for economic or contractual reasons relating to
the borrower’s financial difficulty, have granted to the borrower a concession(s)
that the lender(s) would not otherwise consider
d. It is becoming probable that the borrower will enter Bankruptcy or other financial
reorganization

e. The disappearance of an Active Market for that financial asset because of
financial difficulties
f. The purchase or origination of a financial asset at a deep Discount that reflects
the incurred Credit Loss
The impairment loss is computed as the difference between:

a. The asset’s gross carrying amount, and
b. The present value of estimated cash flows discounted at the original effective
interest rate gross carrying amount
impairmentse
SpyFFOFe)
ILLUSTRATION 4: Stage 3 - Credit-impaired financial assets
On January 1, 20x1, ABC Bank extended a P1,000,000 loan to XYZ, Inc. principal is due
on December 31, 20x5 but 10% interest is due annually starting December 31, 20x1. PNO A
PX OF1
With 2 period left
o n the loan
On December 31, 20x3, XYZ, Inc. was delinquent, and it was ascertained that the loan
is credit impaired. ABC Bank assessed those interests accruing on loan will not be
collected; however, the principal is expected to be received in two equal annual
installments starting on December 31, 20x4. The carrying amount of the loan, together
with the accrued interest, as of December 31, 20x3 is as follows:
Loan receivable 1,000,000

Total carrying amount of receivables before impairment 1,100,000
The current market rate on December 31, 20x3 is 14%.
Requirement: Compute for the impairment loss on the loan receivable

the
Estimated FCF (1M/2) 500,000 getthe pH
* of
PV of OA @ 10%, n=2 1.735537 using the orig

FCF
FIONS
Present value of estimated cash flows 867,769 CASH
compute
A for the
The impairment loss is computed as follows: impairmentloss by:
the
On
Present value of estimated FCF 867,769
Carrying amount before impairment (1,100,000)
Impairment loss 232,231
Direct Allowance
12/31/x3 Dr Impairment loss 12/31/x3 Dr Impairment loss
232,231 232,231
Cr Interest Cr Interest
receivable 100,000 receivable 100,000
Cr Loans Cr Loss
receivable 132,231 allowance 132,231
Loan Receivable (before) Loan Receivable

1000000 1,000,000 1000000 1,000,000
the
Credit to loan receivable Loss allowance
2e
-3, (132,231)
Loan receivable (after)
as (132,231)
Loan receivable – net
867,769 867,769
A new amortization table is prepared after the impairment:

Present
Date Collections Interest Income Amortization
value
12/31/x3 867,769
Withtheen
10 %
~ ~P1 x
12/31/x4 -
500,000 86,777 413,223 454,546
12/31/x5 500,000 45,455 454,545 0
t he prin
OF
in a equal annual
installments
Direct Allowance
12/31/x4 Dr Cash
12/31/x4 Dr Cash 500,000
500,000 Dr Loss allowance
Cr Interest 86,777
income 86,777 Cr Interest
Cr Loans income 86,777
receivable 413,223 Cr Loss
receivable 500,000

ILLUSTRATION 5: Interest not accrued because of loss event
On January 1, 20x1, ABC Co. received a P10,000,000 note receivable from XYZ, Inc.
Principal payments of P2,000,0000 and interest at 12% are due annually at the end of
each year for 5 years. The first payment starts on December 31, 20x1. both PNOA
may 3 periods pang
natifica
XYZ, Inc. made the required payments during 20x1 and 20x2. However, during 20x3, XYZ,
Inc. began to experience financial difficulties, requiring ABC Co. to reassess the
collectability of the note. Because of the loss event, ABC Co. did not accrue the
interest on December 31, 20x3.
Date of expected Amount of cash

receipt flows
-
Why January January 1, 20x4 1,000,000
in? PX OF1 and ginamit
January 1, 20x5 2,000,000
because unequal
January 1, 20x6 3,000,000
and payments
Requirement: Compute for the impairment loss on the note receivable.
The present value of the estimated future cash flows is computed as follows:
Future Cash PV @12%, n=
Date Present value
Flows 0,1,2
01/01/20x4 1,000,000 1
1,000,000
01/01/20x5 2,000,000 0.892857
1,785,714
01/01/20x6 3,000,000 0.797194
2,391,582
5,177,296
The carrying amount of the receivable is computed as

follows
Principal amount, 01/01/20x1 10,000,000

Payment in 20x1 (2,000,000) "paymentsin
-
Payment in 20x2 (2,000,000)
Outstanding balance, 12/31/20x3 6,000,000 "ABCCo. did not

-
Interest receivable, 12/31/20x3 0 accrue interest
For the year."
Carrying amount before impairment 6,000,000
The impairment loss is computed as follows

Present value of the estimated future cash
flows 5,177,296
Carrying amount before impairment (6,000,000)
Impairment loss (822,704)
(new amort table s

Amortization table – installment:
Interest Present
Date Collections Amortization
Income value
12/31/20x3 in 5,177,296
8
-
01/01/20x4 1,000,000 0 1,000,000 4,177,296
01/01/20x5 2,000,000 501,276 1,498,724 2,678,571
01/01/20x6 3,000,000 321,429 2,678,571 0

Allowance for impairment loss 822,704
01/01/20x4 Cash 1,000,000

Notes receivable 1,000,000

01/01/20x5 Cash 2,000,000


01/01/20x6 Cash 3,000,000


Life Application:
Here's how the loan process works. When someone needs money, they apply for a loan from
a bank, corporation, government, or other entity. The borrower may be required to provide
specific details such as the reason for the loan, their financial history, Social
Security Number (SSN), and other information. The lender reviews the information
including a person's debt-to-income (DTI) ratio to see if the loan can be paid back.
Based on the applicant's creditworthiness, the lender either denies or approves the
application. The lender must provide a reason should the loan application be denied. If
the application is approved, both parties sign a contract that outlines the details of
the agreement. The lender advances the proceeds of the loan, after which the borrower
must repay the amount including any additional charges such as interest
Conclusion:
 A loan is when money is given to another party in exchange for repayment of the
loan principal amount plus interest.
 Loan terms are agreed to by each party before any money is advanced.
 A general approach that applies to all loans and receivables not eligible for the
other approaches.
 A simplified approach that is required for certain trade receivables and so called
“IFRS 15 contract assets” and otherwise optional for these assets and lease
receivables.
 A “credit adjusted approach” that applies to loans that are credit impaired at
initial recognition (e.g., loans acquired at a deep discount due to their
credit risk).
-----------------------------------------Nothing follows---------------------------------
References: INTERMEDIATE ACCTG 1A [by: Millan, Zeus Vernon B. (2021)]
Financial Accounting Volume 1 [by: Valix, C. T., Peralta, Jose F., Valix, C A M. (2015).]
https://www.freshbooks.com/hub/accounting/accounting-loans-receivable
https://www.investopedia.com/terms/l/loan.asp
https://ifrscommunity.com/knowledge-base/ifrs-9-impairment/
https://www.pwc.com/gx/en/audit-services/ifrs/publications/ifrs-9/ifrs-9-understanding-
the-basics.pdf

Topic: Receivable Financing
 Explain the accounting for Receivable Financing.
 Identify the different types of receivable financing.

2 Timothy 2:15 ESV
Do your best to present yourself to God as one approved, a worker who has no
need to be ashamed, rightly handling the word of truth.
Learning Activity:
Receivable financing makes sense when a business has structural cash flow gaps—
for example, because they are required to pay for their goods (materials,
inventory) well in advance of when they will receive payment for the cost of
those goods.
Introduction:
Receivable’s finance is a term that describes several different techniques a
inangapan business can use to raise funds against the amounts owed to it by its customers
and man
na
in outstanding invoices, also known as its trade receivables or accounts
receivables
receivable. By financing its receivables, a business can receive payments
earlier, meaning it can invest in business growth and innovation.
- -
Body:
RECEIVABLE FINANCING
Receivable financing refers to the act of inducing cash inflows from receivables
other than from their normal or scheduled payments.
C
The following are the common forms of receivable financing:
a. Pledge
b. Assignment
c. Factoring
d. Discounting
PLEDGE (HYPOTHECATION)
pledqur
Under a pledge transaction, receivables are used as collateral security
↓ for a loan. A pledge is treated as secured borrowing because the
debtor pledgor/borrower retains control over the pledged receivables.
↓ Accordingly, the pledged receivables are not derecognized, and are also
may receivables not specifically identified from other receivables. No entry is made for the
no they
pledged receivables; only a note disclosure is necessary. Only the loan
put as collate -
rat
transaction is recorded.
ILLUSTRATION 1: Pledge (Hypothecation)
On September 1, 20x1, ABC Co. borrowed P100,000 from a bank and pledged its
receivables as collateral security.
Journal entry:
09/01/20x1 Cash 100,000
Loan payable 100,000

ASSIGNMENT
Assignment is a formal form of pledge wherein the receivables used as
nakastate (a collateral security for borrowing are specifically identified and stated in the
contractna
all
loan contract.
loan
kung Under pledge, the receivables held out as collateral security are not
I
may specific na specifically identified; thus, in case of default, the lender may hold any of
receivable na the borrower's receivables. Under assignment, the lender can only hold as
collateral
held as
collateral security the specific receivables assigned. thetort""bleaaor's
security.
->
Assignment is also treated as secured borrowing. However, the assigned
receivables are identified by reclassifying them to the "Receivables - assigned"
account or similar account. nililipat
no
no
12
sa
and
acct
receivable
The assigned receivables are presented in the statement of financial

position as regular receivables, i.e., included in "trade and other
receivables." However, the equity in the assigned receivables is disclosed in
the notes.
Equity in the assigned receivable is carrying amount of the assigned
receivables minus carrying amount of the related loan payable (Asset - Liability
= Equity). This is only a note disclosure. The assigned receivable and the loan
payable are presented separately in the statement of financial position (i.e .,
not offset).
equity CAOFassigned rec- CA OF loan payable
-
in the A.R.
Forms of assignment ↳ disclosed the notes in
Assignments may be made on a (a) notification basis or a (b) non-notification

basis.
Notification basis Non-notification basis

nuna ent;
no mat
abled
The -assignor/borrower notifies the The assignor/borrower does not notify

- whose receivables have been
debtors the debtors. Accordingly, the debtors
yung
assigned
may about the assignment. will continue to remit payments to the
utand Accordingly, the debtors will remit
or assignor/borrower. Assignments are
need bay
payments on the receivables directly
a
more commonly made on a non-
-
to the Cr
ran sa
assiquor
assignee/lender. notification basis.
Cyuna pinaguhanan no finances
ILLUSTRATION 2: Assignment
On March 1, 20x1, ABC Co. assigned P4,000,000 accounts receivable to Piggy Bank
in exchange for aC2-month, 12%, loan equal to 75% of the assigned receivables.
ABC Co. received the loan proceeds after a 2% deduction for service fee based
on the assigned accounts. During March, P2,500,000 were collected from the
receivables. Sales returns and discounts amounted to P50,000.
Journal Entries:
Notification basis Non-notification basis
(1) To record the assignment.
03/01/x1 ~nareclassify amount na 03/01/x1
A/R – assigned 4,000,000 A/R – assigned 4,000,000
&
A/R mababawaAililitat 4,000,000 A/R 4,000,000
(2) To record the receipt of loan.
03/01/x1 03/01/x1
Cash 2,920,000 a total Cash 2,920,000
Disc. on L/P (4M x 2%) 80,000
3 oF 4M
-
Disc. on L/P (4M x 2%) 80,000

A/R (4M x 75%) 3,000,000 A/R (4M x 75%) 3,000,000
(3) To record the collections.
Date
No entry yet
ABC Co. will record the collections when
Cash 2,500,000 ~a rerecord
Sales Ret. & Disc. 50,000 na sila since

it receives notification from Piggy Bank. kanila naman
A/R (4M x 75%) 2,550,000 sa
talaga Manbaya-
(4) To record the remittance of collections to the bank, plus interest. bad yung
Not applicable
debtorsinre
a
The debtors remit payments directly to
Piggy Bank alai kung sing
(see #5 and #6 below). an a napili

nnin"debtor,
&
(5) Piggy Bank notifies ABC Co. of the collections.
Date
Loan payable (b) 2,500,000

Sales Ret. & Disc. 50,000
A/R - assigned 2,550,000
(6) ABC Co. pays the interest
Date
Interest Expense (a) 30,000
Cash (b) 30,000
month palang outofthe
(a) (3M x 12% x Gr

½) = 30,000 2-month
period
(b) Cash collections from assigned receivables are usually applied only to
the principal balance of the loan. Additional cash is paid for the
interest.
The equity in the assigned receivables is disclosed in the notes as follows:

Accounts receivable - assigned (4M - 2.550M collected) 1,450,000
Loan payable (3M - 2.5M paid) (500,000)
Equity in assigned receivables 950,000
FACTORING
Instead of being collateralized, receivables can also be sold to a
financial institution (a.k.a. the "factor"). This is referred to as factoring.
/Factoring is usually done on a notification basis and on either a without
Or recourse or with recourse basis.
Without recourse With recourse
 The transferor guarantees payment
to the factor in the event the the transferor is
For the
debtor fails to pay. The transferor liable
 The factor assumes the risk of payment OF
hot
is liable for the guaranteed
uncollectability and absorbs any the debtor
the entirety OF amount.
the receivable is credit losses. The transferor is ~
 This is recorded using financial
I
recognizing
sold a
to factor not liable in case the debtor fails liabi-
to pay. components approach because of the the assets and
8
in substance
lities that
transferor's continuing involvement are
② in Form  It is an outright sale of

in the receivable. Values are directly related to
receivable, both in form (transfer

the transferor de-
assigned to such components as the the sale
recognizes the of title) and substance (transfer
recourse provision, servicing
receivable. of control). Accordingly, the
rights, and agreement to
in its entirety.
-
factored receivable is derecognized
repurchase. Each party to the
factoring recognizes only the kung landand
D -
assets and liabilities that it namak ulla,
controls after the transfer. non land recod
hila
Factor's holdback
Whether the factoring is on a without recourse or with recourse basis,
the transferor is responsible for any reduction in the collection of receivables
- due to sales returns and discounts. Thus, the factor usually retains a certain
aine deduct
percentage of the transferred receivables for these items. The transferor
sa
value nopuede ~ Since hindi

records the factor's retention as "Factor's holdback" or "Receivable from
nila itrans- naa nila its
factor." The factor records a corresponding liability. The factor returns to PNede (DASA
Fer
the transferor any excess "holdback" when the receivables are fully collected Sa Factor
or when there are no further sales returns and discounts.
Casual basis vs. Regular means of financing

The factor normally charges the transferor commission or service fee and
interest.
If the factoring is made on a casual basis (i.e., an isolated event), the
charges are recorded as "loss."
If the transferor regularly factors receivables as a means of financing, the
charges are recorded as regular expenses (i.e., commission expense or interest
expense).

commission expense
interest expense
quaranteed amountdue to default
The transferor's cost of factoring consists of the charges above plus,

incase of debtor's default, any amount that the transferor has guaranteed to
pay to the factor.
ILLUSTRATION 3: Factoring
On Jan. 1, 20x1, ABC Co. factored P60,000 accounts receivable to XYZ Financing
Corp. XYZ charged a 4% service fee and retained a 10% holdback to cover expected
sales returns. In addition, XYZ charged 12% interest computed on a weighted
average time to maturity of the receivables of - 73 days based on 365 days.
(Assume a fair value of P3,000 for the recourse obligation in the 'with recourse
scenario.)
C average time
60,000 10.x73/345
nice at
e
x
Maturity
to
Journal entries: 3 448
Without recourse Without

- recourse
Casual Basis
Cash (1) 50,160
Cash (1) 50,160
Receivable from factor 6,000 10% holdback
Receivable from factor 6,000 10% noldback
int
Loss on factoring 6,840 + sF+recourse obli
Loss on factoring 3,840 int 4 JF
S Accounts receivable 60,000
recoq al Recourse obligation 3,000
101
Regular means of financing
na agad
Cash (1) 50,160
Cash (1) 50,160 Receivable from factor 6,000
Receivable from factor 6,000 Service charge 2,400
Service charge 2,400 Interest expense 1,440
Interest expense 1,440 Loss on recourse obligation 3,000
Accounts receivable 60,000 Accounts receivable 60,000
Recourse obligation 3,000
(1) The proceeds from the factoring are computed as follows:

Accounts receivable factored 60,000
Service charge (60,000 x 4%) (2,400)
Factor's holdback (60,000 x 10%) (6,000)
Interest charge (60,000 x 12% x 73/365) (1,440)
Proceeds from factoring 50,160
Settlement of factor's holdback

All the factored receivables were collected, and actual sales returns amounted
to P2,000.
Without recourse Without

- recourse
Sales returns 2,000 Sales returns 2,000
Cash 4,000 Cash 4,000
Receivable from factor 6,000 Receivable from factor 6,000
Recourse obligation 3,000

Gain on recourse obligation 3,000
*The recourse obligation is reversed as gain because all the receivables were
collected. If in case of a debtor's default, any payment on the recourse
agreement will be treated as settlement of the recourse obligation.
Cost of factoring
The cost of factoring in all the scenarios above is P3,840 (equal to the
service charge and interest). However, in case of debtor's default, this amount
is increased by any payment on the recourse agreement.
SECURITIZATION
Another form of a transfer of receivable is securitization.
Securitization takes a pool of assets, such as credit card receivables,
mortgage receivables, or car loan receivables, and sells shares in these pools
of interest and principal payments.

This, in effect, creates securities backed by these pools of assets.
Virtually every asset with a payment stream and a long-term payment history is
- -
a candidate for securitization. Securitization is compared with factoring as

follows:
Factoring Securitization
Usually involves sale to only one Many investors are involved, margins
entity, fees are high, the quality of are tight, the receivables are of
the receivables is low, and the generally higher quality, and the
transferor afterwards does not usually transferor usually continues to
service the receivables. service the receivables.
Credit card transactions

A seller records a sale to a customer using a credit card as a receivable
-
sale
seller-p customer from the customer's credit card company rather from the customer. The credit
receivable:
card company in turn records a receivable from the customer and a corresponding
From thepure
e
payable to the seller. In effect, the seller transfers the receivable from the
Preceivable
company
from
customer to the credit card company. This type of transfer qualifies for
customer,
derecognition. It is a form of factoring without recourse.
Sellers allow purchases through credit cards primarily to promote sales
/
seller
payable to
and to transfer the risk of bad debts to credit card companies. In return,
From the
credit card companies charge sellers a service fee. Sellers recognize revenue
customer,
at the point of sale.
napupunta na
sa creditcard
company
ILLUSTRATION 4: Credit card transactions
An entity makes total sales of P1,000,000 to customers using credit card.

- Accounts receivable – credit card company 1,000,000
naubenta Sales 1,000,000
palang C recognized atthe point ofsale
The entity C collects from the credit card company after a 1% charge.
Cash a 990,000
S Service Charge 10,000
debited T
Accounts receivable – credit card company 1,000,000
acknOW 1ed92
expense
DISCOUNTING OF NOTES RECEIVABLES
Discounting of notes receivable is another form of receivable financing
whereby the holder endorses a note to a bank in exchange for the maturity value
less a discount. At maturity date, the bank collects from the maker of the note.
Notes may be discounted on a without recourse or with recourse basis.

 The entity is liable in case the maker
 The entity is not liable in case the
fails to pay.
maker fails to pay.
 The note is sold outright and  The note is not derecognized, and the
therefore derecognized. discounting is accounted for as
either:
disclosure
a. Conditional sale a contingent
land liability equal to the face
amount of the note is only
disclosed in the notes to
financial statements; or
b. Secured borrowing - a liability
recognized
+alada
equal to the face amount of the
note is recognized.

The following formulas are used in the accounting for note receivable
discounting:
 Net proceeds = Maturity value - Discount
 Maturity value = Principal + Interest for the full term of the note (P (prt)) +
 Discount = Maturity value x Discount period x Discount rate (My dp ar) x x
 Discount period is the remaining period to maturity date of the note as

~ of date of discounting.
iland periods The discount period is also the unexpired term of the note and can be
nalana natitira
computed as the "full term of the note less the expired term.
unexpired term
 Discount rate is the rate at which the note is discounted with a bank.
 Interest income is the accrued interest as of date of discounting
ILLUSTRATION 5: Discounting of notes receivables

3 months intrate
I
On November 1, 20x1, ABC Co. discounted a P1,000,000, 90-day, C
12% note, dated
September 15, 20x1, with a bank at C16%. The bank uses 365 days per year in
computing for discounts. ar
Computations:
Maturity value = Principal + Interest for the full term of the note
① maturity Maturity value = 1,000,000 + (1,000,000 x 12% x 90/365)
Value
Maturity value = 1,029,589 (P (pr 1) + +
Discount period = unexpired term (or full term minus expired term)
② discount Discount period = 90 days - 47 days* (expired from Sept. 15 to Nov. 1)
period
Discount period = 43 days
*When counting days, exclude the first day but include the last day. Consider
also that some months have 30 days while some have 31 days; the month of
February has 28 days except in a leap year.
[47 days = (30 days in Sept. - 15) + 31 days in Oct. + 1 day in Nov.]
15 31 1
=
+
+
Discount = Maturity value x Discount rate x Discount period

Discount = 1,029,589 x 16% ? 43/365
③ discount
Discount = 19,407
X
Net proceeds = Maturity value - Discount

Net proceeds = 1,029,589 - 19,407
⑪
netproceeds
Net proceeds = 1,010,182
Interest income = accrued interest as of date of discounting

Interest income = 1,000,000 x 12% x 47 expired term/365
⑤
insome
Interest income = 15,452
Journal entries:
a. Conditional sale
Nov. 1. 20x1
Nov. 1. 20x1
Cash (net proceeds) 1,010,182
Loss on discounting 5,270
Note receivable 1,000,000
Note receivable discounted 1,000,000
C.
b. Secured borrowing
Nov. 1. 20x1
Liability on note discounted 1,000,000

Dishonored notes
Notes receivable not collected at - maturity are considered dishonored
notes. Dishonored notes are reclassified from "notes receivable" to "accounts
receivable" because, when dishonored, they become an-
ordinary claim. The amount -
- -
transferred to accounts receivable is the maturity value of the note plus any
direct costs attributable to the dishonor. Following the dishonor, the
receivable is assessed for impairment.
ILLUSTRATION 6: Dishonored notes
ABC Co. received a P150,000, 60-day, 15% note receivable. At maturity date, the
maker fails to pay. ABC Co. uses 360 days per year in computing for interests.
The journal entry at maturity date is as follows:
(Notes Receivable -
dishonored)
Maturity date Accounts receivable (1) 153,750
Notes receivable 150,000
Interest receivable (2) 3,750
(1) 150,000 + (150,000 x 15% x 60/360)

Alternatively, the “Note receivable – dishonored” account may be used in lieu
of accounts receivable. Nevertheless, the dishonored note is excluded from notes
receivable and presented as ordinary claim.
(2) (150,000 x 15% x 60/360)
DISCOUNTING OF "OWN" NOTE

In the previous illustrations, the note discounted to a bank is a note
received from another party
(e.g., customer). When an entity borrows money from a bank and discounts its
own note, not a note from another party, such transaction is accounted for as
a regular loan transaction. "Discounting" here means that the bank deducted in - -
-
advance the interest on the loan. The loan proceeds released to the borrower is
equal to the principal less the interest deducted in advance.
ILLUSTRATION 7: Discounting own note
On July 1, 20x1, ABC Co. discounted its own note of P1,000,000 to a bank at 12%
for one year.
The entry to record the discounting of "own" note is as follows:

07/01/20x1 Cash [1M - (1M x 12%)] 880,000
discount lang talaga,
Discount on note payable (1M x 12%) 120,000 - a
as In
Note payable 1,000,000
The "Discount on note payable" is a contra-liability account (deduction) to the

note payable.
Life Application:
How Does Selective Receivables Finance Work?
The most successful selective receivables finance programs are powered by state-
of-the-art software platforms that allow companies to sell their invoices for
early payment well before the actual due date and, in most cases, without any
involvement from or disclosure to their customers. Facilitating a true sale of
receivables, not factoring or a loan, the platform automatically handles all
transactions across multiple customers and provides companies with additional
cash flow in different countries and currencies.
Summary:
 Pledge (hypothecation) transactions are disclosed only.
 Assignments are recorded by debiting "Accounts receivable assigned" and
crediting accounts receivable.
 Factoring on a without recourse basis is an outright sale.

 Discounting of notes receivable
NP = MV – D
MV = P + i
D = MV x Dr x Dp
Dr = Discount rate
Dp = Discount period (the unexpired term of the note)
Interest income = interest accrued on the expired term of the note
---------------------------------Nothing follows------------------------------
https://primerevenue.com/what-is-accounts-receivable-financing/
https://www.ondeck.com/resources/receivables-financing
https://corporatefinanceinstitute.com/resources/knowledge/finance/accounts-
receivable-financing/
https://taulia.com/glossary/what-is-receivables-finance/

Topic: Inventories
 Define inventory and identify the timing of its recognition.
 Differentiate between the periodic and the perpetual inventory systems.

Daniel 12:3
And they that be wise shall shine as the brightness of the firmament; and they
that turn many to righteousness as the stars for ever and ever.
Learning Activity:
IAS 2 provides guidance for determining the cost of inventories and the
subsequent recognition of the cost as an expense, including any write-down to
net realizable value. It also provides guidance on the cost formulas that are
used to assign costs to inventories.
Introduction:
IAS 2 Inventories contains the requirements on how to account for most types of
inventory. The standard requires inventories to be measured at the lower of
cost and net realizable value (NRV) and outlines acceptable methods of
determining cost, including specific identification (in some cases), first-in
first-out (FIFO) and weighted average cost.
Body:
INVENTORIES
Inventories are assets that are:

·
a9 reanaisel 1. Held for sale in the ordinary course of business (Finished Goods);
o ginanama paland
2. In the process of production for such sale (Work in Process); or
o raw Materials 3. In the form of materials or supplies to be consumed in the production
process or in the rendering of services (Raw materials and
manufacturing supplies).
Examples of inventories:
a. Merchandise purchased by a trading entity and held for resale.
b. Land and other property held for sale in the ordinary course of
business.
c. Finished goods, goods undergoing production, and raw materials and
supplies awaiting use in the production process by a manufacturing
entity.
Ordinary course of business refers to the necessary, normal or usual business

-
activities of an entity.
RECOGNITION
Inventories are recognized when they meet the definition of inventory and
they qualify for recognition as assets, such as when control (legal title) is
obtained by the buyer from the seller.
 Control (Legal title) normally passes when physical possession over of

the goods is transferred.
 However, there may be cases where the transfer of control (ownership)
does not coincide with the transfer of physical possession. The
transfer of control may precede, coincide with, or comes after the
transfer of physical possession. transfer control
of
may come before, during, or after

the transfer ofphysical possession
An entity considers all relevant facts and circumstances in determining
whether it has control, including the following:
a. Goods in transit
b. Consigned goods
c. Inventory financing agreements

d. Sale with unusual right of return
e. Sale on trial or sale on approval
f. Installment sale
g. Bill and hold sale
h. Lay away sale
Goods in transit
Goods in transit are goods that the seller has already shipped but the
buyer has not yet received. The lack of physical possession may pose a question
on which party includes the goods in transit in its inventories.
Goods in transit may form part of the buyer's or the seller's inventories
depending on the sale term, such as:
1. FOB shipping point upon shipment
 Ownership is transferred to the buyer upon shipment.
 Therefore, the goods in transit form part of the buyer's
inventories.
 The buyer records the purchase (and accounts payable) on shipment
date.
2. FOB destination upon receipt

 Ownership is transferred to the buyer only when the buyer
receives the goods.
 Therefore, the goods in transit still form part of the seller's
inventories.
 The buyer records the purchase (and accounts payable) only when
he receives the shipment.
*FOB stands for "free on board."
Freight
Sale contracts may also contain terms for shipping costs indicated by any of
the following:
a. Freight Prepaid - The seller pays the freight in advance before
shipment. However, this does not mean that the seller is the one
who is supposed to pay for the freight.
b. Freight Collect - Freight is not yet paid upon shipment. The carrier
collects shipping costs from the buyer upon delivery. Thus, the
buyer pays for the freight. However, this does not mean that the
buyer is the one who is supposed to pay for the freight.
c. FAS (free alongside) - The seller assumes all expenses in delivering
upon shipmentto
the carrier
the goods to the dock next to (alongside) the carrier on which the
goods are to be shipped. The buyer assumes loading and shipping
costs. Title passes upon shipment to the carrier.
goodsare unloaded
d. Ex-ship - The seller assumes all expenses until the goods are
From the carrier
unloaded from the carrier, at which time title passes to the buyer.
e. CIF (cost, insurance, and freight) - The buyer pays in lump sum the
cost of the goods and the insurance and freight costs. binabayaran ni buyer
lahat no CIF
and
f. CF (cost and freight) - The buyer pays in lump sum the cost of the
delivery OF
00
goods and the freight cost. In either CIF or CF, the seller must buner pays
-
all
deliver the goods to the carrier and pay the costs of loading. Thus,
-
CF
goods to the
seller pays loading
carrier
title passes to the buyer upon delivery of the goods to the carrier. to the
costs
carrier
The foregoing is meant only to define normal terms and usage. Actual
contractual arrangements between a buyer and a seller can vary widely. As a
rule, the entity who owns the goods being shipped should pay for the shipping
costs.
ia""ner
sila dapatmagba.
Special accounting arises when the term of the sale contract is either had shipping
"FOB shipping point, Freight prepaid" or "FOB destination, Freight collect."
a. Under FOB shipping point, freight prepaid, the buyer owns the
goods being shipped but the seller already paid the shipping
costs.
b. Under FOB destination, freight collect, the seller owns the
goods being shipped but the carrier will be collecting the
shipping costs from the buyer.

ILLUSTRATION 1: Goods in transit
ABC Co. purchased goods with invoice price of P1,000 on account on December
27, 20x1. Therelated shipping costsamounted" P10. The seller shipped the
goods on December 31, 20x1. ABC Co. received the goods on January 2, 20x2 and
settled the account on January 5, 20x2.
The journal entries in the books of ABC Co. under the different terms of
purchase are as follows:
FOB shipping point, Freight collect buyer ari, may buyer hadbayad
POV ni December 31, 20x1 Purchases 1,000

Accounts Payable 1,000
buyer!
January 2, 20x2 Freight-in 10
Cash 10
January 5, 20x2 Accounts Payable 1,000
Cash 1,000
The buyer recognizes "Freight-in" because the buyer is the one who is supposed
to pay for the freight. Under FOB shipping point, the buyer owns the goods in
transit. Therefore, the buyer bears the cost of transportation. "Freight-in" is
included as cost of the inventories purchased.
FOB destination, Freight prepaid seller mayars, seller hadbayad
December 31, 20x1 No Entry

January 2, 20x2 Purchases 1,000
Upon receipt goods of
ownership transferred Accounts Payable 1,000
Cash 1,000
The buyer does not recognize "Freight-in" because the seller is the one who is
supposed to pay for the freight. Under FOB destination, the seller owns the
goods in transit. Therefore, the seller bears the cost of transportation.
00, KaaMa
mankaka payable
FOB shipping point, Freight prepaid buner man ari, seller had bay ad and buyer?
sa amountno
accOUnt
December 31, 20x1 Purchases 1,000 payable
Freight-in 10
January 2, 20x2 No Entry natransfer na ownership una paland
Cash 1,010
The buyer records "Freight-in" because the buyer is the one who is supposed to
pay for the freight. However, since the seller already paid the freight (i.e.,
Freight prepaid), the freight-in is recorded as an increase in "Accounts
payable." This is because the buyer will reimburse the seller for the freight.
A "reimbursement payable" account may be used in lieu of "accounts payable"
most especially when the freight cost is⑳material.
FOB destination, Freight collect seller man ari, buyer had banad
December 31, 20x1 No Entry

January 2, 20x2 Purchases 1,000
Accounts Payable ⑧
10 ninaine"on
nabawas
or
Ca990
Ja
Cash accounts
10
January 5, 20x2 Accounts Payable payable niya
Cash 990
The buyer does not recognize freight-in because the seller is the one who is
supposed to pay for the freight. The buyer treats the freight accommodation
C
=>
(Freight collect) as a reduction to the amount that will be remitted to the

seller. The freight does not affect the cost of inventory.
Consigned goods
Under a consignment arrangement, an entity (called the consignor')
delivers goods to another party (called the 'consignee') who undertakes to sell
the goods to end customers on behalf of the consignor.

consignor -
a
considemaabebenta
t
sila pa rin
may ari;
has iny. Darin
nild
The consignor retains control over the consigned goods until they are
sold to end customers. Accordingly, before such sale, the consigned goods remain
in the consignor's inventory.
Since ownership is not transferred, transfers of consigned goods between
the consignor and consignee are usually recorded only through memo entries.
Freight and other incidental costs of transferring consigned goods to the
consignee form part of the cost of the consigned goods. Repair costs for damages
during shipment and storage and other maintenance costs are charged as expense.
In a typical consignment, the consignee is entitled to a commission on
the sales he makes. Commissions are accounted for as expense by the consignor
and as income by the consignee. Accordingly, commissions do not affect the cost
of consigned goods. In cases where commission is paid to the consignee in
advance, the consignor records the advanced commission as receivable and not as
cost of inventory.
ILLUSTRATION 2: Total inventory
ABC Co.'s records on Dec. 31, 20x1 show the following:

 Goods located at the warehouse (physical count)
 Goods located at the sales department (at cost)
C
3,800,000
-
13,600,000
 Goods in-transit purchased FOB Destination 1,600,000
 Goods in-transit purchased FOB Shipping Point -
2,100,000
 Freight incurred under "freight prepaid" for the
goods purchased under FOB Shipping Point -
60,000
 Goods held on consignment from XYZ, Inc. 1,800,000
Requirement: Compute for the total inventory on Dec. 31, 20x1.
Goods located at the warehouse (physical count) 3,800,000

Goods located at the sales department (at cost) 13,600,000
Goods in-transit purchased FOB Shipping Point 2,100,000
Freight incurred under FOB Shipping Point -a
60,000
Total Inventory 19,560,000
ILLUSTRATION 3: Consigned goods
C
ABC Co. consigned goods, costing P10,000, to XYZ, Inc. Transportation costs of
delivering the goods to XYZ totaled- P2,000. Repair costs for goods damaged
during transportation totaled P500. To induce XYZ, Inc. in accepting the
consigned goods, ABC Co. gave XYZ P1,000 representing an advance commission.
How much is the cost of the consigned goods?
Answer: 12,000 (10,000 cost + 2,000 freight)
ILLUSTRATION 4: Correct Inventory and Accounts Payable
On December 31, 20x1, ABC Co. has a balance of P160,000 in its inventory account
determined through physical count and a balance of P100,000 in its accounts
iny 160,000
payable account. The balances were determined before any necessary adjustment
alp 100,000
for the following:
O
a. Merchandise costing P10,000, shipped FOB shipping point from a vendor
on December 30, 20x1, was received and recorded on January 5, 20x2.
b. A package containing a product costing P50,000 was standing in the
shipping area when the physical inventory was conducted. This was not
included in the inventory because it was marked "Hold for shipping
instructions." The sale order was dated December 17 but the package
was shipped and the customer was billed on January 3, 20x2.
c. Goods in the shipping area were included in inventory because shipment
was not made until January 4, 20x2. The goods, billed to the customer
-
FOB shipping point on December 30, 20?1, had a cost of P20,000.
d. Goods shipped F.O.B. destination on December 27, 20?1, from a vendor
to ABC Co. were received on January 6, 20x2. The invoice cost of
hindi
-
C
P30,000 was recorded on December 31, 20?1 and included in the count as
"goods in-transit."
muna dapat
i record

Requirement: Determine the adjusted balances of
(1) inventory and

(2) accounts payable as of December 31, 20x1.
Accounts
Inventory
payable
Unadjusted balances 160,000 100,000
Purchase on FOB shipping
a. 10,000 10,000
pt.
b. Unshipped goods not counted 50,000
c. Unshipped goods counted
FOB destination improperly
d. (30,000) (30,000)
included
Adjusted balances
① 190,000 C
80,000
Inventory Financing Agreements

Inventories may be acquired or sold under various forms of financing
agreements, which may include the following:
supplier
and a. Product financing agreement - a seller sells inventory to a buyer but
merch seller rela-
tionship
assumes an obligation to repurchase it at a later date. br This
no transfer
arrangement does not result to the transfer of control over the asset.
Therefore, the seller retains ownership over the inventory.
b. Pledge of inventory - a borrower uses its inventory as o collateral
inventories as
security for a loan. This arrangement does not result onto the transfer
collateral,
of control over the asset. Therefore, the borrower retains ownership over
transfer OF
No
the inventory.
ownership
 Warehouse financing - under this arrangement, a third party (ex. A
may third party public warehouse) holds the inventory and acts as the creditor’s
involved Ware-
agent. The public warehouse then furnishes the creditor the
-
no
nonse
warehouse receipts evidencing
c. Loan of inventory - an entity borrows inventory from another entity to be
politan ofs ame goods replaced with the same kind of inventory. This arrangement results to
in inventory
transfer of control over the asset. Accordingly, the borrower includes
there is transfer
the loaned goods in its inventory.
Sale with unusual right of return

The buyer normally recognizes goods purchased under a sale with right of
return at the time of sale unless the goods purchased does not qualify for
recognition as asset.
For example, the buyer does not recognize any inventory when:
a. the buyer assesses that no economic benefits will be derived from
the goods, such as when they are defective or unsalable;
or
b. the buyer intends to return the goods to the seller within the time
limit allowed under the sale agreement.
Sale on trial
Under a "sale on trial" (or "sale on approval), a seller allows a
prospective customer to use a good for a given period of time. At the end of
that time, if the prospective customer is satisfied with the good, he purchases
it. If not, he returns it to the seller.
Under this type of arrangement, the legal title over the good does not
pass to the prospective customer until he approves it and purchases it.
Therefore, the good remains in the seller's inventory during the trial period.
Accordingly, the prospective customer does not include the good in his inventory
until he purchases it.
In some arrangements, the good is considered sold if it is not returned
within a reasonable period of time after the trial period has lapsed.
Installment sale
An installment sale where the possession of the goods is transferred to natransfer
the buyer, but the seller retains legal title solely to protect the no yung goods,
pero yung
collectability of the amount due is considered as a regular sale. Therefore,
199 al title an
the goods are excluded from the seller's inventory and included in the buyer's hald seller
inventory at the point of sale. the point of
at pa rin.- to D
sale hattransfer -
and legal title protectthe collec
tibility

Bill and hold arrangement
A bill-and-hold arrangement is a contract (of sale) under which a seller
bills a customer but retains physical possession of the goods until it is
transferred to the customer at a future date.
The goods are excluded from the seller's inventory and included in the
buyer's inventory upon billing, provided:
a. the reason for the bill-and-hold arrangement is substantive (e.g .,
the customer has requested for the arrangement);
b. the goods are identified separately as belonging to the customer;
c. the goods are available for immediate transfer to the customer; and
d. the seller cannot use the goods or sell them to another customer.
Lay away sale

Lay away sale is a type of sale in which goods are delivered only when
the buyer makes the final payment in a series of installments. This is different
from a regular installment sale wherein goods are delivered to the buyer at the
time of sale.
The goods sold under a lay away sale are included in the seller's inventory
until the goods are delivered to the buyer when he makes the final installment
payment. However, when significant payments have already been made,
thegoodsmaybe included in the buyer's inventory, provided delivery is probable.
Remember the following:

Type of Arrangement Included in the inventory
of:
.
FOB shipping Buyer
FOB destination Seller
Consigned goods Consignor
Product financing & Pledge Borrower
Sale with unusual right of Buyer, except when
return unsalable
Sale on trial (or approval) Seller
Bill and hold Buyer
Lay away Seller
ILLUSTRATION 5: Recognition of inventory
The records of ABC Co. show the following information:

a. Goods sold on installment basis whereby the buyer took possession but
ABC retained the legal title to protect the collectability of the sale
price.750,000 installmentsale Seller parin
-
agreements
productfinancing
b. Goods sold but ABC agrees to repurchase at a future date. 680,000 0 D
c. Goods sold where large returns are predictable. 270,000 amen buyer (not us two)
borrower
-
d. Goods received from another entity to be replaced with similar goods at

&
a future date. 580,000 loan oflux-> borrower
Requirement: How much are included in ABC Co.'s inventory?
Answer: 1,260,000 (680,000 product financing + 580,000 loan of

inventory)
ILLUSTRATION 6: Bill and hold and Lay away
ABC Co. had the following transactions during the year:

 Purchased goods costing P10,000. Billing was received but delivery was
delayed per ABC Co.'s request. The goods are segregated and ready for
delivery on demand.
 Purchased goods costing P25,000 on a lay away sale agreement. The goods
will be delivered when ABC Co. fully pays the purchase price. ABC Co.
made total payments of P1,000 during the year.
Requirement: How much are included in ABC's inventory?
Answer: 10,000 - purchased on a "bill and hold" arrangement.

FINANCIAL STATEMENT PRESENTATION
All inventories are aggregated and presented on the statement of financial
position under a single line item captioned "Inventories." The breakdown (i.e.,
finished goods, work in process, and raw materials and manufacturing supplies)
is disclosed in the notes. Inventories are classified as current assets.
Accounting for Inventories

The major objectives of inventory accounting are:
a. Proper determination of periodic income through the recognition of
appropriate costs that are matched with revenue.
b. Proper representation of inventories recognized as assets in the
financial statements.
Inventories are accounted for either through: (a) perpetual inventory system or
(b) periodic inventory system.
Perpetual Inventory System
The perpetual inventory system is called as such because under this
system, the "Inventory" account (or "Merchandise inventory" account) is updated
each time a purchase or sale is made. Thus, the "Inventory" account shows a
continuing or running balance of the goods on hand.
Moreover, records called "stock cards" and "stock ledger cards" are
maintained under this system, from which the quantities and balances of goods
on hand and goods sold can be determined at any given point of time without the
need of performing a physical count of inventories.
-
no need ↑ T
All increases and decreases in inventory, such as purchases, freight-in,
↓ purchase returns,↓ purchase discounts,↓ cost of goods sold, and sales returns I are
N
recorded in the "Inventory" (or "Merchandise inventory") account. "Cost of goods

sold" is also updated each time a sale or sale return is made.
The perpetual inventory system is commonly used for inventories that are
specifically identifiable and are relatively high valued, such as cars,
machineries, furniture, and heavy equipment.
Periodic Inventory System
The periodic inventory system is called as such because under this system,
the "Inventory" account (or "Merchandise inventory" account) is updated only
when a physical count of inventory is performed. Thus, the amounts of inventory
and cost of goods sold are determined only periodically.
Under this system, the business does not maintain records that show the
running balances of inventory on hand and cost of goods sold as at any given
point of time. To determine this information, a physical count of the quantity
of goods on hand must be performed periodically (e.g., on a daily, weekly,
monthly, or annual basis). The quantity counted is then multiplied by the unit
cost to get the balance of the "Inventory" account. quantity cost/ unit inventory
x -
This amount is then used to compute for the "Cost of goods sold," which is the
residual amount in the formula below.
Beginning inventory xx
Add: Net purchases (a) xx
COST OF
900 AS
Total Goods Available for Sale xx
Less: Ending inventory (physical count) (xx) Sold Formula
Cost of Goods Sold XX
(a) "Net purchases" is computed as follows:
Purchases xx
Add: Freight-in xx net purchases
Less: Purchase returns (xx)
Formula
Less: Purchase discounts (xx)
Net purchases XX
A
"Freight-in" is an adjunct account (addition), while ↓"Purchase returns"

I
and ↓"Purchase discounts" are contra accounts (deductions), to -

"Purchases" when
computing for "Net purchases."
 Purchases - the account used to record purchases of inventory under the

periodic system.

 Freight-in (Transportation-in) - the account used to record the shipping
costs incurred on purchases of inventory under the periodic system.
 Purchase returns - the account used to record returns of purchased goods
to the supplier.
 Purchase discounts - the account used to record cash discounts availed of
on the purchased goods.
Under the periodic inventory system, purchases of inventory are debited to

the "Purchases" account, shipping costs are debited to the "Freight-in" account,
purchase returns are credited to the "Purchase returns" account, and purchase
discounts are credited to the "Purchase discounts" account. No entry is made to
recognize cost of goods sold when inventory is sold.
Because the "Inventory" account is updated only after a physical count, prior
to the count, the balance of the inventory account represents the beginning
balance or the balance from the last physical count. Consequently, the balance
of "Cost of goods sold" prior to a physical count is zero.
The periodic inventory system is commonly used for inventories that are
normally interchangeable, relatively low valued, and have a fast turnover rate,
such as grocery items, medicines, electrical parts, and office supplies.
ILLUSTRATION #7: Perpetual system VS Periodic system Journal Entries
Perpetual system Periodic system

(1) You purchased goods worth P10,000 on account.
Inventory 10,000 Purchases 10,000
palagi has a
Accounts payable 10,000 Accounts payable 10,000
inventory
and effect (2) You paid shipping costs of P1,000 on the purchase above. Iba- i band
Inventory 1,000 Freight-in 1,000 respective

Cash 1,000 Cash 1,000 accounts
(3) You returned damaged goods worth P2,000 to the supplier.

Inventory 2,000 Purchase returns 2,000
20.000
(4) You sold goods costing P5,000 for P2,000 to the supplier.
Accounts receivable 20,000 Accounts receivable 20,000

Sales 20,000 Sales 20,000
Cost of goods sold 5,000
Inventory 5,000 No entry
(5) A customer returned goods with sale price of P800 and cost of P200.
Sales returns 800

Sales returns 800
Accounts receivable 800
Accounts receivable 800
record MO
Inventory 200 land Yung price

No entry
Cost of goods sold 200 and its
accts recent e
Notes:
 Under the perpetual inventory system, all increases and decreases in the
goods on hand are recorded through the "Inventory" account. Also, cost of
goods sold is debited when inventory is sold and credited when there is a
sales return.
 Under the periodic inventory system, the increases and decreases in the
goods on hand are recorded through the purchases, freight-in, purchase
returns, and purchase discounts accounts. Cost of goods sold is not recorded.
Under the perpetual inventory system, the balances of inventory on hand and
cost of goods sold are readily determinable from the ledger. See T-accounts
below:
Inventory
Beg. Bal.
(1)Purchases 10,000 2,000 (3)Purchase return
(2)Freight-in 1,000 5,000 (4)Cost of goods sold
(5)Sales return 200
4,200

Cost of Goods Sold
(4)COGS 5,000
200 (5)Sales return
4,800
Under the periodic inventory system, the balances of inventory on hand

and cost of goods sold are not readily determinable without performing first a
physical count of the quantity of goods on hand.
Assume that a physical count revealed inventory on hand of 105 units

costing P40 per unit. Using the formula above, the inventory on hand and cost
of goods sold under the periodic inventory system are determined as follows:
Beginning inventory 0
ginagamit and Formn-
Purchases (1) 10,000 ito Kapad
la na
Freight-in (2) 1,000 system damit
periodic
Purchase returns (3) (2,000)
Purchase discounts 0
Net purchases 9,000
Total goods available for sale 9,000
Ending inventory (105 units x P40 per unit) (4,200)
Variation: Shortages/Overages
When an entity uses a perpetual inventory system, and a difference exists
between the perpetual inventory balance and the physical inventory count, there
is inventory shortage or overage.
Assume in the illustration above that the physical count revealed a balance of
P4,000. The inventory shortage is determined as follows:
Balance per count 4,000
Balance per records 4,200
Difference- shortages (200)
The adjusting entry under perpetual system is as follows:
Loss on inventory shortage (or Inventory shortage or overage) 200

C
-
Inventory 200
Inventory shortage is charged to cost of goods sold if it is considered

normal spoilage, (e.g ., shrinkage and breakages within a tolerable limit set
by management). If considered abnormal spoilage, the shortage is charged as
loss, e.g., theft, pilferage, and loss on casualty.
danil Note that an entity using the periodic inventory system does not report
Wala na-
the account Inventory shortage overage. The reason is that the periodic method
mana
ganito na
does not have accounting records against which to compare the physical count.
manqyaua-
As a result, the entity subsumes inventory overages and shortages in cost of
ri goods sold.
Perpetual system Periodic system

All increases and decreases in inventory are Increases and decreases in inventory during
recorded in the "Inventory" account. the period are recorded in the purchases,""
"freight-in,’ “purchase returns," and
"purchase discounts" accounts, as appropriate.
"Cost of goods sold" is debited when inventory "Cost of goods sold" is not recorded.
is sold and credited for sales returns.
Physical count is performed only to check the Physical count is necessary to determine the
accuracy of the ledger balances. balances of inventory on hand and cost of
goods sold.
Does not require the use of any formula to Requires the use of the following formula when
determine cost of goods sold because this determining cost of goods sold:
information is readily available from the BI XX
ledger. Net purchases XX
TGAS XX
EI (physical count) (XX)
COGS XX

Inventory Errors Under the Periodic Inventory System
Under the periodic system, cost of goods sold is a residual amount. Thus,
it is affected by errors in ending inventory, beginning inventory and net
purchases. When cost of goods sold is misstated, so is the profit for the
period.
We will use the following guidance in determining the effects of inventory

errors on profit under a periodic system: Ending inventory profit and
directrelation
ENDING INVENTORY: PROFIT - DIRECT RELATIONSHIP gota
-
I
ship. Meiny profit
being profit
a
Ending inventory and Profit have a direct relationship. Direct

relationship means that if ending inventory is understated, profit is also
understated.
From the main guidance above, we can also derive the following relationships:
 Beginning inventory & Purchases: Profit - Inverse relationship
 Ending inventory: Cost of goods sold - Inverse relationship
 Beginning inventory & Purchases: Cost of goods sold - Direct relationship
Inverse relationship means that if an account (e.g., ending inventory) is

understated, the related account (e.g., cost of goods sold) is overstated.
ILLUSTRATION 8: Inventory Errors
Ending inventory is understated by P5,000. The effects of the errors are

analyzed as follows:
Should be Erroneous Effects

Inventory, beg. 10,000 10,000
Net purchases 100,000 100,000
Total goods avail.
110,000 110,000
for sale
understated by
Inventory, end. (20,000) (15,000)
P5,000
Cost of goods sold 90,000 95,000 overstated by P5,000
Net sales 220,000 220,000

Cost of goods sold (90,000) (95,000)
understated by
Gross profit 130,000 125,000
P5,000
If a contra-purchases account (i.e., purchase returns and discounts) is

misstated, its effect would be the reverse of the effect of the purchases
account. For example, if purchase returns is understated, the effect on profit
is also understatement, a direct relationship - the reverse of the effect of
purchases on profit which is inverse relationship.
If an adjunct-purchases account (i.e., freight-in) is misstated, its
effect would be the same as the effect of purchases account. For example, if
freight-in is understated, the effect on profit is overstatement - the same as
the effect of purchases on profit which is inverse relationship.
Errors in purchases account (and contra and adjunct accounts) affect only
cost of goods sold and profit. They do not affect ending inventory because
ending inventory is determined independently through physical count. amen be periodic.
The above-mentioned relationships are not applicable under a perpetual
inventory system because cost of goods sold under perpetual inventory is
determined independently of the physical count of ending inventory.
contra-purchases accounts:
>purchase returns
>purchase discounts
adjunct -
purchases accounts:
in
>
Freight
perpetual inn sas-no physi-
cal cont
periodic in sus-may
phusical count

Life Application:
Physical Inventory vs. Cycle Counting
A physical inventory is a comprehensive, often annual count of the stock a
company has on-hand. Cycle counting is a more systematic method of counting
portions of the stock. Companies sometimes conduct cycle counting as often as
daily, and it’s advisable to perform them at least quarterly.
Physical inventory is not always automated. Cycle counting is typically

automated, however. Automation streamlines the inventory process overall,
whether physical or cycle counts. It saves time, eliminates most human error,
and enables real time and useful data. The most accurate inventory counts are
those that combine cycle counts with automation.
Summary:
 Inventories are assets that are held for sale in the ordinary course of
business activities.
 Inventories are recognized when they meet the definition of inventory and
they qualify for recognition as assets, such as when legal title is
obtained by the buyer from the seller.
 The two inventory systems are: (1) Perpetual system and (2) Periodic
system.
 If ending inventory is overstated, Profit is also overstated.
--------------------------------------------------------Nothing follows-------
---------------------------------------------------------
https://www.iasplus.com/en/standards/ias/ias2
https://www.ifrs.org/issued-standards/list-of-standards/ias-2-inventories/
https://www.netsuite.com/portal/resource/articles/inventory-
management/physical-counts-inventory.shtml

Topic: Inventories Part II
 Measure inventories and apply the cost formulas.
 Account for inventory write-down and the reversal thereof.

Colossians 3:16
Let the message of Christ dwell among you richly as you teach and admonish one
another with all wisdom through psalms, hymns, and songs from the Spirit,
singing to God with gratitude in your hearts.
Learning Activity:
IAS 2 provides guidance for determining the cost of inventories and the
subsequent recognition of the cost as an expense, including any write-down to
net realizable value. It also provides guidance on the cost formulas that are
used to assign costs to inventories.
Introduction:
IAS 2 Inventories contains the requirements on how to account for most types of
inventory. The standard requires inventories to be measured at the lower of
cost and net realizable value (NRV) and outlines acceptable methods of
determining cost, including specific identification (in some cases), first-in
first-out (FIFO) and weighted average cost.
Body:
MEASUREMENT
Inventories are measured at the lower of cost and net realizable value.
I. COST
The cost of inventories comprises the following:

a. Purchase cost - this includes the purchase price (net of trade discounts
and other rebates), import duties, non-refundable or non-recoverable
purchase taxes, and transport, handling and other costs directly
attributable to the acquisition of the inventory.
o Purchase cost excludes refundable or recoverable taxes.
o Trade discounts, rebates and other similar items are deducted in
determining the purchase cost.
b. Conversion costs - these refer to the costs necessary in converting raw

materials into finished goods.
c. Other costs necessary in bringing the inventories to their present

location and condition.
The following are excluded from the cost of inventories and are expensed in the
period in which they are incurred:
a. Abnormal amounts of wasted materials, labor or other production costs.
b. Selling costs, e.g., advertising and promotion costs and delivery expense
or freight out.
c. Administrative overheads that do not contribute to bringing inventories
to their present location and condition; and
d. Storage costs unless those costs are necessary in the production stage.
S  Storage costs of partly finished or partly completed goods are
capitalized as cost of inventory, e.g., storage cost of wine during
partly-finished goods fermentation.
D partOFCOSA
 Storage costs of finished or completed goods are expensed,
-
Finished 900 as e.g., warehousing costs of completed inventories.

expense
-

ILLUSTRATION 1: Cost of purchase
ABC Co., a VAT payer, imported goods from a foreign supplier and incurred the
following costs:
Purchase price 100,000

Import duties 10,000
Value added tax 13,000
Transportation and handling costs 5,000
Commission to broker __2,000
TOTAL 130,000
Requirement: How much is the purchase cost of the goods?
Inventory 117,000
Input VAT 13,000
Cash 130,000
If the purchaser is not a VAT payer, the VAT paid is capitalized as cost
of inventory because, for a non-VAT business, any VAT paid is considered non-
refundable/non-recoverable.
Trade discounts and Cash discounts
 Trade discounts given to  Cash discounts given to encourage

prompt payment.
encourage orders in large
 deducted from the invoice price
quantities. when determiningthe amount of net
 deducted from the list payment required within the
discount period.
price when determining the
 reflected in the books of the buyer
invoice price. and seller.
 not recorded in the books
of either the buyer or the
seller.
Accounting for cash discounts
The two accounting methods for cash discounts are:

a. Gross Method - The cost of inventory and accounts payable are recorded
gross of cash discounts.
 Cash discounts are recorded under the "Purchase discounts" account
only when taken. Purchase discounts is deducted from gross purchases
when computing for net purchases.
b. Net Method - The cost of inventory and accounts payable are initially
recorded net of cash discounts, whether taken or not.
 Cash discounts not taken are recorded under the "Purchase discounts
lost" account and included as part of "other expense" or as "finance
cost" (interest expense).
ILLUSTRATION 2: Accounting for cash discounts
An entity purchases inventory with a list price of P10,000 on account under

credit terms of 20%, 10%, 2/10, n/30.
GROSS METHOD NET METHOD

Purchase of inventory
Purchases 7,200 Purchases 7,056

Assume payment is made within discount period.
Purchase Discounts 144
Cash 7,056
Cash 7,056
Assume payment is made beyond discount period.
Purchase Discounts Lost 144
Cash 7,200
Cash 7,200
Conversion costs
Conversion costs refer to direct labor and manufacturing overhead that
are necessary in converting raw materials into finished goods.
Manufacturing overhead (a.k.a. factory overhead, factory burden,
production overhead and manufacturing support costs) refers to costs that are
not directly traceable to the finished goods but are necessary in producing
those goods
Examples: depreciation on factory equipment, cost of electricity to run
factory equipment
Manufacturing overhead is classified into:

1. Variable production overheads are indirect costs of production that vary
directly with the volume of production, such as indirect materials and
indirect labor.
2. Fixed production overheads are indirect costs of production that remain
relatively constant regardless of the volume of production, such as
depreciation and maintenance of factory buildings and equipment, and cost
of factory management and administration.
Allocation of Production Overheads

1. Fixed production overheads are allocated to the costs of conversion based
on the normal capacity of the production facilities.
 Normal capacity is the production expected to be achieved on average expected produc-
tion;taking note
over a number of periods or seasons under normal circumstances, taking ofthe decreasing
into account the loss of capacity resulting from planned maintenance. capacity ofthe
Facilities
 The actual level of production may be used if it approximates normal
capacity. The amount of fixed overhead allocated to each unit of
production is not increased as a consequence of low production or idle
plant.
 Unallocated overheads are recognized as expenses in the period in which
they are incurred.
2. Variable production overheads are allocated to each unit of production

based on the -
actual use of the production facilities.
Kung gadno ginagamit
and prod facilities
Absorption Costing and Variable Costing

1. Absorption (Full) Costing is a costing method in which both fixed and
variable production overheads are included in the cost of inventories.
2. Variable Costing is a costing method in which only variable production

overhead is included in the cost of inventories. Fixed production overhead
is expensed immediately. variable included -
Fixed
- expensed
PAS 2 requires the use of absorption costing. Variable costing is used only for
internal reporting purposes.
Joint and By-products

A production process may result in more than one product being produced
simultaneously. This is the case, for example, when joint products are produced
(i.e., main product and a by-product).

When the conversion costs of each product are not separately identifiable,
they are allocated between the products on a rational and consistent basis. The
allocation may be based, for example, on the relative sales value of each
product either at the stage in the production process when the products become
separately identifiable, or at the completion of production.
Most by-products, by their nature, are immaterial. When this is the case,
they are often measured at net realizable value and this value is deducted from
the cost of the main product. As a result, the carrying amount of the main
product is not materially different from its cost.
Standard Cost System

Standard costs are budgeted inventory unit costs established to motivate
optimal productivity and efficiency. Standard costs take into account normal
levels of materials and supplies, labor, efficiency and capacity utilization.
They are regularly reviewed and, if necessary, revised in the light of current
conditions.
A Standard Cost System is designed to alert management when the actual
costs of production differ significantly from target or standard costs. The use
of a standard cost system is allowed under PAS 2 for convenience provided the
results approximate cost. normal levels ofmaterials and supple in
Standardcutsustenand productivity
IADOr
efficiency
capacity utilization
Borrowing Costs
Borrowing cost (interest) forms part of the cost of inventory only if it
is incurred on borrowings taken to finance the acquisition or production of
inventory that meets the definition of a qualifying asset. A qualifying asset
is an asset that necessarily takes a substantial period of time to get ready
for its intended use or sale.
All other interests are charged as expenses.
Deferred Settlement Terms

When payment for purchases is deferred and the arrangement effectively
contains a financing element, the difference between the purchase price for
normal credit terms and the amount paid is recognized as interest expense over
the period of the financing. purchase price for normal credit
) amountpaid)
ILLUSTRATION 3: Deferred Payment C A interest expense for the period
naging deferred
On January 1, 20x1 ABC Co. acquired goods for sale in the ordinary course of
paymentdahil
business for P100,000, including P5,000 refundable purchase taxes. The supplier dapatwithin
usually sells goods on 30 days' interest-free credit. However, as a special 30 days pero
minove / ni extend
promotion, the purchase agreement for these goods provided for payment to be
to a near.
made in full on December 31, 20?1. In acquiring the goods, transport charges of
P2,000 were paid on January 1, 20x1. An appropriate discount rate is 10% per
year.
REQUIREMENT: Compute for the initial cost of the inventories.
Total purchase price 100,000

Refundable purchase taxes (e.g ., Value added tax) (5,000)
Purchase price excluding refundable purchase taxes 95,000 Kasi youre
Multiply by: PV of P1 @10%, n=1 0.90909- D
paying For some
-
which
Cash price equivalent of inventory purchased 86,364 thing
period
a
is for
Transport costs (Freight-in) 2,000 emer
Initial cost of inventories 88,364
Cost of Agricultural Produce Harvested from Biological Assets

Inventories comprising agricultural produce harvested from biological
assets are initially measured at fair value less cost to sell at the point of

harvest in accordance with PAS 41 Agriculture. This will be the deemed cost for
subsequent measurement at the lower of cost and net realizable value using PAS
2.
Cost of Inventories Purchased in Lump Sum

The cost of different inventories having different values purchased on a
lump sum basis is allocated to the inventories based on their relative sales
prices.
ILLUSTRATION 4: Purchase in lump sum
ABC Co. acquired a tract of land for P1,000,000. The land was developed and
subdivided into residential lots at an additional cost of P200,000. Although
the subdivided lots are relatively equal in sizes, they were offered at
different sales prices due to differences in terrain. Information on the
subdivided lots is shown below:
Lot Group No. of Lots Price per Lot

A 4 400,000
B 10 200,000
C 15 160,000
REQUIREMENT: Compute for the allocated costs of the groups of lots.

Lot Groups No. of Price per Total Allocation Allocated
Lots Lot price per (to the relative Costs
lot group price (
C
sales
talnilate
a b c = a x b
the
A 4 400,000 1,600,000 1.2M x 320,000

(1.6/6)
B 10 200,000 2,000,000 1.2M x 400,000
(2/6)
C 15 160,000 2,400,000 1.2M x 480,000
(2.4/6)
~90,000,000
6,000,000 1,200,000
The cost per lot in group is computed as follows:

Lot Groups Allocated Costs No. of Lots cost per lot
a b c = a ÷ b
A 320,000 4 80,000
B 400,000 10 40,000
C 480,000 15 32,000
1,200,000
Cost formulas
One of the major objectives of inventory accounting is the determination of
costs of inventories recognized as expense when the related revenues are
recognized. This is important for the proper determination of periodic income.
Proper determination of such costs may be obtained by selecting an appropriate
cost formula from the following:
1. Specific identification - this shall be used for inventories that are not
ordinarily interchangeable (i.e., those that are individually unique) and
those that are segregated for specific projects.

Under this formula, specific costs are attributed to identify items of
inventory. Accordingly, cost of sales represents the actual costs of the
specific items sold while ending inventory represents the actual costs of
the specific items on hand.
2. First-In, First-Out (FIFO) - Under this formula, it is assumed that

inventories that were purchased or produced first are sold first, and
therefore unsold inventories at the end of the period are those most recently
purchased or produced.
Accordingly, cost of sales represents costs from earlier purchases while
the cost of ending inventory represents costs from the most recent purchases.
3. Weighted Average - Under this formula, cost of sales and ending inventory
are determined based on the weighted average cost of beginning inventory
and all inventories purchased or produced during the period. The average
may be calculated on a periodic basis or as each additional purchase is
made, depending upon the circumstances of the entity.
The cost formulas refer to "cost flow assumptions," meaning they pertain
to the flow of costs (i.e. ., from inventory to cost of sales) and not
necessarily to the actual physical flow of inventories. Thus, the FIFO or
Weighted Average can be used regardless of which item of inventory is
physically sold first.
Same cost formula shall be used for all inventories with similar nature and
use. Different cost formulas may be used for inventories with different nature
or use. PAS 2 does not permit the use of a last-in, first out (LIFO) cost
formula.
ILLUSTRATION 5: Cost formulas
ABC Co. is a wholesaler of guitar picks. The activity for product "Pick X"
during August is shown below:
Unit Total
Date Transaction Units
Cost Cost
08 - 01 Inventory
2,000 36.00 72,000
08 - 07 Purchase
3,000 37.20 111,600
08 - 12 Sales
4,200
8 - 13 Sales Return
600
8 - 21 Purchase
4,800 38.00 182,400
8 - 22 Sales
3,800
8 - 29 Purchase
1,900 38.60 73,340
Purchase
8 - 30
Return 300 38.60 (11,580)
Total Goods Available for Sale
₱427,760
REQUIREMENTS: Compute for the (a) ending inventory and (b) cost of goods sold
under the following cost formulas:
1. FIFO - periodic
2. FIFO - perpetual
3. Weighted average - periodic
4. Weighted average - perpetual
1. FIFO - PERIODIC
Beginning inventory in units 2,000

Net purchases in units (3,000 + 4,800 +
9,400
1,900- 300)
Total goods available for sale in units 11,400
Total goods available for sale

11,400
in units
Quantity of goods sold (4,200 - 600 +
(7,400)
3,800)
Ending inventory in
4,000
units
Using the concept that the cost of ending inventory under FIFO is from the cost
of the most recent purchase, the ending inventory in units is allocated as
follows:
Unit Total
Units
Cost Cost
Ending Inventory to be allocated 4,000
Allocated as follows:
From Aug. 29 net purchases (1900 - 300) (1,600) ₱61,760
₱38.60
Balance to be allocated to the next most
2,400
recent purchase date
From Aug. 21 purchase (2,400) 91,200
38.00
Ending Inventory at Cost ₱152,960
Cost of Goods Sold is computed as follows:

Total Goods available for Sale 427,760
Ending inventory at cost (152,960)
Cost of Goods Sold ₱274,800
2. FIFO - PERPETUAL
Unit Total
Cost Cost
1 Aug Inventory 2,000 ₱36.00 ₱72,000
7 Aug Purchase 3,000 37.20 111,600

12 Aug Net Sales 3,600
Stanai, Murchasen,
Allocation:
from Beg.
Inventory (2,000) 36.00 (72,000)
Year
from Aug. 7
purchase -
(1,600) 37.20 -
(59,520)
21 Aug Purchase 4,800 38.00 182,400

22 Aug Sales 3,800 ofarran
C
Allocation: maynatifiva
sold:)
~ the and Ipurchase
from Aug. 7 pa From
&
purchase -
(1,400) 37.20 (52,080)
from Aug. 21 ~and
al purchase
purchase -
(2,400) 38.00 (91,200)
29 Aug Net Purchases 1,600 38.60 61,760

Ending Inventory at Cost ₱152,960
Cost of Goods Sold is computed as follows: 72,000 + 59,520 + 52,080 + 91,200 =

₱274,800
3. WEIGHTED AVERAGE – PERIODIC
The weighted average unit cost is computed as follows:

Total Goods available for Sale (TGAS in
Weighted Pesos)
Ave. Unit Total Goods available for Sale (TGAS in
Cost = Units)
Weighted ₱427,760
Ave. Unit = ₱37.52
11,400
Cost =
Ending inventory in units 4,000

Multiply by: Weighted average unit cost ₱37.52
Ending inventory at cost ₱150,080
Total goods available for sale in pesos 427,760

Cost of Goods Sold ₱277,680
4. WEIGHTED AVERAGE - PERPETUAL (MOVING AVERAGE)
A new weighted average unit cost is computed after every purchase. Cost of goods
sold is determined using the moving average unit cost on the date of sale.
Unit Total
Cost Cost
1 Aug Inventory 2,000 ₱36.00 ₱72,000
I 37.20
(02)
7 Aug Purchase 3,000 111,600 185,600 total cost
Moving Ave. Unit Cost 5,000 ₱36.72 ₱183,600 -
D
5,000 -
total units
12 Aug Sales (4,200) 36.72 (154,224)
C.
Sales Return 600 36.72 22,032
21 Aug Purchase 4,800 38.00 182,400

Moving Ave. Unit Cost -
6,200 ₱37.71 ₱233,808
22 Aug Sales (3,800) 37.71 (143,298)
29 Aug Purchase 1,900 38.60 73,340 -340 58.8

=
Purchase Return (300) 38.60 (11,580)

Ending Inventory in Units and at
Cost 4,000 ₱152,270
Cost of Goods Sold is computed as follows: P154,224 - P22,032 + P143,298 =

₱275,490
ILLUSTRATION 6: FIFO vs LIFO
Unit Total
Units
Cost Cost
Beginning - Aug. 1 800 ₱1.00 800
Purchases - August 14 1,000 2.00 2,000
Purchases - August 21 1,200 2.50 3,000
Total Goods Available
for Sale 3,000 ₱ 5,800
Units on hand on August 31 .... 500
REQUIREMENTS: Compute for the following:

a. Ending inventory and cost of goods sold under FIFO.
b. Ending inventory and cost of goods sold under LIFO.

Requirement (a): FIFO
Ending inventory in units 500
Multiply by: Unit cost from latest purchase (Aug. 21) 2.50
Ending inventory in pesos ₱1,250

Cost of goods sold ₱4,550
Requirement (b); LIFO

Ending inventory in units 500
Multiply by: Unit cost from beginning inventory 1.00
Ending inventory in pesos ₱500

Ending inventory at cost (500)
Cost of goods sold ₱5,300
ILLUSTRATION 7: FIFO vs LIFO
With LIFO, cost of goods sold is P390,000 and ending inventory is P90,000. If
FIFO ending inventory is P130,000, how much is FIFO cost of goods sold?
CGAS/TGAS 480,000
FIFO ending inventory (given) (130,000) When is cost > NRY
FIFO cost of goods sold ₱350,000
· Obsolete 100d/
o tumads yung costs to sell
II. NET REALIZABLE VALUE (NRV)
Inventories are measured at the lower of cost and net realizable value.
Net realizable value is "the estimated selling price in the ordinary
course of business less the estimated costs of completion and the estimated
costs necessary to make the sale."
NRV is different from fair value. "Net realizable value refers to the net
amount that an entity expects to realize from the sale of inventory in the -
ordinary course of business. Fair value reflects the price at which an orderly ·jo
transaction to sell the same inventory in the principal (or most advantageous)
market for that inventory would take place between market participants at the
measurement date. The former is an entity-specific value; the latter is not.
Net realizable value for inventories may not equal fair value less costs to
sell."
Measuring inventories at the lower of cost and NRV is in line with the
basic accounting concept that an asset shall not be carried at an amount that
exceeds its recoverable amount. The cost may exceed the recoverable amount if,
for example, the inventory is damaged, becomes complete obsolete, or prices to
sell have the declined, inventory or have the estimated costs to circumstances,
the cost of the inventory is increased. In these written-down to NRV.
Write-down of inventory
Inventories are usually written down to net realizable value on an item-
by-item basis.
If the cost of an inventory exceeds its NRV, the inventory is written
down to NRV, the lower amount. The excess of cost over NRV represents the amount
of write-down.
ILLUSTRATION 8: Write-down of inventory
Information on ABC Co.'s inventories on Dec. 31, 20x1 is as follows: (All costs
are borne by ABC Co.) 10
Product Product
X Y
Number of units 2,000 3,000
Purchase cost (per unit) ₱100 ₱200

Delivery cost from supplier (per
unit) 20 30
Estimated selling price (per
unit) 150 250
Selling costs (per unit) 22 40
General and administrative (per
unit) 15 18
REQUIREMENTS:
a. Compute for the amount of write-down. Provide the entry.
b. Compute for the valuation of the inventories in ABC's December 31, 20x1
statement of financial position.
Requirement (a): Write-down of raw materials -

-
- -
Product Product
X Y
Cost
Purchase Cost 100 200

Delivery cost from supplier
(freight in) 20 30
Cost per unit ₱120 ₱230
Net Realizable Value
Estimated selling price 150 250

Selling costs (22) (40)
NRV per unit ₱128 ₱210
Lower of Cost and NRV ₱120 ₱210
Journal Entry:
Write Down
-si
60,000
12/31/20x1 Cost of Goods Sold 60,000

Inventory 60,000
Requirement (b): Inventory Valuation

Product X Product Y
Lower of Cost and NRV O120 O210
Multiply by: Number of Units 2000 3000
Inventory, December 31, 20x1 ₱240,000 ₱630,000
Write-down of Raw Materials

Raw materials inventory is not written down below cost if the finished Finished 900d/
goods in which they will be incorporated are expected to be sold at or above Atsold
COSt
cost. If, however, this is not the case, the raw materials are written down to
C above cost or
their NRV. The best evidence of NRV for raw materials is replacement cost. no write
dOWn +8
below cost
ILLUSTRATION 9: Write-down of Raw Materials
Information on Entity A's inventories is as follows:

Raw materials Finished goods
cost is
Cost 60,000 100,000 160,000
=>
less than
Replacement cost/NRV 50,000 120,000 170,000
=
NRY
REQUIREMENT: Compute for the valuation of the inventories in Entity A's

statement of financial position.
P160,000 TOTAL COST (60,000 cost of raw materials + 100,000 cost of

finished goods).

The raw materials need not be written down to replacement cost because
the cost of the finished goods is less than the NRV (100,000
cost<120,000NRV).
Reversal of Write-Downs
The amount of reversal to be recognized should not exceed the amount of
the original write-down previously recognized.
Write down entry:
ar. 100S
Cr. Inv
reversal ofwrite down:
dr. inv
Cr 106S
ILLUSTRATION 10:
Information on ABC Co.'s inventories is as follows:
20,088
20x2 20x1 amount
->
Inventory, December 31 at cost 300,000 240,000 OFWrite down
Inventory, December 31 at NRV 330,000 220,000

Cost of goods sold before adjustments 1,800,000 2,000,000
REQUIREMENTS:
a. Provide journal entries in 20x1 and 20x2.
b. Compute for the (a) adjusted ending inventories and (b) costs of goods sold
as of Dec. 31, 20x1 and 20x2. Assume that all write-downs are not considered
material.
Requirement (a):
Write-down:
12/31/20x1 Cost of goods sold 20,000
Inventory 20,000
Reversal of write-down:
12/31/20x2 Inventory 20,000
(deducted)
Requirement (b): Write down revetee

f P
here
20x1 20x2
Cost 240,000 300,000
(Write-down) / Reversal (20,000) 20,000
Adjusted Ending
Inventories 220,000 320,000 Write dOXYnS:
daddad sa 206s
balance write
20x1 20x2 sa
dovon yr.
Unadjusted Cost of Goods
Sold 2,000,000 1,800,000 reveral year,
(Write-down) / Reversal 20,000 (20,000) baNas na sa C06S
Adjusted Cost of Goods

Sold 2,020,000 1,780,000
Variation: Material/Abnormal write-down

If the write-down is considered material or have resulted from abnormal loss,
the write-down would be charged as loss. Consequently, the reversal is
recognized as gain.
The journal entries would be as follows:

12/31/20x1 Impairment Loss 20,000
Inventory 20,000
12/31/20x2 Inventory 20,000

Gain 20,000

Purchase Commitments
A firm purchase commitment is "an agreement with an unrelated party,
binding on both parties and usually legally enforceable, that
a. specifies all significant terms, including the price and timing of
the transactions, and
b. includes a disincentive for non-performance that is sufficiently
large to make performance highly probable."
A contracting party under a firm purchase commitment cannot cancel the

contract without suffering penalty. Thus, the buyer has to accept future
delivery even if the goods promised to be purchased become impaired. In such
case, the buyer recognizes loss on purchase commitment.
When prices subsequently increase, the buyer recognizes gain on purchase
commitment. However, the gain should not exceed the loss on purchase commitment
previously recognized.
ILLUSTRATION 11: Purchase commitment
On January 1, 20x1, ABC Co. signed a three-year, non-cancelable purchase

contract that allows ABC Co. to purchase up to 60,000 units of a microchip
annually from XYZ Co. at P25 per unit. The guaranteed minimum purchase is 15,000
units per year. At yearend, it was found out that the goods are obsolete. ABC
Co. had 10,000 units of this inventory at December 31, 20x1, and believes these
parts can be sold as scrap for P5 per unit.
REQUIREMENT: Compute for the loss on purchase commitment to be recognized on

December 31, 20x1.
Guaranteed minimum annual purchase 15,000

Multiply by: Remaining yrs. in the contract 2
Total goods to be accepted in the future 30,000
Multiply by: Purchase price per unit less salvage value
- - 20___
Loss on purchase commitment 5 600,000
(5
12/31/20x1 Loss on Purchase Commitment 600,000
Estimated Liability on Purchase Commitment 600,000
aUrineen
12/31/20x1 Impairment Loss 200,000
Inventories 200,000
↳ Value
Loss on purchase commitment is recognized only on guaranteed future

purchases. Consequently, "Impairment loss" and not "Loss on purchase
commitment" is recognized on the 10,000 units on hand on December 31,
20x1.
T-ACCOUNT ANALYSIS
Most accounting problems can be solved much easier using T-account
analysis than formulas. In this section, we will solve for common accounting
problems regarding inventory using T-accounts.

The beg. Balance is Inventory
placed on the DEBIT side
because “Inventory” is an COGS is placed on the CREDIT
asset
Beg. Bal. xx
side because the goods sold
Cost of decrease the balance of
Net goods inventory.
Net purchases is places Purchases xx xx sold
on the DEBIT side because
purchases increase the End.
balance of inventory The End. Balance is placed on
XX Balance the CREDIT side to facilitate
the “squeezing” of amounts.
The sum of the amounts of
debit side must be equal to
the sum of the amounts on the
credit side.
Case 1: Ending inventory Inventory

Inventory, beg. P40,000
Net Purchases P180,000 Beg. Bal. 40,000
COGS P200,000 Net Cost of goods
Purchases 180,000 200,000 sold
How much is the Ending Inventory?
20,000 End. Balance
Case 2: Cost of goods Sold

Inventory, beg. P60,000 Inventory
Net Purchases P270,000
Inventory, end. P90,000 Beg. Bal. 60,000
Net Cost of goods
How much is the Cost of Goods Sold? Purchases 270,000 240,000 sold (squeeze)
90,000 End. Balance
Case 3: Net purchases Inventory

Inventory, beg. P40,000
COGS P200,000 Beg. Bal. 40,000
Inventory, end. P20,000
Net
How much is the Net purchases? Purchases Cost of goods
(squeeze) 180,000 200,000 sold
20,000 End. Balance
Case 4: Inventory, beginning

Net Purchases P270,000 Inventory
COGS P240,000
Inventory, end. P90,000 Beg. Bal.
(squeeze) 60,000
How much is the Inventory,
beginning? Net Cost of goods
90,000 End. Balance
Case 5: Inventory, beginning

COGS P240,000
Inventory, end. P90,000 Beg. Bal. --
Net Cost of goods

90,000 End. Balance

How much is the Total Goods Avail for sale?
CGAS/TGAS = Inventory, Beg. + Net Purch
Inventory, End + COGS
330,000 = 90,000 + 240,000
Case 6: Increase in Inventory - COGS Inventory

Net Purchases P270,000
Increase in Inv. DTY P90,000 Beg. Bal. 0
How much is the Cost of Goods Sold? Net Cost of goods

Purchases 270,000 180,000 sold (squeeze)
90,000 End. Balance

Case 6: Decrease in Inventory - COGS
Decrease in Inv. DTY P90,000
Beg. Bal. 90,000
How much is the Cost of Goods Sold?
Net Cost of goods
Purchases 270,000 360,000 sold (squeeze)
0 End. Balance
Life Application:
Physical Inventory vs. Cycle Counting
A physical inventory is a comprehensive, often annual count of the stock a
company has on-hand. Cycle counting is a more systematic method of counting
portions of the stock. Companies sometimes conduct cycle counting as often as
daily, and it’s advisable to perform them at least quarterly.
Physical inventory is not always automated. Cycle counting is typically

automated, however. Automation streamlines the inventory process overall,
whether physical or cycle counts. It saves time, eliminates most human error,
and enables real time and useful data. The most accurate inventory counts are
those that combine cycle counts with automation.
Summary:
 Specific identification - is used for inventories that are not ordinarily
interchangeable (i.e., inventories that are unique). Cost of sales is
the cost of the specific inventory that was sold.
 FIFO – cost of sales is based on the cost of inventories that were
purchased first. Consequently, ending inventory represents the cost of
the latest purchases.
 Weighted Average Cost – cost of sales is based on the average cost of
all inventories purchased during the period.
o Wtd. Ave. Cost = (TGAS in pesos ÷ TGAS in units)
 If the cost of an inventory exceeds its NRV, the inventory is written
down to NRV, the lower amount. The excess of cost over NRV represents
the amount of write-down.
 The amount of reversal to be recognized should not exceed the amount of
the original write-down previously recognized.
----------------------------------Nothing follows-----------------------------
https://www.iasplus.com/en/standards/ias/ias2
https://www.ifrs.org/issued-standards/list-of-standards/ias-2-inventories/
https://www.netsuite.com/portal/resource/articles/inventory-
management/physical-counts-inventory.shtml

Topic: Inventory Estimation
Learning Outcomes:
a. Apply the methods of Inventory Estimation

Let Go. Let God. “For we fix our attention, not on things that are seen, but on
things that are unseen. What can be seen lasts only for a time, but what cannot
be seen lasts forever. (2 Corinthians 4:16-18)
Introduction:
Inventory Estimation
There may be instances where the value of inventories must be estimated, such
as when it is not practicable to take a physical count. For example, in the
interest of timeliness and cost consideration an entity may elect to rely on pay
estimates of inventory at interim dates. Another instance is when records of estimation
inventories are incomplete and inventories must be approximated.
O
V
Estimates are allowed under PAS 2 only if they approximate the cost. Generally,
inventory estimation is made only for interim reporting. For annual reporting,
physical count of inventories is more appropriate. inventory estimation interim reporting
-
physical count -
annual reporting
The cost of inventories may be estimated using either the (a) gross profit
method or the (b) retail method.
Body:
GROSS PROFIT METHOD
Under the gross profit method, gross profit is assumed to be relatively constant
from period to period. Thus, the gross profit rate (GPR) is used to determine
the cost ratio which in turn is used to estimate the inventory and the cost of
goods sold.
Gross profit rate can be expressed as a percentage (a) based on sales, or (b)
based on cost of goods sold. &% sales on
⑧ on coass
The gross profit rates of an entity with sales of P1,000 and cost of goods sold
of P800 are computed as follows:
Net Sales 1,000 GPR based on sales GPR based on cost

net sales Cost of Goods Sold (800) 200/1,000 = 20% 200/800 = 25%
/1091 (
gross profit
Gross Profit 200 ↓ ↓
sales COSOF
900dS 101d
*Note that GPR based on cost can be translated to GPR based on sales. See below
illustrations.
1. If GPR based on cost is 25%, what is the GPR based on sales?
Net Sales (squeeze) 125%

Cost of Sales (constant) (100%)
Gross Profit rate based on cost 25%
 GPR based on sales (25%/125%) = 20%
*Note that Cost of sales is 100%, when the given GPR is based on cost.

- 100%
806)
based on cost
sales
-
100%
based on sales
2. If GPR based on sales is 20%, what is the GPR based on cost?
Net Sales (constant) 100%

Cost of Sales (squeeze) (80%)
Gross Profit rate based on sales given 20%
 GPR based on cost (20%/80%) = 25%
*Note that Sales is 100% when the given GPR is based on sales.
COST RATIO
Cost ratio is derived from the gross profit rate as follows:

net sales 100%
 Cost ratio from GPR based on sales = 100% Net Sales – GPR based on
oponcales
-
sales
COGS 100%  Cost ratio from GPR based on cost = 100% Cost of Goods Sold/Net sales
100% +GPRcOst (100% + GPR based on cost)
Cp net sales
Illustration:
1. If the GPR based on sales is 20%, what is the cost ratio?
Net Sales 100%

Cost of Sales (80%)
GPR based on sales 20%
2. If GPR based on cost is 25%, what is the cost ratio?
Net Sales 125%

Cost of Sales (100%)
GPR based on cost 25%
Cost Ratio (100%/125%) = 80%
NET SALES
For the purposes of inventory estimation, only sales returns are deducted from
grOSS gross sales when computing for net sales. Sales discounts and allowances are
SAI2S not deducted because these do not affect the physical inventory of goods. Sales
<sales ret-
returns, on the other hand, affect the physical inventory of goods because goods
urns)
are physically returned to the seller.
sales
-
ESTIMATING INVENTORIES UNDER THE GROSS PROFIT METHOD
Accounts Payable Inventory
xx beg. Bal beg. Bal xx
xx net purchases net purchases xx
payments to suppliers xx Freight-in xx

xx COGS
End. Bal xx xx End. Bal

The formula below is derived from the inventory T-account above.
Inventory, beg. xx
480,008
Net Purchases xx
40,000
Freight-In 14,000
xx
Total Goods available for sale xx
Inventory, end. 534008 (xx)
rot:
nywrote
Cost of Goods sold (COGS) xx
Illustrations
a. An entity had net sales of P600,000 and cost of sales of P400,000. What
are the (a) gross profit rate based on sales and (b) gross profit based
on cost?
Solution:
GPR based on sales GPR based on cost
Net sales 600,000

Less: COGS 400,000 (200K ÷ 600K) (200K ÷ 400K)
Gross profit 200,000 33.33% 50%
b. If the gross profit based on sales is 40%, what is the gross profit rate
based on cost?
Solution:
(40% ÷ 60%) = 66.67%
c. If the mark-up based on cost is 50%, what is the mark-up based on sales?
Solution:
(50% mark-up based on cost ÷ (100% cost + 50% mark-up) = 33 1/3%
d. If the gross profit rate based on cost is 42.86%, what is the cost ratio?
Solution:
(100% ÷ 142.86%) = 70%
e. On Nov. 29, 20x1, a meteorite struck the warehouse of Unlucky Co. and
destroyed the inventories contained therein. The following information
was determined:
Beginning Inventory 80,000

Accounts Payable, Jan. 1 30,000
Accounts Payable, Nov. 29 60,000
Payments to Suppliers 480,000
Purchase returns 3,000
Purchase discounts 4,000
Freight-in 5,000
Sales fr. Jan-Nov 585,000
Sales returns 15,000
Sales discounts 117,000
Gross Profit rate based on sales 25%
Goods in transit, purchased FOB shipping point, from a vendor on Nov. 29,
⑳ ⑳
20x1 were P28,000, while goods held by consignees were P32,000. The goods
⑧
salvaged from the fire can be sold at a scrap value of P2,500. How much
is the inventory loss?

net sales 688,008 OPR On SaleS 6PR based on cost
COHOF900d) JOld (400,000) 200,000 200,000
600,000 400,000
200,000
Gross profit
33.33%
=
50%
=
os-
dahil air ce
given
40%=60% 66.67%
=
Cpaiven (p pano to nakuna? aprsales 40%
50% 50% mark up bo cost

mark-up based on lost
=
33.33%
=
100% cost 50%

+
MarK-UP
mark-up based on sales-?
CPU b0 cost 42.86%

=
206s 100%
100%+42.86%
0.699986/2
=
142.8
1.428b
Solutions:
Accounts payable
30,000 beg.
Payments 480,000 510,000 Net purchases (squeeze)
end. 60,000
Inventory
beg. 80,000
Net purchases 510,000 427,500 COGS (585K - 15K) x 75%
Freight-in 5,000
167,500 end.
(28,000) goods in-transit
(32,000) consigned goods
(2,500) salvage value
105,000 Inventory loss
f. On Dec. 1, 20x1, aliens invaded the Earth and destroyed the warehouse of Unlucky
Too Co. The following information was determined:
Beginning Inventory 80,000

Gross Purchases 517,000
Freight-In 5,000
Purchase returns 3,000
Purchase discounts 4,000
Sales fr. Jan to Nov 585,000
Gross profit rate based on cost 33 1/3%
20% of the inventory contained in the warehouse has been salvaged from the
destruction, while half is partially damaged. The aliens agreed to buy the
partially damaged goods at 30% of the cost as peace offering. How much is the
inventory loss?
Solution:
Inventory
80,000
517,000 3,000 Purchase returns
5,000 4,000 Purchase discounts
COGS
427,500
(585K - 15K) x 100%/133 1/3%
167,500 end.
(33,500) Undamaged (20% x 167.5K)
Salvage value
(25,125)
(50% x 167.5K x 30%)
108,875 Inventory loss
g. You were engaged to assist in reconstructuring ABC Co.’s records after an

operating crashed on August 1. ABC Co. does not have an established
business continuity plan or a disaster recovery program and only the
following information has been determined:
Increase in Inventory 16,000

Decrease in AP 8,000
Payments to suppliers 70,000
Compute for the cost of goods sold.

accounts payable
- 30,000
~nindi
480,000
⑧ 60,808 12 Kasama
390,000
Trovant, panabio
80,000
510,000
inventory
427,588
-
585,000
~
/10,000 suethe
ending
(15,000) balance
5,000
75%
x
ny alp
167,000
Kaya ba sing
128,000)
I
bina was en
D danil hindi
192,000)
-
sina Kasama sa
12,500 man undestroy?
105,000 -
Inventory loss
inventory
80,000
510,000
5000
427,500
167,500
(33,500)
(25,125)
188,875
104S585,000
C
1000
inventory loss
The
-
427,500 -
D as
SOId
+
inventory 16,000
-
AlP 8,008
CON T6As-ending in
AIP 70,000 inventory a/P

-
-
16,000
⑩
-
wo
.
accounts payable 70,000
10,000
I 800 -
a net purchases 000
1,000 C
0
40,000 coal? mao lahat
mali:1
I entoror
a t
net purchases 16,000 -

increase
I
-
in inventory
Solution:
Accounts Payable Inventory
8,000 beg. Bal beg. Bal 0
62,000 net purchases net purchases 62,000
payments to suppliers 70,000

46,000 COGS
End. Bal 0 16,000 End. Bal
ACCOUNTS OF A MANUFACTURING COMPANY
The inventory accounts of a manufacturing company entity include the raw

materials, work in process and finished goods. The relationships between these
accounts and accounts payable are depicted below:
Accounts Payable Raw Materials
xx beg. Bal beg. Bal xx
xx net purchases net purchases xx
payments to suppliers xx Freight-in xx

xx Raw Materials issued to production
End. Bal xx xx End. Bal
Work in process Finished Goods
beg. Bal xx beg. Bal xx

Raw mat. Issued to prod. xx
Direct Labor xx xx cost of goods manufactured cost of goods manufactured xx
Prod. Overhead xx
xx COGS
xx End. Bal xx End. Bal

Total Goods
Total Goods put
available for
into process
xx xx sale xx xx
The formula below is derived from the T-accounts above.
Raw materials, beg. xx

Purchases xx
Freight-in xx
Purchase returns and allowances (xx)
Total Raw Materials available for use xx
Raw materials, end. (xx)
Raw materials issued to production xx
Work in process, beg. xx
Direct Labor xx
Production overhead xx
Total goods put into process xx
Work in process, end. (xx)
Cost of goods manufactured xx
Finished Goods, beg. xx
Total goods available for sale xx
Finished goods, end (xx)
Cost of goods sold xx

Illustration:
On June 1, 20x1, a fire completely destroyed the work in process inventories of

ABC Manufacturing, Inc. The following amounts were determined:
January 1, 20x1 June 1, 20x1
Accounts Payable 78,000 90,000

Raw Materials 10,000 7,000
Work in process 40,000 ?
Finished goods 46,000 58,000
Additional information:
 Payments to suppliers for purchases on account, 40,000
 Freight on purchases, 5,000
 Purchase returns, 5,000
 Direct labor, 32,000
 Production overhead, 12,000
 Sales from Jan 1 to May 31, 150,000
 Sales returns, 30,000
 Sales discounts, 10,000
 Gross Profit rate based on sales, 25%
Answer: Php42,000
1.
78,000 beg. Bal beg. Bal 10,000
? net purchases 440,000 net purchases ?

60,008
payments to suppliers 40,000 Freight-in 5,000
? Raw Materials issued to production
End. Bal 90,000 7,000 End. Bal
beg. Bal 40,000 beg. Bal 46,000

Raw mat. Issued to prod. ?
Direct Labor 32,000 ? cost of goods manufactured cost of goods manufactured ?
Prod. Overhead 12,000
? COGS
? End. Bal 58,000 End. Bal
2.
78,000 beg. Bal beg. Bal 10,000

60,000 Raw Materials issued to production
beg. Bal 40,000 beg. Bal 46,000

Raw mat. Issued to prod. 60,000
Direct Labor 32,000 ? cost of goods manufactured cost of goods manufactured ?
? COGS
? End. Bal 58,000 End. Bal

3. Gross Sales 150,000
Sales returns (30,000)
Net sales 120,000
Multiply by: Cost ratio (100%-25% GPR based on sales) 75%
Cost of Goods Sold 90,000
4.
78,000 beg. Bal beg. Bal 10,000

60,000 Raw Materials issued to production
beg. Bal 40,000 beg. Bal 46,000

Raw mat. Issued to prod. 60,000
Direct Labor 32,000 102,000 cost of goods manufactured cost of goods manufactured 102,000
~APA nakuna mona
O
2. lebs
90,000 COGS a
42,000 End. Bal 58,000 End. Bal
RETAIL METHOD
The retail method is often used in the retail industry (e.g., supermarkets and
department stores) for measuring large quantities of inventories with rapidly
changing items and with similar margins and for which it is impracticable to
use other costing methods.
The retail method is similar to the gross profit method. Actually, the gross
profit method is a variation of the retail method. The following are peculiar
to the retail method:
a. The cost ratio is computed directly without regard to the gross profit
rate.
b. Net mark-ups and net mark-downs are considered.
 Net markups (markups less markup cancellations) are net increases

above the original retail price, which are generally caused by changes
in supply and demand.
- Markup refers to increase above the original retail price.

- Original retail price refers to the selling price at which the
goods are first offered for sale.
- Markup cancellation refers to decrease in selling price that
↓sprices does not reduce the selling price below the original retail
in
price.
 Net markdowns (markdowns less markdown cancellations) are net

decreases below the original retail price.
- Mark-down refers to the decrease below the original retail
price.
↑sprice Soria sell price - Markdown cancellation refers to increase in selling price that
does not raise the selling price above the original retail
price.

APPLICATION OF THE RETAIL METHOD
The retail method is applied using either the
a. Average cost method – under this method, the total goods available for
sale at cost (beginning inv + net purchases) is determined and divided by
the total goods available for sale at sales price to come up with the
cost ratio.
Cost Ratio =
&
Total goods avail. For sale at cost
Total goods avail. For sale at sales price or at retail
*COGS = Net Sales x Cost Ratio
!
*Ending inventory at cost = Ending inventory at retail x cost ratio
& b. FIFO Cost Method – this method is very similar to average method, the
only difference lies on the computation of cost ratio. Under FIFO, the
beginning inventories at cost and at retail are simply excluded from TGAS
when computing the cost ratio.
T6 as & cost
/beainvecost)
Cost Ratio = Total goods avail. For sale (TGAS) at cost less beg. Inventory at cost
TGAS at sales price or at retail less beg. Inventory at retail
T6a1 e retail
I bea ix & retail)

Illustration:
The invading aliens in illustration about GPR based on cost put up a department
store to sell alien stuff to the alien stuff to the alien settlers. The alien
accountant determined the following information:
Cost Retail
Inventory, beg. 300,000 375,000
Purchases 1,180,000 1,500,000
Freight-in 30,000 -
Purchase Discount 150,000 -
Purchase returns 4,000 5,000
Departmental Transfer-In 2,000 3,000
Markups 20,000
Markups Cancellations 2,000
Markdowns 6,000
Markdowns Cancellations 1,000
Abnormal Spoilage 8,000 11,000
Normal Spoilage 400
Sales 1,428,000
Employee discounts 2,600
Compute for the ending inventory and COGS under Average and FIFO Method.
Solutions:
Cost Retail
Inventory, beg. 300,000 375,000
add Net purchases (a) 1,056,000 1,495,000
add Departmental Transfers-In 2,000 3,000
add Net mark-ups (20,000 – 2,000) 18,000
less Net mark-downs (6,000 – 1,000) (5,000)
12ss Abnormal spoilage (8,000) (11,000)
- TGAS 1,350,000 1,875,000
Net sales (b) (1,375,000)
EI @ retail 500,000
(a) @ cost: 1,180,000 + 30,000 - 150,000 - 4,000 = 1,056,000;

@ retail: 1,500,000 – 5,000 = 1,495,000

(b)
Normal spoilage 400

Sales 1,428,000
Sales returns (56,000)
Employee discounts 2,600
Net sales 1,375,000
Cost ratios:
Total goods avail. for sale at

Cost ratio cost
=
(Average cost) Total goods avail. for sale at
sales price
Average cost ratio = (1,350,000 ÷ 1,875,000) = 72.00%
TGAS at cost less beg. inventory

Cost ratio at cost
=
(FIFO) TGAS at retail less beg. inventory
at retail
FIFO cost ratio = [(1,350,000 – 300,000) ÷ (1,875,000 – 375,000)] = 70.00%
Average FIFO
Cost ratios 72.00% 70.00%
Multiply by: EI @
retail 500,000 500,000
Ending inventory @ cost 360,000 350,000
Average FIFO
TGAS @ cost 1,350,000 1,350,000
Ending inventory @ cost (360,000) (350,000)
Cost of goods sold 990,000 1,000,000
SEPARATE COST RATIO FOR EACH DEPARTMENT
When applying the retail method, separate computations should be made for
departments that experience significantly higher or lower profit margins. These
separate computations for each department necessitate the consideration for
departmental transfers-in and out.
Distortions arise in the retail method when a department sells goods with
varying margins in a proportion different from that purchased. In which case,
the cost-to-retail percentage would not be representative of the mix of goods
in ending inventory. Also, manipulations of income are possible by planning the
timing of markups and markdowns.
Summary/Conclusion:
Whether a company uses a periodic or perpetual inventory system, a physical

inventory (i.e., physical count) of goods on hand should occur from time to
time. The quantities determined via the physical count are presumed to be
correct, and any differences should result in an adjustment of the accounting
records. Sometimes, however, a physical count may not be possible or is not
cost effective, and estimates are employed.
One such estimation technique is the gross profit method. This method might be
used to estimate inventory on hand for purposes of preparing monthly or quarterly
financial statements, and certainly would come into play if a fire or other
catastrophe destroyed the inventory. Very simply, a company’s normal gross
profit rate (i.e., gross profit as a percentage of sales) would be used to
estimate the amount of gross profit and cost of sales.
On another note, a method that is widely used by merchandising firms to value

or estimate ending inventory is the retail method. This method would only work
where a category of inventory has a consistent mark-up.

The cost-to-retail percentage is multiplied times ending inventory at retail.
Ending inventory at retail can be determined by a physical count of goods on
hand, at their retail value. Or, sales might be subtracted from goods available
for sale at retail.
References:

Millan

https://www.principlesofaccounting.com/chapter-8/inventory-estimation/

Topic: Agriculture (PAS 41)
Learning Outcomes:
 Define agriculture-related terminologies.

 Cite examples of biological assets, agricultural produce and resulting
products.
 Identify between biological assets and agricultural produce and resulting
products.
 Know when biological assets or agricultural produce should be recognized.
 Know how to value biological assets and agricultural assets transactions
should be recognized.
The Beginning – Undated Past (Genesis 1:1-31)
1:1 In the beginning, God created the universe. 2 When the earth was as yet unformed and desolate,
with the surface of the ocean depths shrouded in darkness, and while the Spirit of God was hovering
over the surface of the waters, 3 God said, “Let there be light!” So there was light. 4 God saw
that the light was beautiful. He separated the light from the darkness, 5 calling the light “day,”
and the darkness “night.” The twilight and the dawn were day one. 6 Then God said, “Let there be a
canopy between bodies of water, separating bodies of water from bodies of water!” 7 So God made a
canopy that separated the water beneath the canopy from the water above it. And that is what
happened: 8 God called the canopy “sky.” The twilight and the dawn were the second day. 9 Then God
said, “Let the water beneath the sky come together into one area, and let dry ground appear!” And
that is what happened: 10 God called the dry ground “land,” and he called the water that had come
together “oceans.” And God saw how good it was. 11 Then God said, “Let vegetation sprout all over
the earth, including seed-bearing plants and fruit trees, each kind containing its own seed!” And
that is what happened: 12 Vegetation sprouted all over the earth, including seed-bearing plants
and fruit trees, each kind containing its own seed. And God saw that it was good. 13 The twilight
and the dawn were the third day. 14 Then God said, “Let there be lights across the sky to distinguish
day from night, to act as signs for seasons, days, and years, 15 to serve as lights in the sky,
and to shine on the earth!” And that is what happened: 16 God fashioned two great lights—the larger
light to shine during the day and the smaller light to shine during the night—as well as
stars. 17 God placed them in space to shine on the earth, 18 to differentiate between day and
night, and to distinguish light from darkness. And God saw how good it was. 19 The twilight and
the dawn were the fourth day. 20 Then God said, “Let the oceans swarm with living creatures, and
let flying creatures soar above the earth throughout the sky!” 21 So God created every kind of
magnificent marine creature, every kind of living marine crawler with which the waters swarmed,
and every kind of flying creature. And God saw how good it was. 22 God blessed them by saying, “Be
fruitful, multiply, and fill the oceans. Let the birds multiply throughout the earth!” 23 The
twilight and the dawn were the fifth day. 24 Then God said, “Let the earth bring forth each kind
of living creature, each kind of livestock and crawling thing, and each kind of earth’s animals!”
And that is what happened: 25 God made each kind of the earth’s animals, along with every kind of
livestock and crawling thing. And God saw how good it was. 26 Then God said, “Let us make mankind
in our image, to be like us. Let them be masters over the fish in the ocean, the birds that fly,
the livestock, everything that crawls on the earth, and over the earth itself!” 27 So God created
mankind in his own image; in his own image God created them; he created them male and female. 28 God
blessed the humans by saying to them, “Be fruitful, multiply, fill the earth, and subdue it! Be
masters over the fish in the ocean, the birds that fly, and every living thing that crawls on the
earth!” 29 God also told them, “Look! I have given you every seed-bearing plant that grows throughout
the earth, along with every tree that grows seed-bearing fruit. They will produce your food. 30 I
have given all green plants as food for every wild animal of the earth, every bird that flies, and
to every living thing that crawls on the earth.” And that is what happened. 31 Now God saw all that
he had made, and indeed, it was very good! The twilight and the dawn were the sixth day.
Introduction:
PAS 41 Agriculture, prescribes the accounting treatment and disclosures related

to agricultural activity. Specifically, the standard shall be applied to account
for the following when they relate to agricultural activity:
a. Biological assets;
b. Agricultural produce at the point of harvest; and
c. Government grants related to agricultural activity

Body:
AGRICULTURE-RELATED DEFINITIONS
Agricultural activity is the management by an entity of the biological

transformation and harvest of biological assets for -
sale or for conversion into
agricultural produce or into additional biological assets. Examples of
agricultural activities are forestry, raising livestock, annual or perennial
cropping, cultivating orchards and plantations, floriculture and aquaculture
(including fish farming). Common features of this actually include:
a) Capability to change, arising from biological transformation;

b) Management of change, which facilitates biological transformation by
enhancing or stabilizing conditions necessary for the process to take
place
c) Measurement of change, brought about by biological transformation or
harvest
 Agricultural produce is the harvested produce on the entity's
biological assets.
animal held  Bearer animal is any living animal held solely for the produce
that they bear.
used
plant  Bearer plant is a plant that is used in the production or supply
of agricultural produce.
processes
-
 Biological assets are "living animals and living plants."

degeneration
growth
Biological transformation comprises the processes of growth, and procreation
procreation
that cause qualitative and quantitative asset. This transformation could result
t
in the following type of outcomes:
qualitative
and quantitive a. Asset changes through
asset 1. growth (an increase in quantity or improvement in quality or plant);
or
2. degeneration (decrease in quantity or deterioration in animal or
plant); or
3. procreation (creation of additional living animals or plants)
b. Production of agricultural produce as wool from sheep, milk tea leaf,
instant coffee from coffee trees, picked fruit from a cotton plant.
A group of biological assets is an aggregation of similar living animals or

plants.
Examples of Biological Assets, Agricultural Produce and Resulting Products
Biological Assets Agricultural Produce Products that are result

of processing after
harvest
Sugarcane root system* Harvested Cane Sugar
Tobacco Plants* Pickled leaves Cured Tobacco
Grape vines* Grapes Wine
Fruit trees (mangoes)* Picked Fruit Processed Fruit
Coffee trees* Coffee Beans Ground Coffee
Cotton plants* Harvested Cotton Thread, clothing
Tea bushes* Picked leaves Tea
Rubber trees* Harvested leaves Rubber products
Bamboo trees root Bamboo Bamboo Lumber
system*
Trees in a timber Felled Trees Logs, Lumber
plantation
Dairy Cattle Milk Cheese
Sheep Wool Yam, Carpet
Pigs Carcass Sausages, cured hams
*Bearer plants (accounted for under PAS 16 PPE)

RECOGNITION
 PAS 41, par 40 states that, an entity shall recognize a biological asset
or agricultural produce when, and only when:
8
a. the entity controls the asset as a result of past events;
-
will flow to the entity; and

c-
b. it is probable that future economic benefits associated with the asset
-
-
-
c. the fair value or cost of the asset can be measured reliably.
 In agricultural activity, control may be evidenced by, for example, legal

ownership of cattle and the branding or otherwise marking of the cattle
on acquisition, birth, or weaning. The future benefits are normally
assessed by measuring the significant physical attributes.
animal-upon purchase;
upon
birth  A biological asset is recognized upon purchase or upon birth of an animal
agricultural produce and agricultural produce is recognized upon harvest. Biological assets
- recognized may be outside the scope of PAS 41 when they are not used in agricultural
upon
harvest activity. Examples are:
-
Animals in a zoo that does not have an active breeding programme
and rarely sells any animal or animal products.
- Bacteria being cultured in a pharmaceutical company development
of a culture does not constitute agricultural activities.
audition
is
 An unconditional government grant granted to a biological asset measured

at its fair value less costs to sell, shall be recognized in profit or Grant
t
loss when, and only when the government grant becomes receivable. receivable
 On the other hand, if a government grant related to a biological asset ↓
P11
measured as its fair value less costs to sell is conditional (e.g ., when recoa.
a government grant requires an entity not to engage in specified

conditional
agricultural activity) an entity shall recognize the government grant in -
when conditions
profit or loss only when the conditions attaching to the government grant by
are met
are met.
the entity
MEASUREMENT I
sell
Fair value-costs to P/L recog
Biological assets
Lo commissions
Initial Measurement levis
transfer taxes and duties
Any biological asset shall be measured on initial recognition and at each
statement of financial position date, at its fair value less estimated costs to
sell. Once the fair value of such a biological asset becomes reliably measurable,
the entity shall measure it at its fair value less costs to sell. The only
exception is where the fair value cannot be measured reliably.
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. Fair value can be measured in several ways which include,
but not limited, to the following:
a. price in an active market;

b. most recent market transaction price;
c. market prices for similar assets after adjustment to reflect any
differences in quality, size and other characteristics;
d. sector benchmark such as value of a rice plantation per hectare or value
of hogs per kilogram; and
Costs to sell include brokers' and dealers' commissions, any Levis by regulatory
authorities and commodity exchanges and any transfer taxes and duties. They
exclude transport and other costs necessary to get the assets to a market.
In some cases, market prices or value may not be available for an asset in its
present condition. In these instances, the entity can use the present value of
the expected net cash flow from the asset discounted as the current market
pretax rate. In some circumstances, costs may be an indicator of fair value,

especially where little biological transformation has taken place or the impact
of biological transformation on the price is not expected to be significant.
PAS 41 par 30 prescribes that when fair value of a biological asset cannot be
reliably determined and alternative estimates of fair value are likewise
unreliable, such asset shall be measured at cost less any accumulated
depreciation and any accumulated impairment losses. ifNalana no fair value
makuna
BEARER PLANT
cost -
accum.dep and impairment
Bearer plant is a living plant that:
a. is used in the production or supply of agricultural procedure;

b. is expected to bear produce for more than one period; and
c. has a remote likelihood of being sold as agricultural produce expect for
incidental scrap sales.
All of the above criteria need to be met for a biological asset to be considered
bearer plant. Examples are grape vines, coconut trees, mango trees, oil palms
and rubber trees.
⑧
The following are not bearer plants:
1. Annual crops (for example, rice, corn, wheat) panapananon?

2. Plants cultivates to be harvested as agricultural produce (for example,
mahogany trees, narra trees, etc grown for use as lumber) sila mismo yung product
3. Plants cultivated to produce agricultural produce where there is more
bearer plants than a remote likelihood that the entity will also harvest and sell the
+
#2plants
plant as agricultural produce, other than as incidental scrap sale (for
example trees that are cultivated both for their fruit and lumber.
When bearer plants are no longer used to bear produce they might be cut down
and sold as scrap, for example, for use as firewood. These scrap sale would
not prevent the plant from satisfying the definition of a bearer plant.
Bearer plants will be accounted for and within the scope of PAS 16 Property,
Plant and Equipment for annual periods beginning on or after January 1, 2016.
CLASSIFICATION
The amendments to PAS 41 require that prior to harvest of agricultural produce,

bearer plant and the agricultural produce shall be separately accounted for
(i.e. ., two separate accounts) with different measurement models.
Bearer plants will be presented as Non-Current Assets while Agricultural produce

will usually be a Current Asset, unless it takes more than a year to mature.
Bearer plants
-
non currentassets
MEASUREMENT Agricultural produce

-
currentassets
Initial Recognition -31 or to mature
-
noncurrentassets
Before maturity, bearer plants will be measured separately from any agricultural
produce attached at their accumulated cost until maturity (similar to the
accounting treatment for a self-constructed item of plant and equipment before
it is "available for use").
Initially, bearer plants are accounted for in the same way as self-constructed
items of property, plant and equipment before they are in the location and
condition necessary to be capable of operating in the manner intended by
management.
C
"Construction" refers to the activities that are necessary to cultivate the -
-
bearer plants before they are in the location and condition necessary to be
capable of operating in the manner-
intended by management.
Cp thattheir
agricultural produce
Would be borne

After the bearer plants mature, they continue to be separately accounted for
from any related agricultural produce and entities will have a policy choice to
use either
cost- depreciation
impair  Cost, less any subsequent accumulated depreciation and impairment, with
and changes recognized in profit or loss or
ment

subsequent Fair value at each revaluation date, less any subsequent accumulated
depreciation and impairment. Revaluation adjustment (and impairment to
FV- de
and the extent it reverses previous revaluation increase) recognized in "Other
impairment
a.
Comprehensive Income"; all other changes recognized in profit or loss
Entities following either model shall determine the useful life of the bearer
plant in order to depreciate it. The useful life will need to be re-evaluated
each year.
Bearer animals held solely for the produce that they bear will continue to be
accounted for under PAS 41.
Agricultural Produce
Agricultural produce which are harvested from an entity's biological assets

shall be measured at its fair value less costs to sell at the point of harvest
(net realizable value). The fair value of agricultural produce at point of
harvest can always be measured reliably. At harvest the agricultural product is
complete and is ready for sale. Once harvested, the net realizable become its
cost. This asset is then accounted for similar to other inventories held for
sale in the normal course of business applying PAS 2 Inventories.
The pro-forma entry to record the harvested product is
Inventory xx
Income – Gain from change in fair value xx
ACCOUNTING FOR BIOLOGICAL ASSETS

A biological asset is initially recognized upon purchased or upon birth of an
animal.
Purchased biological asset is initially measured and recorded at its fair value
less estimated cost to sell. Upon purchase of a biological asset gains and
losses can result on its initial recognition since the fair value less estimated
cost to sell could be more or lesser than the total purchase price which is
exclusive for transaction and transportation cost. The gain or loss arising on
initial recognition of a biological asset at fair value less costs to sell and
from a change in fair value less costs to sell of a biological asset shall be
included in profit or loss for the period in which it arises. A loss may arise
on initial recognition of a biological asset because costs to sell are deducted
in determining fair value less costs to sell of a biological asset.
Biological asset (Fair value less costs to sell) xx

Loss in initial recognition of biological asset xx
Cash (Purchase Price) xx
When a piglet is born, a gain may arise on initial recognition of a biological
S
asset. The pro-forma entry will be:
Biological asset (Fair value less costs to sell) xx

naq siba na -Income – Change in fair value of biological asset xx
nuna value no asset ↳p hindi naman
because was thmathas kasi binili
na nuna North Sadyang
because nadadadansila hadagangan

Changes in fair value arising from growth and harvesting from mature biological
-oc--
asset can be estimated based on changes in market prices of different age or
stage of maturity of the asset.
Minerals and mineral products, such as nickel, coal or gold may also be measured
at fair value less costs to sell (net realizable value) in accordance with well-
established practices in the industry. In the mining industry, when minerals
have been extracted, there is often an assured sale under a forward contract,
a government guarantee, in an active market. Because there is negligible risk
of failure to sell, measurement as net realizable value recognition of gain as
the point of extraction justified in subsequent periods, changes in value of
minerals and mineral products inventory are recognized in profit or loss in the
period of change.
OTHER CONSIDERATIONS
Land related to agricultural activity (e.g., rice, farmland) is not considered

as biological asset. An entity can follow either PAS 16 Property, Plant and
Equipment or PAS 40 Investment Property depending on which standard is
appropriate in the circumstances.
PAS 16 requires the land to be measured either as its O cost less accumulated
impairment losses or at a revalued amount while PAS 40 requires land that is
-
investment property to be measured at its fair value cost less any accumulated
impairment losses.
Subsequent expenditures related to biological assets such as cost of producing

and harvesting should be changed to expense when incurred. Examples are wages
paid to farmers, fertilizer cost, water, feeds and the like are recorded as
farm operating expenses when incurred.
Some animals and plants may not be considered biological assets but would be
classified and accounted for as other type of assets. For example, a pet shop
may hold an inventory of dogs purchased from breeders that it then sells.
Because the pet shop is not breeding the dogs, the dogs are not considered
biological assets. As a result, the dogs are accounted for as Inventory held
for sale at lower of cost and net realizable value.
In determining cost, depreciation, and impairment losses, the entity shall use
PAS 2, PAS 16 and PAS 36.
Investment
InX PRE
property
Illustrative Case 1. Financial Statement Presentation of Agricultural Assets
Facts
An entity on adoption of PAS 41 has reclassified certain assets as biological

assets. The total value of the group’s forest assets is P2, 000,000 comprising:
Freestanding trees P1,700,000

Land under trees 200,000
Roads in forests 100,000
P2,000,000
Required: Show how the forests would be classified in the FS.

Solution:
The forests would be presented in the statement of financial position as follows:
Non-current assets
Biological assets P1,700,000
Land 200,000
Other tangible assets 100,000
2,000,000
Illustrative Case II. Accounting for Agricultural Assets
Nasugbu Dairy Farm (NDF) produces milk for sale to local cheese-makers. NDF
begun operating on January 1, 20x6, by purchasing 210 milking cows for P230,000.
NDF provides the following information related to the milking cows.
What journal entries should be made in the book of Nasugbu Dairy Farm record
the above transaction/events occurring in January, 20x6?
Milking cows
Carrying Value, January 1, 20x6* P230,000

bio as 230,000
230,000Change in fair value due to growth P17,500
cas
and price change
BA 16,900
16,908
Decrease in fair value due to harvest (600) 16,900
income
Inventory 18,000 Carrying value, January 31,20x6 P246,900

Income 18000
Milk harvested during January** P18,000
*The carrying value measured at fair value less cost to sell (net
realizable value). The fair value of the milking cows is determined based
on market prices of livestock of similar age, breed, and genetic merit.
**Milk is initially measured at its fair value less cost to sell (net
realizable value) at the time of milking. The fair value of milk is
determined based on market prices in the local area.
Solution:
The entries to record the events/transactions related to the biological assets

(milking cows) and agricultural produce (milk) follow:
Date Accounts Dr Cr
Jan. 1, 20x6 Biological asset – Milking Cow 230,000

Cash 230,000
*To record the purchase of 210 milking cows
Jan. 31, 20x6 Biological asset – Milking cow 16,900

Income- Unrealized holding gain or loss 16,900
*To record the change in fair value of the milking cows
Jan. 31, 20x6 Milk Inventory 18,000

Income- Unrealized holding gain or loss 18,000
*To record the milk harvested for the month of January

19,250
Cash
CO9d
18008
18008
Inventory
sala
19200
Assuming that the milk harvested in January is sold to a local cheese-maker on

February 1, 20x6 for P19,250. What entry shall be made to record the sale?
The entry to record the sale of the milk harvested will be as follows:
Cash 19,250
Cost of sales 18,000
Milk Inventory 18,000
Sales 19,250
Thus, agricultural produce once harvested, the fair value less cost to sell,
becomes its cost and the milk is accounted for similar to other inventories
held for sale in the normal course of the business.
Illustrative Casee III. Accounting for Biological Asset and Agricultural Produce
On January 1, 20x6, an entity purchased 100 cows which are three years old for
P30,000 each for the purpose of producing milk for the local community. On July
1, 20x6, the cows gave birth to 20 calves.
The following fair value less cost to sell of the biological assets based on
information from the active market are available
3m
a. Bio Ass
Newborn Calf on July 1, 20x6 P8,000
3M
Newborn calf on December 31, 20x6 10,000 cas
½ year old calf on December 31, 20x6 14,000 ASS 160,000

b. BIO
3 years old cow on December 31, 20x6 36,000 income
160,000
4 years old cow on December 31, 20x6 48,000
3140000
=
8: 3M 160
+
Requirements: Bio 3280000 + 200

3200000 =
3M
(1) Prepare the journal entries to record the
1920008
a. Purchase of 100 cows Bio ass
1930000
b. Birth of 20 calves income
c. Change in fair value of the cows and the calves as of December

31, 20x6
48,008
(2) How should the above be presented in the financial statements? - D 100 CONS
4808008
=
Solution: -
3000 00U
⑲annerv
Requirement 1
a. January 1, 20x6
Biological assets 3,000,000
-
Cash 3,000,000
*To record the acquisition of 100 cows @30,000 each.
b. July 1, 20x6
Biological assets 160,000
Unrealized holding gain arising 160,000
from change in fair value
*To record the birth of 20 calves @8,000
c. December 1, 20x6
Biological assets 1,920,000
Unrealized holding gain 1,920,000
Arising from change in fair
Value
*To record change in fair value of the cows and calves on December 31, 20x6
Summary:
Cows = 4 years old (100 x 48,000) P4,800,000

Calves ½ year old (20 x 14,000) 280,000
Total fair value – December 31, 20x6 5,080,000

Carrying value of biological assets 3,160,000
(3,000,000 + 160,000)
Increase in fair value 1,920,000
Requirement 2
Financial Statement Presentation
Statement of Financial Position
Non-current assets
Dairy livestock – immature P260,000
⑧
Dairy livestock – mature 4,800,000
Biological asset (Note 1 & 2) P5,080,000
Income Statement 50
S
-
Unrealized gain arising from change in fair value P2,080,000 2,080,000
of Biological assets
Notes to Financial Statement
Note 1. Accounting Policies
Livestock and milk

Livestock is measured at fair value less cost to sell. The fair
value of livestock is determined based on market prices of livestock
of similar age, breed, and genetic merit. Milk is initially measured
at its fair value less costs to sell as the time of milking. The
fair value of milk is determined based on market prices in the local
area.
Note 2. Biological assets: Reconciliation of carrying amounts of dairy livestock
Carrying amount at January 1, 20x6 3,000,000

(100 x 30,000)
Increase due to:
Gain arising from changes in fair value less cost

to sell attributable to physical changes (a) 1,440,000
Gain arising from changes in fair value less cost

to sell attributable to physical changes (b) 640,000
Sales -
Carrying amount at December 31, 20x6 5,080,000
Summary
100 x P48,000 P4,800,000
20 x P14,000 P 280,000
P5,080,000
(a) Increase in fair value less cost to sell due to physical changes
100 (48,000-36,000) 1,200,000 Fromnading
3DK dapat nd North.
48 because oft heir
20 (14,000-10,000) 80,000 aue
same with the calves
20 x 80,000
- 160,000
8,000 1,440,000
(b) Increases in fair value less costs to sell due to price changes
100 (36,000-30,000) 600,000
20 (10,000-8,000) 40,000
Fromthe purchase priceare
640,000

DISCLOSURE REQUIREMENT
 An entity shall disclose the aggregate gain or loss arising during the
current period on initial recognition of biological assets and
agricultural produce and from the change in fair value less costs to sell
of biological assets.
 An entity shall provide a description of each group of biological assets.
 An entity is encouraged to provide a quantified description of each group

of biological assets, distinguishing between consumable and bearer
biological assets or between mature and immature biological asset as
appropriate. Consumable biological assets are those that are to be
harvested as agricultural produce or sold as biological assets.
 Biological assets may be classified either as mature biological assets or

immature biological assets. Mature biological assets are those that have
attained harvestable specification (for consumable biological assets) or
are able to sustain regular harvests (for bearer biological assets).
 If not disclosed elsewhere in the information published with the financial

statements, an entity shall describe:
(a) The nature of its activities involving each group of

biological assets; and
(b) Non-financial measures or estimates of the physical

qualities of:
(i) Each group of the entity's biological assets
at the end of the period; and
(ii) output of agricultural produce during the

period.
 An entity shall also disclose:
(a) the existence and carrying amounts of biological assets

whose title is restricted, and the carrying amounts of
biological assets pledge as security for liabilities;
(b) the amount of commitments for the development or

acquisition of biological assets; and
(c) Financial risk management strategies related to

agricultural activity.
 An entity shall present a reconciliation of changes in the carrying amount

of biological assets between the beginning and the end of the current
period. The reconciliation shall include:
a. the gain or loss arising from changes in fair value less costs
to sell;
b. increases due to purchases;
c. decreases to attributable to sales and biological assets

classified as held for sale (or included in a disposal group
that is classified as held for sale) in accordance with IFRS 5;

d. decreases due to harvest;
e. increases resulting from business combinations;
f. net exchange differences arising on the translation of financial

statements into a different presentation currency, and on a
translation of a foreign operation into the presentation currency
of the reporting entity; and
g. other changes.
Additional disclosure for biological assets where fair value cannot be measured
reliably
If an entity measures biological assets at their cost less any accumulated

depreciation and any accumulated impairment losses (see paragraph 30) at the
end of the period, the entity shall disclose for such biological assets:
1. a description of the biological assets;
2. an explanation of why fair value cannot be measured reliably;
3. if possible, the range of estimates within which fair value is highly

likely to lie;
4. the depreciation method used;
5. the useful lives or the depreciation rates used; and
6. the gross carrying amount and the accumulated depreciation (aggregated

with accumulated impairment losses) at the beginning and end of the
period.
If, during the current period, an entity measures biological assets at their
cost less any accumulated depreciation and any accumulated impairment losses
(see paragraph 30), an entity shall disclose any gain or loss recognized on
disposal of such biological assets and the reconciliation required by paragraph
50 shall disclose amounts related to such biological assets separately. In
addition, the reconciliation shall include the following amounts included in
profit or loss related to these biological assets:
a. impairment losses;
b. reversals of impairment loses; and
c. depreciation.
If the fair value of biological assets previously measured at their cost less
any accumulated depreciation and any accumulated impairment losses become
reliably measurable during the current period, an entity shall disclose for
those biological assets.
a. a description of the biological assets;
b. an explanation of why fair value has become reliably measurable; and
c. the effect of the change.

Government grants
An entity shall disclose the following related to agricultural activity covered

by this standard:
a. the nature and extent of government grants recognized in the financial

statements;
b. unfulfilled conditions and other contingencies attaching to government

grants; and
c. significant decreases expected in the level of government grants.
Summary/Conclusion:
PAS 41 prescribes the accounting treatment, financial statement presentation,

and disclosures related to agricultural activity. Agricultural activity is the
management of the biological transformation of biological assets (living animals
or plants) and harvest of biological assets for sale or for conversion into
agricultural produce or into additional biological assets.
PAS 41 establishes the accounting treatment for biological assets during their
growth, degeneration, production and procreation, and for the initial
measurement of agricultural produce at the point of harvest. It does not deal
with processing of agricultural produce after harvest (for example, processing
grapes into wine, or wool into yarn). PAS 41 contains the following accounting
requirements:
 bearer plants are accounted for using PAS 16;

 other biological assets are measured at fair value less costs to sell;
 agricultural produce at the point of harvest is also measured at fair
value less costs to sell;
 changes in the fair value of biological assets are included in profit or
loss; and
 biological assets attached to land (for example, trees in a plantation
forest) are measured separately from the land.
The fair value of a biological asset or agricultural produce is its market price
less any costs to sell the produce. Costs to sell include commissions, levies,
and transfer taxes and duties
References:

Millan
Intermediate Accounting Volume 1(2020-2021 Edition) by Ma. Elenita Cabrera

PAS 41 Agriculture

Topic: Property, Plant and Equipment Part 1 (PAS 16)
Learning Outcomes:
 Measure the initial cost of a PPE and identify the point where the
capitalization of costs ceases.
 Provide examples of the common classes of PPE and state some of the
peculiar costs capitalized for each class.
 Identify the different modes of acquisition of PPE and state the initial
measurement of cost for each mode.

Deuteronomy 19:14
“Do not move your neighbor's boundary stone set up by your predecessors in the
inheritance you receive in the land the LORD your God is giving you to possess.”
In any area in life, we need to have integrity. We should be honest in all of
our undertakings.
Introduction:
PAS 16 establishes principles for recognizing property, plant, and equipment as
assets, measuring their carrying amounts, and measuring the depreciation charges
and impairment losses to be recognized in relation to them.
Body:
Property, Plant and Equipment (PPE) Property, plant and equipment are:
a. Tangible assets (have physical substance)
b. Used in business (used in the production or supply of goods or
services, for rental, or for administrative purposes)
c. Long-term in nature (expected to be used for more than one period)
Examples of PPE:
a. Land used in business

b. Land held for future plant site
c. Building used in business
d. Equipment used in the production of goods
e. Equipment held for environmental and safety reasons
f. Equipment held for rentals
g. Major spare parts and long-lived stand-by equipment
h. Furniture and fixture
i. Bearer plants
The following are not PPE:
a. Land held for speculation

b. Land held for an undetermined future use
c. Land and/or building classified as investment property under PAS 40
Investment Property (Ipa pa nuna investment property (a PPE)
d. Property held for sale in the ordinary course of business
e. Assets classified as held for sale under PFRS 5
f. Biological assets related to agricultural activity, other than
bearer plants
g. Intangible assets
h. Minor spare parts and short-lived stand-by equipment

Recognition
An item of PPE is recognized if:

a. it is probable that future economic benefits associated with the item
will flow to the entity; and
b. the cost of the item can be measured reliably.
[SP s+ser]
Spare parts, stand-by equipment and servicing equipment are recognized as
PPE if they meet the definition of PPE; otherwise, they are classified as
inventory.
Safety and environmental equipment are usually recognized as PPE because,

although they do not directly increase the future economic benefits of other
existing assets, they are necessary in obtaining the future economic benefits
from other assets. For example, a factory may be required to install safety and
environmental equipment by the government; non-compliance may result to the
factory being shut down.
Initial Measurement
An item of PPE is initially measured at cost.

Cost is "the amount of cash or cash equivalents paid, or the fair value of
the other consideration given to acquire an asset at the time of its
acquisition or construction or, where applicable, the amount attributed to
that asset when initially recognized in accordance with the specific
requirements of other PFRSs."
Cost is measured at the cash price equivalent at the acquisition date. If

payment is deferred beyond normal credit terms, the difference between the cash
price equivalent and the total payment is recognized as interest expense over
the credit period. equivalent& acquisition date
cash price
cost =
--
cas price equi
Deferred payment total payment)
Cost comprises the following: interestexpense
over the cred period
a. Purchase price, including import duties, nonrefundable purchase taxes,

less trade discounts and rebates.
b. Direct costs of bringing the asset to the location and condition
necessary for it to be used in the manner intended by management.
c. Initial estimate of dismantlement, removal and site restoration costs
for which the entity incurs an obligation by acquiring or using the
asset other than to produce inventories.
Examples of directly attributable costs:
a. Costs of employee benefits arising directly from the construction or

acquisition of PPE
b. Costs of site preparation
c. Initial delivery and handling costs (e.g., freight costs)
d. Installation and assembly costs
e. Testing costs gross of disposal proceeds of samples produced during
testing (the proceeds, and the cost of the samples which is measured
using PAS 2 Inventories, are recognized in profit or loss in accordance
with applicable Standards); and
f. Professional fees
Examples of costs that are expensed outright:
a. Costs of opening a new facility.

b. Costs of introducing a new product or service (including costs of
advertising and promotional activities).
c. Costs of conducting business in a new location or with a new class of
customers (including costs of staff training).
d. Administration and other general overhead costs.

Cessation of Capitalization of Costs
Capitalization of costs ceases when the PPE is in the location and condition
necessary for it to be capable of operating in the manner intended by management.
Therefore, costs incurred in using or redeploying PPE are not capitalized.
CLASSES OF PPE
A class of property, plant and equipment is a grouping of assets with similar
nature and use in an entity's operations. The following are examples of separate
classes of PPE:
1. Land
2. Land and buildings
3. Machinery
4. Ships
5. Aircraft
6. Motor vehicles
al
in
7. Furniture and fixtures
8. Office equipment ↳p used in the production or supp
9. Bearer plants I OFgoods or services or for
LAND (PROPERTY)
Land is classified as PPE if it is used in the entity's operations as "owner
occupied" property, e.g., land on which the entity's office building was
constructed, land used as plant site, and land held for future plant site.

a. Land being sold in the ordinary course of business – classified as
"Inventory"
b. Land held for sale under PFRS 5 - classified as "Noncurrent asset held
for sale"
c. Land held for long-term capital appreciation - classified as "Investment
property"
d. Land held for a currently undetermined future use - classified as
"Investment property"
e. Land held as site for a building being constructed or developed for
future use as investment property - classified as "Investment property"
f. Land leased out under operating lease - classified as "Investment
property"
g. Land leased out under finance lease - derecognized in the lessor's books
of accounts
Cost of land costs, such as

1. Purchase price including other necessary broker's commissions. fees, and
2. Closing costs, such as titling costs, attorney's recording fees. for its
3. Costs incurred in getting the land in the condition intended use, such
as surveying, grading, filling, draining, and clearing.
4. Unpaid taxes prior to date of acquisition assumed by the buyer. Taxes
incurred after the date of acquisition are recognized as expense.
5. Assumption of any liens, mortgages, or encumbrances on the property.
6. Special assessments for local government-maintained improvements, such
as pavements, streetlights, sewers, and drainage systems.
7. Option paid to acquire the land. Options paid on items not acquired are
recognized as expense.
8. Costs incurred to induce tenants to vacate premises of relocating and
reconstructing property belonging to and others. costs
9. Initial estimate of restoration costs for which the entity has a present
obligation.
10. Any additional land improvements that have indefinite useful life,
such as costs of draining, clearing, grading, leveling, and filling,
surveying, subdividing, and other permanent improvements.

LAND IMPROVEMENT
Land improvements are enhancements to the land which have a definite useful
life, such as private driveways, walks, fences, parking lots, drainages and
water systems, and cost of trees, shrubs, plants and other landscaping.
Land normally has an indefinite useful life and thus not subject to depreciation.
On the other hand, land improvements have a definite useful life. Therefore,
land improvements are recognized separately from land and depreciated over their
estimated useful lives.
BUILDING (PLANT)
Building is classified as PPE if it is used in the entity's operations as "owner
occupied" property, e.g., office building. Building being constructed or
developed for future use as "owner occupied" property is also classified as
PPE.

a. Building being sold in the ordinary course of business classified as
"Inventory"
b. Building held for sale under PFRS 5 - classified as "Noncurrent asset
held for sale"
c. Building being constructed or developed for future use as investment
property - classified as "Investment property."
d. Building leased out under operating lease - classified as "Investment
property"
e. Building leased out under finance lease - derecognized in the lessor's
books of accounts
Cost of purchased building

1. Purchase price including other necessary costs, such as broker's
commissions and legal fees.
2. Assumption of any liens, mortgages, or encumbrances on the property
3. Option paid to acquire the building. Options paid on items not acquired
are charged to expense.
4. Unpaid taxes prior to date of acquisition assumed by the buyer. Taxes
incurred after the date of acquisition are recognized as expense.
5. Costs incurred to induce tenants to vacate premises.
6. Costs of getting the building in the condition for its intended use,
such as remodeling, renovation, and other repairs prior to occupancy.
Repairs and maintenance costs incurred after occupancy are recognized
as expense.
BUILDING IMPROVEMENT
Building improvements improvement are subsequent expenditures that either
increase the useful life or improve the current state of a building.
Examples of Building improvements

1. Cost of elevator, escalator, or similar item that was not originally
included in the purchased building or in the blueprint of a self-
constructed building.
2. Ventilation, plumbing, and lighting systems installed after the
occupancy of a purchased building or the completion of a self-constructed
building. If installed prior to occupancy or during construction, these
items are capitalized to the building account.
3. Immovable fixtures attached to the building which, if removed, would
necessarily damage the building, e.g., partitions, compartments and
cranes. Movable fixtures are classified as furniture and fixtures, e.g.,
signage.

EQUIPMENT
Equipment refers to delivery and transportation equipment, office equipment,
machinery, furniture and fixtures, furnishings, factory equipment, and similar
fixed assets.
Cost of equipment
1. Purchase price including other necessary costs, such as broker's
commissions and non-refundable purchase taxes.
2. Freight, handling charges, and insurance on the equipment while in transit
3. Cost of necessary special foundations or platform
4. Assembling and installation costs
5. Costs of testing and conducting trial runs, gross of proceeds from sale
of samples produced during testing.
6. The initial estimate of decommissioning and restoration costs for which
the entity has a present obligation
The cost of equipment does not include the following:

a. Cost of relocating the equipment after it has been put to the
location and condition originally intended by management this is recognized as
expense.
b. Cost of training personnel who will be responsible in operating the
equipment - recognized as expense.
c.Cost of dismantling and removing old equipment, which
belongs to the entity, prior to the installation of new equipment - recognized
as expense except when the cost was previously recognized as liability.
Bearer plants
A bearer plant is a living plant that:
a. is used in the production or supply of agricultural produce;
b. is expected to bear produce for more than one period; and
c. has a remote likelihood of being sold as agricultural produce,
except for incidental scrap sales.
Bearer plants are accounted for similar to self-constructed assets. PAS 16 uses
the term 'construction' to include activities that are necessary to cultivate
the bearer plants before they are in the location and condition intended by
management.
Lump-sum purchase of items of PPE

The acquisition cost of two or more PPE acquired at a lump-sum price (basket
price) is allocated to the individual assets based on their relative fair values
at the date of purchase.
The main reason for the allocation is subsequent measurement. Some of the items
purchased may be non-depreciable while some are depreciable, and even if all
the items are depreciable, each may have a different useful life.
Land, buildings, and equipment are separate classes of PPE. Therefore, they are
accounted for separately even when they are acquired together. Land has an
indefinite useful life and is therefore not depreciated (with some exceptions
such as quarries and sites used for landfill). Buildings and equipment on the
other hand have finite useful lives and are therefore depreciated.
Land and building acquired at a lump-sum price mentioned

no rin above
The lump-sum purchase price of land and building is allocated to both the land
and building based on their relative fair values at the date of purchase. The
entity's intention to demolish rather than use the building does not affect the
fair value that is used in the cost allocation. This is because the fair value
is measured by considering the non-financial asset's highest and best use
determined from the perspective of market participants, even if the entity
intends a different use or intends not to use the nonfinancial asset. (PFRS 13)

Therefore, the acquisition cost is nevertheless allocated to both land and
building even if:
a. the entity intends to use the building only in the meantime but demolish
it in the future. In this case, the cost allocated to the building is
depreciated over the period of expected usage; or
b. the entity intends to demolish the building right away. In this case, the
cost allocated to the building is recognized as loss. If a new building
is constructed following the demolition, the cost of the new building
shall not be affected by the cost allocated to the building demolished.
However, if the building is unusable, from the perspective of both the entity
and market participants, such that the building has an insignificant fair value,
the total acquisition cost is allocated only to the land. In this case, the
building is not recognized as an asset because the asset recognition criteria
are not met.
The lump-sum acquisition cost is not allocated if both the land and building
are classified as inventory or investment property measured at fair value. This
is because, in these cases, the land and building are accounted for as a single
asset. However, if the land and building are classified as investment property
measured at cost, the lump-sum acquisition cost is allocated because in this
latter case, the land and building are accounted for as separate assets.
Demolition costs
The accounting treatment for demolition costs depends on the reason for the
demolition.
Case 1: To construct a new building

An old building is demolished to make way for the construction of a new building.
Accounting for demolition cost:

The cost of demolishing or razing the old building qualifies as cost of site
preparation that is directly attributable to the construction of the new
building. Therefore, the demolition cost is capitalized as cost of the new
building. This applies whether the old building is an existing asset or is newly
acquired.
Only the demolition costs may be capitalized as cost of the new building. The
carrying amount of the building demolished,-if any, is recognized as loss.
Any proceeds from sale of salvaged materials from the demolition are deducted
from the demolition cost that is capitalized.
Case 2: To clear the land for a possible future sale

An old building is demolished to clear the land for a possible future sale. The
demolition costs are incurred to shoulder the burden of demolishing for the
buyer.
Accounting for demolition cost:

The demolition cost is capitalized only if it C enhances the future economic
benefits of the land; otherwise, it is expensed (e.g., as cost of disposal).
Spado nila isiping I hold for sale yung land
If the decision to demolish occurs prior to the classification of the land as

"held for sale" under PFRS 5 Non-current assets held for sale and Discontinued
Operations, the demolition cost is treated as
"Costs to sell" when measuring the asset at the lower of carrying amount and
fair value less costs to sell. needed to be done
For the sale I happen

~
If the demolition cost is a prerequisite to the sale of land classified as
inventory, the demolition cost is treated as "costs to sell" when measuring the
asset at the lower of cost and net realizable value.

Any proceeds from sale of salvaged materials from the demolition are deducted
from the demolition cost that is capitalized or expensed.
Decommissioning and Restoration costs

Aside from the purchase price and direct costs of acquisition, cost of a PPE
also includes the initial estimate of dismantlement removal and site restoration
costs (a.k.a. 'decommissioning and restoration costs') for which the entity
incurs an obligation by acquiring or using the asset other than to produce
inventories. these costs thatyou pay
are
FOr FOr the PPE itself not FOr

Whatitwould then produce
The decommissioning and restoration costs are initially measured at fair value,
which is usually the present value of the estimated costs.
Self-constructed assets
An entity may opt to construct a PPE (e.g., a building or machine) rather than
purchase it from another party. The entity measures the cost of a self-
constructed asset using the same principles used for a purchased asset.
The cost of a self-constructed building includes the following:

a. Materials, labor, and overhead costs incurred during construction
b. Architectural costs, supervision costs, and costs of building permit
c. Excavation costs
d. Insurance costs and safety inspection fees
e. Costs of temporary structures built during construction, such as
temporary safety fence, construction offices, sleeping quarters for
laborers, and materials and tools shed
f. Borrowing costs to the extent that they are capitalizable under PAS 23
Borrowing Costs.
The cost of a self-constructed asset on self-construction does not include the

following
a. Internal profits or savings recognized. of wasted material, labor, or
other
b. Cost of abnormal amounts resources due to inefficiencies recognized as
expense.
c. Costs of uninsured hazards or claims for uninsured accidents recognized
as expense.
d. Costs of private driveways, walks, permanent fences, parking lots, and
drainages and water systems that are not included in the building's
blueprint - these are capitalized as land improvements.
e. Income from incidental operations
Other modes of acquisition of a PPE

Aside from purchase and self-construction, a PPE may also be acquired through
exchange (including trade-in), issuance of equity or debt instrument, or
donation.
① Acquisition through Exchange

A PPE may be acquired in exchange for (a) a non-monetary asset or (b) a
combination of monetary and non-monetary assets. The measurement of the PPE
acquired depends on whether the exchange transaction has commercial substance
or not. maakakaroon
cash FIN e
D a
~ na change
With Commercial Substance:
An exchange has commercial substance if the entity's subsequent cash flows are
expected to change as a result of the exchange. The PPE received is measured
using the following order of priority:
I FVG 1. Fair value of the asset GivenG up (plus cash paid or minus cash received)
2. Fair value of the asset Received
R
② FUR
3. Carrying amount of the asset Given
6 up (plus cash paid or minus cash
③ CA6 received)

Without Commercial Substance:
The PPE received is measured at the Carrying amount of the asset Given up (plus
cash paid or minus cash received). No gain or loss is recognized in an exchange
transaction that lacks commercial substance. gain x loss or
recognized
Acquisition through Trade-in

In a trade-in transaction, a buyer uses a- used asset as part payment for the
purchase of a new asset. For example, you buy a new cellphone by trading-in
your old cellphone and paying cash for the balance.
Trade-ins are accounted for as exchange involving a combination of monetary and

non-monetary assets (i.e ., the new asset purchased is measured using the 'order
of priority discussed earlier). 8 FVG
② FVR
③
CAb
Acquisition through Issuance of own equity instrument

Acquisitions of assets through the issuance of an entity's own equity instrument
are accounted for under PFRS 2 Share-based Payments. Under PFRS 2, the asset
received is measured using the following order of priority:
1. Fair value of the asset received
R
I FVAR
2. Fair value of the equity
E instrument
I issued
② FVEl
Acquisition through Issuance of debt instrument

A PPE acquired through the issuance of a debt instrument (e.g., bond payable,
note payable, and the like) is initially measured using the following order of
priority:
① FVAR 1.
2.
Fair value of the asset received
Fair value of the debt
D
R
instrument
I issued
② FVDI
The foregoing order of priority is based on the following:
1. "The cost of an item of property, plant and equipment is the cash price
equivalent at the recognition date."
Cash price equivalent (the deemed the fair value of the asset received)
is the amount that would have been paid if the entity acquired the PPE on
cash basis rather than defer the payment by issuing a debt instrument.
2. If the fair value of the asset received is indeterminable, the PPE received
is measured in relation to the fair value of the debt instrument issued.
Such fair value may be determined using an appropriate valuation
technique, e.g., present value of future cash flows discounted at the
prevailing market rate of interest for a similar instrument. (PFRS 9.B5.1
and PFRS 13.38)
Acquisition through Donation
A PPE received from donation is measured at fair value and accounted for as:
a. Donated capital - if the donor is an owner (shareholder). "Donated
capital" is presented in equity under share premium or additional paid-
in capital. Any cost incurred attributable to the receipt of donation and
transfer of ownership is -offset to the donated capital account.
b. Income - if the donor is an unrelated party. Any cost incurred attributable
to the receipt of donation and transfer of ownership is- offset to the
income recognized.
c. Government grant in accordance with PAS 20 Accounting for Government
Grants and Disclosure of Government Assistance - it the donor is the
government.
Alternatively, nonmonetary assets received as government grants are measured at

a nominal amount.

Summary/Conclusion:
Property, plant, and equipment (PP&E) are the long-term, tangible assets that
a company owns. They are most often fixed assets. PP&E, which includes trucks,
machinery, factories, and land, allows a company to conduct and grow its
business.
PP&E is depreciated over time and can be sold for its salvage value. When a
company purchases PP&E, it is known as a capital expenditure. Proper management
of capital expenditures is crucial to the growth and profitability of a company,
so much so that investors analyze how a company manages its PP&E to determine
if its capital expenditures will aid its success or be a drain on its funds.
References:
Millan
https://www.ifrs.org/issued-standards/list-of-standards/ias-16-property-plant-
and-equipment/
https://www.investopedia.com/ask/answers/06/propertyplantequipment.asp

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COLLEGE OF BUSINESS AND ACCOUNTANCY

Topic: Cash and Cash Equivalents

At the end of this module, the student should be able to:

An important element of the objective of financial reporting is assessing the

The only real guidance is that offered in PAS 1 Presentation of Financial

GEN‐FM‐018 Rev 0 Effective Date 01 Jun 2021

↳"cradi to grave cycle"

ACCOUNTING FOR BUSINESS TRANSACTIONS AFFECTING CASH

The activities of a business enterprise can be grouped into three categories,

a) Operating activities - These are the principal revenue - producing activities

b) Investing activities - These activities include acquisitions' and->

In accordance with PFRS 9, CASH being a financial asset should be recognized at

Underlying the definition of fair value is a presumption that an entity is a

MAGIGING CPA AKO CORPORATION (Partial)

Cash on hand & Cash in bank P20,000,000 -breakdown

COMPONENTS OF CASH AND CASH EQUIVALENTS

Cash in common practice (i.e. ., coins, currency, checks encashment) includes

GEN‐FM‐018 Rev 0 Effective Date 01 Jun 2021

SD For minor expenditures

S Bank drafts are commitments by banking institutions to advance funds on demand

Deposits in foreign banks that are subject to immediate and unrestricted

when cash in foreign banks is restricted as to use or withdrawal, it should be

Components disclosed or of reported cash restricted separately as and to

The objective of the disclosure is to provide the user of financial statements

GEN‐FM‐018 Rev 0 Effective Date 01 Jun 2021

1. Three-month month time commercial deposit, or money market

SUMMARY OF BUSINESS TRANSACTIONS AFFECTING CASH

Debits to Cash arising from: Credits to cash arising from:

1. Cash Sales 1. Cash purchases of Goods/RawMaterials/Services

2a. Payments for purchases of goods (merchandise/

2b. Payment of Direct Labor and Factory overhead

2c. Payment of Selling and Administrative Expenses

3. Receipt of interest, rent, dividend

Investing Activities Scapital expenditure)

1a. Sale of property, plant, and equipment on cash

2. Sale of investments in securities, debt 2. Purchase of investment securities, debt and

3. Collection of loans, granted to other

2. Issuance of entity's equity shares 2a. Retirement of equity shares

2b. Purchase of treasury shares

2c. Payment of cash dividends

3. In case of sole proprietorship and partnership: 3. Withdrawal by owner or partners

GEN‐FM‐018 Rev 0 Effective Date 01 Jun 2021

Intermediate Accounting Part IA and Part IB (2021 Edition) by Zeus Vernon B.

Financial Accounting Volume 1 (2021 Edition) by Conrado T. Valix, Jose F.

PAS 7 Statement of Cashflows

PAS 1 Presentation of Financial Statements

GEN‐FM‐018 Rev 0 Effective Date 01 Jun 2021

- Rationale for Managing Cash Effectively

At the end of this module, the student should be able to:

a. Understand the basic effective cash management principles.

In accounting, cash refers to money (currency) that is readily available for

Cash is the lifeblood of a business. For a company to cover its operating

RATIONALE FOR MANAGING CASH EFFECTIVELY

Because it plays such a central role in operating a business, cash must be

Since cash is the most liquid asset, it is particularly susceptible to

GEN‐FM‐018 Rev 0 Effective Date 01 Jun 2021

Effective cash management includes planning and control aspects.

1. Adopt an effective system of internal control of cash transactions

The following procedures may be put into place:

1. Provide physical protection of cash by using bank

GEN‐FM‐018 Rev 0 Effective Date 01 Jun 2021

1. Statement of Cash Flows

2. Regular preparation of bank reconciliation statement and proof of cash.

3. Adoption of the Imprest Cash System

AC 3 - Intermediate Acctg' 1 (Ate Jan Ver)

AC 3 - Intermediate Acctg' 1 (Ate Jan Ver)