Professional Documents
Culture Documents
ACCOUNTING I
ASSETS
Intermediate Accounting I: ASSETS
• CASH (Ch 1 – 3)
PRELIM • INVENTORIES (Ch 10 – 14)
• RECEIVABLES (Ch 4 – 9)
MIDTERM • PROP., PLANT and EQPT. (Ch 25 – 32)
• INVESTMENTS (15 – 24)
FINAL • INTANGIBLE ASSETS ++ (Ch 33 – 38)
ACCOUNTS
RECEIVABLE
Chapter 4
Definition of Receivables
• Receivables are financial assets that represent a contractual
right to receive cash or another financial asset from another
entity.
• 2 Classes
1. trade receivables
2. non trade receivables
Trade Receivables
• claims arising from sale of merchandise or services in the ordinary
course of business
• Accounts receivables
• open accounts arising from the sale of goods and services in the
ordinary course of business and not supported by promissory notes.
• customer’s accounts, trade debtors, and trade accounts receivables
• Notes receivable
• those supported by formal promises to pay in the form of notes.
Nontrade Receivables
• represent claims arising from sources other than the sale of
merchandise or services in the ordinary course of business
Loan Receivables
• For banks and other institutions, receivables result primarily from
loans to customers.
• The loans are made to heterogeneous customers and the repayment
periods are frequently longer or over several years.
• Chapter 7
Classification
• 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, are noncurrent assets.
Cash 475,000
Sales Discount 15,000
Allowance for Freight Charge 10,000
Accounts Receivable 500,000
To record collection
2. FOB Destination and Freight Prepaid
Cash 485,000
Sales Discount 15,000
Accounts Receivable 500,000
To record collection
3. FOB Shipping Point and Collect
Cash 485,000
Sales Discount 15,000
Accounts Receivable 500,000
To record collection
4. FOB Shipping Point and Prepaid
Cash 495,000
Sales Discount 15,000
Accounts Receivable 510,000
To record collection
Allowance for sales returns
• recognize the probability that some customers will return goods
that are unsatisfactory or will make other claims requiring
reduction in the amount due as in the case of shipment shortages
and defects.
• An amount of P50,000 of the total accounts receivable at year-end
represents selling price of goods that will probably be returned.
• The adjusting entry to recognize the probable return
Sales Return and Allowance 50,000
Allowance for sales return 50,000
Sales Discount
• Entities usually offer cash discounts to credit customers.
• A cash discount is a reduction from an invoice price by reason of prompt
payment.
• sales discount on the part of the seller
• purchase discount on the part of the buyer.
• expressed as 5/10, n/30
• entitled to a 5% discount if payment is made in 10 days from the
invoice date.
• failure to pay within the 10-day discount period, the gross amount of
the invoice price must be paid within 30 days from the invoice date.
Methods of recording Credit Sales
• Gross method
• The accounts receivable and sales are recorded at gross
amount of the invoice.
• common and widely used method because it is simple to
apply
• Net method
• accounts receivable and sales are recorded at net amount
of the invoice, meaning the invoice price minus the cash
discount.
GROSS METHOD
• Sales of merchandise for P100,000, terms 5/10, n/30.
Accounts receivable 100,000
Sales 100,000
Cash 30,000
Accounts receivable 30,000
Direct Writeoff method
• requires recognition of a bad debt loss only when the accounts
proved to be worthless or uncollectible.
• Worthless accounts are recorded by debiting bad debts and
crediting accounts receivable.
• If the accounts are only doubtful of collection, no entry is necessary.
• often used by small businesses because it is simple to apply.
• the Bureau of Internal Revenue recognizes only this method for
income tax purposes.
• violates the matching principle
NOT PERMITTED under IFRS
• because the bad debt loss is often recognizes in later accounting
period than the period in which the sales revenue was recognized.
• Accounts of P30,000 are considered doubtful of collection.
Illustratio NO ENTRY
n Direct • The accounts proved to be worthless.
writeoff Bad debts 30,000
method Accounts receivable 30,000
• The same accounts that are previously written off as worthless
are recovered or collected.
Accounts receivable 30,000
Bad debts 30,000
Cash 30,000
Accounts receivable 30,000
• If the recovery is subsequent to the year of writeoff and the
direct write off method is used,
• May be credited to other income
Doubtful Accounts in the Income
Statement
• Distribution cost
• If the granting of credit and collection of accounts are under the
charge of the sales manager,
• Administrative expense
• If the granting of credit and collection of accounts are under the
charge of an officer other than sales manager,
• In the absence of any contrary statement, doubtful accounts shall be
classified as administrative expense.
Problem 10-3
• Infra Company provided the following data for the current year:
• Sales on account 3,600,000
• Notes received to settle accounts 400,000
• Provision for doubtful accounts 90,000
• Accounts receivable determined to be worthless 20,000
• Merchandise returned by customer 15,000
• Collections received to settle accounts 2,450,000
• Discounts permitted to be taken by customers 45,000
• Collections received in settlement of notes 180,000
• REQUIRED:
1. Prepare journal entries to record the transactions
2. Compute the net realizable value of accounts receivable
Problem 10-3
• Sales on account 3,600,000
Accounts Receivable 3,600,000
Sales 3,600,000
Cash 180,000
Notes Receivable 180,000
Compute Net Realizable Value
Accounts Receivable 670,000
Less: Allowance for Doubtful Accounts 70,000
Net Accounts Receivable 600,000
• REQUIRED: Prepare adjusting entry to provide for doubtful accounts under each of the
following independent assumptions:
a. Past experiences indicates that 75% of sales are credit sales and that an average
2% of credit sales may prove uncollectible.
b. One percent of gross sales may prove uncollectible.
c. An analysis of aging of trade receivables indicates that accounts receivable in the
amount of P80,000 may prove uncollectible.
d. The policy is to maintain an allowance for doubtful accounts equal to 10% of the
outstanding accounts receivable.
Past experiences indicates that
Credit Sales (5,000,000 * 75%) 3,750,000
75% of sales are credit sales
and that an average 2% of Multiply by rate 2%
credit sales may prove Doubtful Accounts Expense 75,000
uncollectible.
Doubtful Accounts Expense 75,000
Allowance for Doubtful Accounts 75,000
To record allowance
Allowance before adjustment 20,000
Add: provision 75,000
Allowance for Doubtful Accounts 95,000
Accounts Receivable 500,000
Less: Allowance for Doubtful Accounts 95,000
Net Accounts Receivable 405,000
Gross Sales 5,000,000
One percent of gross sales
may prove uncollectible.
Multiply by rate 1%
Doubtful Accounts Expense 50,000
Cash 5,940,000
Accounts Receivable 5,940,000
Cash 10,000
Accounts Receivable 10,000
PRESENTATION
Accounts Receivable 2,400,000
Less: Allowance for Doubtful Accounts 120,000
Allowance for Sales Discounts 10,000 130,000
Net Accounts Receivable 2,270,000
PROBLEM 5-6
Correction in allowance for doubtful accounts
• the percent of sales method of estimating doubtful accounts has the
disadvantage of the allowance for doubtful accounts being inadequate or
excessive
• Aging the accounts is then necessary to test the reasonableness of the
allowance.
• Where the allowance is inadequate or excessive, a question arises as to the
proper treatment of the discrepancy, whether to consider it as an error or a
component of profit or loss.
• `The correction of the discrepancy is to be reported in the income statement
either as an addition to or subtraction from doubtful accounts expense.
• the correction is the natural result of a change in accounting estimate
• Changes in estimate are treated currently and prospectively (part of profit
or loss)
• Accordingly, an inadequate allowance is adjusted as follows:
Doubtful accounts expense xx
Allowance for doubtful accounts xx
• On December 31, the allowance account has debit balance of P20, 000
before adjustment.
• The debit balance does not indicate that the allowance is inadequate
because the accounts written off during the year and charged to the
allowance may have arisen from current year sales.
• The charge to the allowance account simply predates the recording of
doubtful accounts.
• At the end of the period when adjustments are made, the debit balance
should be considered.
Debit balance in allowance account
• if on December 31, the required allowance is P40, 000,
Required allowance 40, 000
Add: Debit balance in allowance 20, 000
Doubtful accounts expense 60, 000
• Note that after the adjustment for doubtful accounts, the allowance
account has a credit of P40, 000, which is the required allowance.
Problem • From inception of operation, Paramount Company provided for
5-8 uncollectible accounts expense under the allowance method
using percentage of sales method.
• Effective with the year ended December 31, 2016, the entity
adopted a new accounting method for estimating the allowance
for doubtful accounts at the amount indicated by the year-end
aging of accounts receivable.
• REQUIRED
1. Determine the allowance for doubtful accounts before
adjustment.
2. Determine the required allowance for doubtful accounts on
December 31, 2016.
3. Prepare the adjusting entry to record doubtful accounts
expense for 2016.
• The balance in the allowance for doubtful accounts was P500,000 on January 1,
2016. 20,000,000*2% = 400,000 (ADD)
• During the current year, credit sales totaled P20,000,000, interim provisions for
(DED doubtful accounts were made at 2% of credit sales, P300,000 of bad debts were
UCT) written off, and recoveries of accounts previously (ADD)written off amounted to
P50,000.
• A summary of aging is as follows: multiply ALLOWANCE
Classification Balance Collectible 5% 250,000
November – December 5,000,000 95% 10% 200,000
July – October 2,000,000 90% 25% 250,000
January – June 1,000,000 75% 400,000 75% 300,000
Prior to January 1, 2016 500,000 8,400,000
25% 1,000,000
• Based on the review of collectability of the account balances in the “prior to
January 1, 2016” aging category, additional
DEDUCT accounts
– Allowance (to gettotaling P100,000 are to
be written off on December 31, 2016. before adjustment)
Allowance
1. Determine the allowance for doubtful accounts before
adjustment.
PRESENTATION
ACCOUNTS RECEIVABLE 8,400,000
LESS: ALLOWANCE for DA 1,000,000
NET ACCOUNTS RECEIVABLE 7,400,000
Prepare the adjusting entry to record doubtful accounts expense
for 2016.
Required Allowance 1,000,000
Allowance – before adjustment 550,000
Doubtful Accounts Expense 450,000
• All of the accounts receivable are individually significant, except the other customer’s
accounts receivable.
• The entity has determined the impairment loss as follows:
Customer A not impaired 0
Customer B not impaired 0
Customer C partly impaired 1,500,000
Customer D partly impaired 1,000,000
Customer E totally impaired2,000,000
Computation of impairment loss
• It is reliably determined that a composite rate of 5% is appropriate to
measure impairment on all other accounts receivable.
• The impairment loss is computed as follows:
Customer C 1,500,000
Customer D 1,000,000
Customer E 2,000,000
Other accounts receivable (5% x 6,500,000) 325,000
Total impairment loss4,825,000
• Collective Assessment
Customer A 1,000,000
Customer B 1,500,000
Other customer’s accounts 4,000,000
Total other accounts receivable 6,500,000
Journal entry for the Impairment loss
• Note that the accounts receivable from customers A and B which are not
considered impaired should be included in the collective assessment of all
other accounts receivable.
• The rationale for including the unimpaired accounts receivable in the
collective assessment is that an entity does not have all the necessary
information to make an informed decision for individual assessment.
Impairment of Receivables
• The percentage of accounts receivable and percentage of
sales method can be considered “collective assessment
approach” of measuring impairment.
• On the other hand, the aging method is an “individual
assessment approach”.
End…
Credit Losses
• When measuring expected credit losses, an entity
should consider:
a. The probability-weighted outcome. The estimate should
reflect the possibility that a credit loss occurs and the
possibility that no credit loss occurs.
b. The time value of money. The expected credit losses
should be discounted.
c. Reasonable and supportable information that is
available without undue cost or effort.