RECEIVABLES

• Accounts receivable
• Notes receivable
• Loans receivable
• Receivable financing
 Receivables

 financial assets that represent a contractual

right to receive cash or another financial
asset from another entity.

 Trade receivables- claims arising from sale of

merchandise or services in the ordinary course
of business.
 Nontrade receivables- claims arising from
sources other than sale of merchandise or
services in the ordinary course of business.
 Receivables

 Trade receivables which are expected to be

realized in cash within the normal operating
cycle or one year, whichever is longer, are
classified as current assets.

 Nontrade receivables which are expected

to be realized in cash within one year, the
length of the operating cycle
notwithstanding, are classified as current
assets.
If collectible beyond one year, nontrade
receivables are classified as noncurrent assets.
 Receivables

 Trade and nontrade receivables which are currently

collectible shall be presented on the face of
statement of financial position as one line item called
trade and other receivables.

Details to be disclosed in the notes to fs.

Ex.
Accounts receivable xxx
Allowance for doubtful accounts xxx
Notes receivable xxx
Accrued interest on note receivable xxx
Advance to officers and employees xxx
Total trade and other receivables xxx
 Receivables

 Examples of nontrade receivables

1. Advances to or receivables from

shareholders, directors, officers or
employees.
2. Advances to affiliates
3. Advances to supplier
4. Subscriptions receivable
5. Creditors’ accounts debit balance
6. Special deposits on contract bids
7. Accrued income
8. Claims receivable
 Receivables

 Customers’ credit balances- credit balances in accounts

receivable resulting from overpayments, returns and
allowances, and advance payments from customers.
These are classified as current liabilities.

Ex. Customer A
Sales 800 Collection 400
Debit balance 400
Customer B
Sales 500 Collection 400
Credit balance 50 Returns 150

Adjustment may be made only for worksheet purposes,

meaning, not formally journalized and posted to the ledger:
Accounts receivable 50
Customers’ credit balances 50
 Accounts Receivable

 openaccounts arising from sale of

merchandise or services in the ordinary
course of business.
 Initial measurement at face value.
 Subsequent measurement at net realizable
value.
 deductions made in estimating the net
relizable value of trade accounts receivable.
a. allowance for freight charge
b. allowance for sales return
c. allowance for sales discount
d. allowance for doubtful accounts
 Accounts Receivable

a. Allowance for freight charge

Terms:
FOB destination- means that ownership of the goods
purchased is vested in the buyer upon receipt thereof.
FOB shipping point- means that ownership of the goods
purchased is vested in the buyer upon shipment
thereof.
Freight collect- means that freight charge on the
goods shipped is not yet paid. The common carrier shall
collect the same from the buyer.
Freight prepaid- means that freight charge on the
goods shipped is already paid by the seller.
 Accounts Receivable

Ex. An entity has an accounts receivable of P50,000

at the end of accounting period. Terms are 2/10, n/30,
FOB destination and freight collect. Customer paid
freight charge of P2,000.

To record the sale:

Accounts receivable 50,000
Freight out 2,000
Sales 50,000
Allowance for freight charge 2,000
To record the collection within the discount period:
Cash 47,000
Sales discount 1,000
Allowance for freight charge 2,000
Accounts receivable 50,000
 Accounts Receivable

b. Allowance for sales return

Ex. An amount of P100,000 of the total

accounts receivable at year-end represents
selling price of goods that will probably be
returned.

Journal entry to recognize the probable return:

Sales return 100,000

Allowance for sales return 100,000
 Accounts Receivable

c. Allowance for sales discount

 Cash discount- a reduction from an invoice price by

reason of prompt payment. It is known as sales
discount on the part of the seller and purchase
discount on the part of the buyer.

 Methods of recording credit sales

1. Gross method- accounts receivable and sales are
recorded at gross amount of the invoice. –common
and widely used method.
2. Net method- accounts receivable and sales are
recorded at net amount of the invoice, meaning
invoice price minus the cash discount.
 Accounts Receivable

journal entries:

Gross method Net method

1. Sale of merchandise for P200,000, 1. Sale of merchandise for P200,000,
terms 5/10, n/30. terms 5/10, n/30.

Accounts receivable 200,000 Accounts receivable 190,000

Sales 200,000 Sales 190,000
2. Collection within the discount 2. Collection within the discount
period. period.

Cash 190,000 Cash 190,000

Sales discount 10,000 Accounts receivable 190,000
Accounts receivable 200,000
3. Collection is made beyond the 3. Collection is made beyond the
discount period. discount period.

Cash 200,000 Cash 200,000

Accounts receivable 200,000 Accounts receivable 190,000
Sales discount forfeited 10,000
 Accounts Receivable

 If customers are granted cash discounts for prompt

payment, then, conceptually estimates of cash
discounts on open accounts at the end of the period
based on past experience shall be made.

Ex. Of the accounts receivable of P500,000 at the end

of the period, it is reliably estimated that discounts to be
taken will amount to P10,000.

adjustment:
Sales discount 10,000
Allowance for sales discount 10,000

Adjustment may be reversed at the beginning of the

next period in order that discounts can then be
charged normally to sales discount account.
 Accounts Receivable

d. Allowance for bad debts

 Methods of accounting for bad debts:

1. Allowance method- recognition of bad
debts loss if the accounts are doubtful of
collection.
2. Direct writeoff method- recognition of a
bad debt loss only when the accounts
proved to be worthless or uncollectible.

 Generally accepted accounting principles

require the use of the allowance method
because it conforms with the matching principle.
 Accounts Receivable
journal entries:
Allowance method Direct writeoff method
Accounts are considered to be Accounts are considered to be
doubtful of collection: doubtful of collection:
-
Doubtful accounts xxx -
Allow. for doubtful accounts xxx
Accounts are subsequently discovered Accounts are proved to be worthless:
to be worthless:
Bad debts xxx
Allow. for doubtful accounts xxx Accounts receivable xxx
Accounts receivable xxx
Accounts are unexpectedly recovered Accounts are unexpectedly recovered
or collected: or collected:

Accounts receivable xxx Accounts receivable xxx

Allow. For doubtful accounts xxx Bad debts xxx

Cash xxx Cash xxx

Accounts receivable xxx Accounts receivable xxx
 Accounts Receivable

Problem 1:

The following T-account summarizes the

transaction affecting the accounts receivable.

Compute the correct amount of accounts

receivable.
 Accounts Receivable

 Methods of estimating doubtful accounts

1. Aging of accounts receivable- involves an analysis

where the accounts are classified into not due or past
due. (not due, 1 to 30 days past due, 31 to 60 days past
due, etc.)
 Allowance is determined by multiplying the total of each
classification by the rate or percentage of loss
experienced by the entity for each category. (Required
allowance for doubtful accounts at the end of period.)
 Accounts Receivable

Problem 2:
The following data are summarized in the aging of accounts
receivable at the end of the period:

Balance Experience rate

Not due 600,000 1%
1-30 days past due 400,000 3%
31-60 days past due 150,000 4%
61-90 days past due 80,000 5%
Over 90 days past due 30,000 10%

Allowance for doubtful accounts has a credit balance of

10,000 before adjustment.

1. Compute for required allowance and doubtful accounts

expense.
2. Journal entry to record the doubtful accounts expense.
 Accounts Receivable

2. Percent of accounts receivable- a certain rate is

multiplied by the open accounts at the end of the
period in order to get the required allowance balance.

Problem 3:
The balance of accounts receivable is
P3,000,000 and the credit balance in the allowance for
doubtful accounts is P15,000. Doubtful accounts are
estimated at 3% of accounts receivable.

1. Compute for required allowance and doubtful

accounts expense.
2. Journal entry to record the doubtful accounts
expense.
 Accounts Receivable

3. Percent of sales- amount of sales for the year is multiplied by

a certain rate to get the doubtful accounts expense. The rate
may be applied on credit sales or total sales.

Problem 4:
Accounts receivable 1,000,000
Sales 5,000,000
Sales return 50,000
Allowance for doubtful accounts 20,000

Doubtful accounts are estimated at 1% of net sales.

1. Compute for doubtful accounts expense.

2. Journal entry to record the doubtful accounts expense.
 Accounts Receivable

 Impairment of accounts receivable

 PAS 39 paragraph 59 provides that a financial asset

or group of financial assets is impaired if there is
objective evidence of impairment as a result of one
or more “loss events” having an impact on the
estimated cash flows of the financial asset that can
be measured reliably.

 Significant financial difficulty of customer, Breach of

contract, Restructuring of accounts receivable,
Measurable decrease in the estimated cash flows
from a group of accounts receivable.
 Accounts Receivable

 Impairment assessment
 PAS 39,paragraph 64, provides the following detailed
guideline in assessing whether accounts receivable
should be considered impaired:

a. Individually significant accounts receivable

should be considered for impairment separately
and if impaired, the impairment loss is recognized.
b. Accounts receivable not individually significant
should be collectively assessed for impairment.
c. Accounts receivable not considered impaired
should be included with other accounts
receivable with similar credit-risk characteristics
and collectively assessed for impairment.
 Accounts Receivable

Problem 5:

An entity had the following accounts receivable at year-end:

Customer A 1,000,000
Customer B 1,500,000
Customer C 3,000,000
Customer D 2,000,000
Other customers’ accounts 5,000,000

The entity has determined the impairment loss of 750,000 from

Customer B, 1,500,000 from Customer C, and the accounts of
Customer A and D not impaired.

I t is also reliably determined that a composite rate of 5% is

appropriate to measure impairment on all other accounts
receivable.

Compute for the impairment loss.

 Notes Receivable

 Claims supported by formal promises to pay usually in

the form of notes.
 A promissory note is a written contract in which one person,
known as the maker, promises to pay another person,
known as the payee, a definite sum of money.
 The term notes receivable represents only claims arising from
sale of merchandise or services in the ordinary course of
business.

 Dishonored notes- a promissory note that matures and is

not paid.
 Shall be removed from the notes receivable account
and transferred to accounts receivable at an amount
to include any interest and other charges.
 Notes Receivable
 Measurement
Initial measurement Subsequent measurement
Short-term notes Face value -
receivable

Interest bearing Face value = Present value Amortized cost =initial

long-term notes upon issuance measurement minus principal
receivable repayment, plus or minus the
cumulative amortization of any
difference between the initial
carrying amount and the
principal maturity amount
minus reduction for impairment
or uncollectibility.
Noninterest Present value = discounted Amortized cost = present value
bearing long- value of future cash flows plus amortization of the
term notes using the effective interest discount, or the face value
receivable rate minus the unamortized
unearned interest income.
 Notes Receivable

Problem 1: Interest bearing note

Hoping Company sold to another entity a

tract of land costing P5,000,000 for P7,000,000 on
Jan. 1, 2016. The buyer paid P1,000,000 down and
signed a two-year promissory note for the remainder
of the purchase price plus 12% interest compounded
annually. Note matures on Jan. 1, 2018.

Journal entries for 2016, 2017, 2018.

 Notes Receivable

Problem 2: Noninterest bearing note

An entity sold an equipment costing P700,000

for P1,000,000 on Jan. 1, 2016. The buyer paid P100,000
down and signed a P900,000 noninterest bearing note
payable in three equal instalments every Dec. 31.

Prevailing interest rate is 12%

PV of an ordinary annuity of 1 for 3 periods is 2.4018

Journal entries for 2016.

 Loans Receivable

A financial asset arising from loan granted

by a bank or other financial institutions to a
borrower or client.
 Initial measurement- fair value plus transaction
costs that are directly attributable to the
acquisition of the financial asset.
 Transaction costs include direct origination
costs.
 Direct origination costs should be included in
the initial measurement of loan receivable.
However, indirect origination costs should be
treated as outright expense.
 Loans Receivable

 Subsequent measurement- amortized cost

using the effective interest method.
 Amortized cost- the amount at which the
loan receivable is measured initially minus
principal repayment, plus or minus the
cumulative amortization of any difference
between the initial amount recognized and
the principal maturity amount, minus
reduction for impairment or uncollectibility.
 Origination fees- include compensation for
activities such as evaluating the borrower’s
financial condition, evaluating guarantees,
collateral and other security, negotiating
the term of loan, preparing and processing
documents and closing the loan
transaction.
 Loans Receivable

 Origination fees received from the borrower

are recognized as unearned interest income
and amortized over the term of the loan.

 Origination fees not chargeable against the

borrower are known as direct origination
costs. They are deferred and also amortized
over the term of the loan.

 Origination fees - direct origination cost = unearned interest

income (amortization will increase interest income)
 Direct origination costs – origination fees = direct origination
cost (amortization will decrease interest income)
 Loans Receivable

Problem 1:
A bank granted a loan to a borrower on Jan. 1,
2016. The interest on the loan is 8% payable annually
starting Dec. 31, 2016. The loan matures in three years.
Data related to the loan are:

Principal amount 3,000,000

Origination fees charged against the borrower 100,000
Direct origination cost incurred 260,300

The effective rate on the loan is 6%.

Prepare journal entrie for 2016, 2017 and 2018

 Loans Receivable

 Impairment of loan

 Objective evidence of impairment under PAS

39, paragraph 59:
1. Significant financial difficulty of the issuer.
2. Breach of contract
3. Debt restructuring
4. Probability that the borrower will enter bankruptcy
or other financial reorganization.
5. Disappearance of an active market for the
financial asset because of financial difficulty.
6. Decrease in the estimated future cash flow from a
group of financial assets since the initial recognition.
 Loans Receivable

 Measurement of Impairment

 If there is evidence that an impairment loss on

loan receivable carried at amortized cost has
been incurred, the amount of the loss is
measured as the difference between the
carrying amount of the loan and the present
value of estimated future cash flows
discounted at the original effective rate of the
loan.
 Amount of loss shall be recognized in profit or
loss.
 Loans Receivable

Problem 2:

Urban Bank loaned P5,000,000 to Rural Bank on Jan 1,

2016. The terms of the loan require principal payment of
P1,000,000 each year for 5 years plus interest at 10%.

First principal and interest payment is due on Dec. 31,

2016. Rural Bank made the required payments on Dec. 31,
2016 and Dec. 31, 2017.

Rural Bank began to experience financial difficulties

and was unable to make the required payments on Dec. 31,
2018.

The same date, Urban Bank assessed the collectibility

of the loan and has determined that remaining principal
payments will be collected but the collection of interest in
unlikely.
 Loans Receivable

The loan receivable has carrying amount of

P3,300,000 including the accrued interest f P300,000 on
Dec. 31, 2018. Projected cash flows from the loan on
Dec. 31, 2018 as follows:

Dec. 31, 2019 500,000

Dec. 31, 2020 1,000,000
Dec. 31, 2021 1,500,000

PV of 1 is .9091 for one period, .8264 for two periods and

.7513 for three periods.

Present value of cash flows?

Impairment loss?
Carrying amount of loan on Dec. 31, 2018?
 Receivable Financing

 Thefinancial flexibility or capability of an

entity to raise money out of its receivables.

a. Pledge of accounts receivable

b. Assignment of accounts receivable
c. Factoring of accounts receivable
d. Discounting of notes receivable
 Receivable Financing

 Pledge of accounts receivable- accounts receivable

are pledged as collateral security for the payment of
the loan.

Recording of loan:
Cash xxx
Discount on notes payable* xxx
Note payable xxx

*if loan is discounted

Subsequent payment of loan:

Note payable xxx
Cash xxx
 Receivable Financing

 Assignment of accounts receivable- a borrower

called the assignor transfers its rights in some of its
accounts receivable to a lender called the assignee
in consideration for a loan.
 Features of assignment:
1. Nonnotification basis- customer are not informed
that their accounts have been assigned.
Notification basis- customer are notified to make
their payments directly to the assignee.
2. The assignee, usually a bank or finance entity,
analyzes the borrower’s accounts receivable. The
assignee usually lends a certain percentage of the
face value of the accounts assigned.
3. The assignee usually charges interest for the loan
that it makes and required a service or financing charge
or commission for the assignment agreement.
 Receivable Financing

 Factoring-a sale of accounts receivable on

without recourse, notification basis.
 Transfer of ownership of accounts receivable to
the factor, a bank or finance entity.

Casual factoring

Cash xxx
Allow. For DA xxx
Loss on factoring xxx
Accounts receivable xxx
 Receivable Financing

Factoring as continuing agreement

Cash xxx
Sales discount xxx
Commission xxx
Receivable from factor* xxx
Accounts receivable xxx

*Factor’s holdback- amount as protection

from customer returns and allowances and
other special adjustments.
 Receivable Financing

 Discounting of note receivable

Net proceeds- discounted value of note received

Net proceeds= Maturity value minus discount

Maturity value- amount due at the date of maturity

Maturity value= Principal plus interest

Maturity date- date on which note should be paid

Principal- amount appearing on face of the note

Interest- amount of interest for full term

Principal x rate x time
 Receivable Financing

Interest rate- rate appearing on the face of the note

Time- full term of the note

Discount- amount of interest deducted by bank in

advance
Maturity value x discount rate x discount period

Discount rate- rate used by bank in computing discount

Discount period- period of time from date of discounting

to maturity date, unexpired term of the note
 Receivable Financing

Problem 1:

On February 1,2012, Pink Company factored

receivables with carrying amount of P300,000 to Black
Company. Black company assesses a finance charge
of 3% of the receivable and retains 5% of the
receivables. Relative to this transaction, you are to
determine the amount of loss on sale to be reported in
the income statement of Pink company for February.

Assume that Pink Company factors receivables

on without recourse basis. The loss to be reported is?

Assume that Pink Company factors receivables

on with recourse basis. The recourse obligation has a
fair value of P1,500. The loss to be reported is?
 Receivable Financing

Problem 2:

On December 1,2014, Jana company assigned on

a notification basis accounts receivable of P5,000,000 to a
bank in consideration for a loan of 80% of the accounts less
service fee of 5%. The entity signed a note for the bank
loan. On December 31,2014 ,the entity collected assigned
accounts of P2,000,000 less discount of P200,000. The entity
remitted the collection to the bank in partial payment for
the loan. The bank applied first the collection to the interest
and the balance to the principal. The agreed interest is 1%
per month on the loan balance. The entity accepted sales
return of P100,000 on the assigned accounts and wrote off
assigned accounts totalling P300,000. What is the balance
of accounts receivable assigned on December 31, 2014 ?
 Receivable Financing

Problem 3:

On July 31,2011, Glade Company

discounted notes at the bank a customer's
P600,000, 6 months, 10% note receivable
dated May 31,2011. The bank discounted the
notes at 12%. How much is the proceeds
Glade received from this discounted notes?
 Theory questions

1. If receivable is hypothecated against borrowings, the amount of

receivable involved should be
A. Disclosed in the notes
B. Excluded from total receivable with disclosure
C. Excluded from total receivable without disclosure
D. Excluded from the total receivable and a gain or loss is recognized
between the face value and the amount of borrowings.

2. Which of the following is used to account for probable sales

discount, sales return, sales allowances in relation to factoring of
accounts receivable
A. Factor's holdback
B. Recourse liability
C. Both factor's holdback and recourse liability
D. Neither factor's holdback nor recourse liability

3. Notes receivable discounted with recourse should be

A. Included in total receivable with disclosure of contingent liability
B. Included in total receivable without disclosure of contingent liability
C. Excluded in total receivable with disclosure of contingent liability
D. Included in total receivable without disclosure of contingent liability
 Theory questions

4. A note receivable bearing a reasonable interest rate is sold to bank

with recourse. At thr date of discounting transaction, the note
receivable discounted account should be
A. Decreased by the proceeds from the discounting transaction
B. Increase by the proceeds from the discounting transaction
C. Increase by the face amount of the note
D. Decreased by the face amount of the note

5. What is imputed interest?

A. Interest based on the stated rate
B. Interest based on the implicit interest rate
C. Interest based on average interest rate
D. Interest based on bank prime rate.

6. All of the following are required when classifying receivables, except

A. Indicate the receivables classified as current and noncurrent.
B. Disclose any receivables pledge as a collateral.
C. Disclose all insignificant concentration of credit risk from the
receivables.
D. All of the choices are required when classifying receivables.
 Theory questions

7. An entity uses the allowance method for recognizing

doubtful accounts. The entry to record the writeoff of a
specific uncollectible account
A. Affect neither net income nor working capital
B. Affect neither net income nor accounts receivable
C. Decreases both net income nor working capital
D. Decreases both net income nor account receivable.

8. Which of the following methods of determining bad

debts expense best achieve the matching concept
A. Percentage of sale
B. Percentage of ending accounts receivable
C. Percentage of average accounts
D. Direct writeoff
 Theory questions

9. Which method of recording uncollectible accounts

expense is consistent with accrual accounting
A. Allowance method only
B. Direct writeoff method only
C. Both allowance method and direct writeoff method
D. Neither allowance method nor direct writeoff method

10. A debit balance in the allowance for doubtful

accounts
A. Should never occur
B. Is always result if management not providing a large
enough allowance in order to manage earnings
C. May occur before year-end adjustment of
uncollectible accounts.
D. May occur after year-end adjustment of uncollectible
accounts.