FINANCIAL ACCOUNTING AND REPORTING

RECEIVABLES

A receivable is the right to receive cash, another asset (goods) or services

Receivables may be current or noncurrent and trade or nontrade

 Trade receivables arise from the sale of goods or services to customers and in the form of accounts
receivable or notes receivable.
 Nontrade receivables are receivables from all other types of transactions like advances to officers and
employees and advances to other entities.

Accounts receivable arise from credit sales. The amount to be recorded as accounts receivable from sales on
account shall be the “Invoice Price” which is the amount after deducting trade discounts from the List Selling
Price. Take note that trade discounts are not accounted for and are ignored for recording purposes.

Example: An item is sold to a credit customer under terms of 2/15 and net 30, FOB shipping point terms with a
list selling price of P2,000,000 with trade discounts of 20% and 10%. The Invoice price is computed as follows:

List selling price 2,000,000

Less: 20% trade discount 400,000
Net 1,600,000
Less: 10% trade discount 160,000
Invoice price 1,440,000

As mentioned, the entry will not include the total trade discount of P560,000 (400,000 + 160,000) but instead
only the P1,440,000 amount will be recorded as follows:

Accounts Receivable 1,440,000

Sales 1,440,000

The following transactions also affect accounts receivable in computing for the ending balance:

ACCOUNTS RECEIVABLE
+ Credit Sales (-) Sales returns and allowances
+ Recovery of accounts written off (-) Sales discounts
(-) Collections including recovery
(-) Write off
(-) Factored accounts

The write off for accounts receivable under the ALLOWANCE METHOD is recorded by:

Allowance for doubtful accounts xx

Accounts Receivable xx

So therefore, the recovery or the collection on an accounts receivable that already has been written off cannot
be recorded by simply debiting cash and crediting accounts receivable. The entry for the write off must be
reversed and before recording the collection with the following two entries:

Accounts Receivable xx
Allowance for doubtful accounts xx

Allowance for doubtful accounts xx

Accounts Receivable xx

**Combining the two entries will be more efficient by:

Cash xx
Allowance for doubtful accounts xx

The ending balance of accounts receivable shall be presented as part of current assets under the heading of
“trade and other receivables” at the Net Realizable Value (expected cash value) or “amortized cost”

The NET REALIZABLE VALUE shall be computed after deducting an allowance for the following:

 Sales returns – Value of merchandise expected to be returned by customers as a result in error of

deliveries and defects.
FINANCIAL ACCOUNTING AND REPORTING

 Sales discounts – Value of price savings to customers expected to pay within the discount period and take
advantage of the cash discount.

 Freight charges – Amount of freight charges collected by the shipper from the buyer even though the
shipment was under FOB destination terms. This amount shall not be remitted by the buyer hence
deducted from the receivable.

 Doubtful accounts – Allowance for expected uncollectability that is an inherent risk from selling on
credit.
Allowance Method vs. Direct Write-off Method

Allowance Direct Write-off

Application Generally Accepted Non-GAAP

Expense and Increase
Accounts considered doubtful Not accounted for
the Allowance
Debit expense and
Write-off Debit Allowance and Credit AR
Credit AR
Debit AR and
Recovery Debit AR and credit Allowance
credit expense

The computation for the doubtful accounts expense which is an adjusting entry and the allowance for doubtful
accounts will be as follows:

Beginning balance xx
Write off (xx)
Recovery xx
Balance before adjustment xx
Doubtful accounts expense xx
Ending balance xx

3 METHODS IN ESTIMATING DOUBTFUL ACCOUNTS

1) The percentage of net credit sales method which will provide the amount of doubtful accounts
expense for the year and therefore is a method that emphasizes proper matching of doubtful accounts
against sales. This amount will then be added to the balance before adjustment, the total of the two will
then be the amount of allowance at yearend or after adjustment.
2) The percentage of accounts receivable method will provide the amount of required allowance for
doubtful accounts and just like its counterpart the “Aging Method”, the amount of doubtful accounts
expense will be worked back as an adjustment to the amount of required allowance.
3) The aging of accounts receivable method that is arguably the most accurate of all three methods since
an analysis is made and each classification of accounts receivable is multiplied by a specific rate of the
estimate of uncollectability. Naturally older accounts receivable are more likely to be uncollectible
compared to newer or more recent sales.

RECEIVABLE FINANCING

Accelerating the collection of receivables either by using accounts receivable as a loan collateral, selling the
receivables without recourse and discounting of notes receivable.

1. The use of receivables as a loan collateral can either be designated as pledging of accounts receivable
or an assignment of accounts receivables.

Pledging Assignment

 Total or all of the accounts receivable is used.  A specific portion or specific accounts
 A disclosure is made of the fact that receivable are used a collateral. Not all of the
receivables have been pledged. accounts receivable balance.
 The accounts receivable is accounted for  A reclassification is made on the assigned
normally but are not reclassified. accounts.
 Accounting for the loan shall be made with  Disclosure on the “equity on the assigned
respect to the proceed, recording of interest accounts or of the assignor” is disclosed in the
and payment of the principal. notes.
 The equity in the assigned accounts is the
difference between the balance of the
assigned accounts and the balance of the loan.
FINANCIAL ACCOUNTING AND REPORTING

2. The absolute sale of receivables is known as factoring and can be either a “casual factoring”
transaction or “factoring as a continuing agreement”.

Casual factoring is a sale of the receivables at a discount. This is similar to any type of sale of an asset in order to
generate cash quickly. However, the sale is always made below the carrying amount or the net realizable value of
the accounts receivable and therefore a loss shall be recognized as follows:

Face value of AR xx
Less: Service fee or commissions (xx)
Selling price xx
Less: Accounts receivable xx
Allowances xx (xx)
Loss on factoring xx

Factoring as a continuing agreement involves the sale of accounts receivable to a financing entity on a long-
term basis and where the buyer is committed to buy the receivables before the actual goods are sold to the
customers on credit. In other words, the collection and credit responsibilities are surrendered to the buyer as
soon as goods are delivered to the customers. The following items shall be deducted from the face value of the
receivables:

Face value of AR xx
Less: Service fee or commissions xx
Interest charges xx
Factor’s holdback xx (xx)
Proceeds from factoring xx

Both the service fee and interest shall be recognized as an expense, meanwhile the factor’s holdback is a
receivable and a value where the factor shall deduct the sales discounts and sales returns taken by the seller’s
customers before finally remitting to the seller the balance when all of the accounts receivable is collected.

3. Discounting of notes receivable that is with recourse and on a notification basis shall involve the
following computation:

Face value or principal xx

Interest on maturity xx
Maturity value xx
Less: Discount (MV x DR x remaining term) (xx)
Proceeds from discounting xx

The discount rate shall be determined by the bank buying the note, however if there is no discount rate provided,
the same rate on the note shall be used as the discount rate. The remaining term is also known as the “discount
period”.

The total receivable shall also be computed on the date of the discounting which is the face value plus the accrued
interest from the date of the note. This amount shall then be compared with the proceeds of the discounting and
a “loss” shall be recognized for the difference.

The entry for the discounting shall be as follows:

Cash xx
Loss on discounting xx
Notes receivable discounted xx
Interest Income or Interest Receivable xx

The note receivable discounted account is credited rather than writing off the notes receivable account because
of the contingent liability feature of the discounting transaction. However, this account shall be a contra-asset
account and deducted from the total notes receivable to be presented in the statement of financial position.

Valuation or the Carrying Amount of Notes Receivable

 Notes receivable shall be presented at its present value or the discounted value of its cash flows.

 As a rule, if the note is interest bearing and the interest rate is a realistic interest rate, the face value of
the note shall be its present value. An ehxception to this rule is that noninterest bearing notes shall not
be discounted if they are short term. Although there is still a difference between the face value and the
present value, the discount is deemed to be immaterial and therefore computing for the present value
shall not be necessary.
FINANCIAL ACCOUNTING AND REPORTING

 Therefore, it shall be for both noninterest bearing and long-term notes where it will be necessary to
discount the cash flows in order to present the notes at their present value. However, even if a note is
interest bearing but if the interest rate is unreasonably low, it will be necessary to compute for the
present value of the cash flows which will include the future interest computed on the low interest rate.

 If the note if a term note, the present value of 1 concept shall be applied, if the note is an installment
note and the installments and intervals are equal, the present value of an ordinary annuity shall be used.

 The 12-month collection period shall also be applied to determine if it’s a current asset or non current
asset. However, the present value shall be the amount to be presented, hence the related discount shall
be deducted from the face value of the note representing the cash flow.

Loan Impairment Loss – Both PFRS 9 and US GAAP requires the assessment of the collectability of a loan
receivable and whenever circumstances and present information and events indicate that it will be probable that
any portion of the principal and interest agreed upon will not be collected an allowance for the present value of
cash flows that will not be collected shall be recognized. The computation corresponding entry shall be as
follows:

PV of expected cash flows xx

Less: Face value xx
Accrued interest xx (xx)
Loan impairment loss (xx)

The journal entry would be:

Loan impairment loss xx

Interest Receivable xx
Allowance for Loan Impairment xx

The interest receivable shall be written off if interest income already recognized shall not be realized meanwhile
the allowance shall be deducted from the current balance of the notes receivable.

FINANCIAL ACCOUNTING THEORIES

1. The category “trade receivables” includes

a. Advances to officers and employees
b. Income tax refunds receivable
c. Claims against insurance companies for casualties sustained
d. None of these

2. What is the preferable presentation of accounts receivable from officers, employees, or affiliated
companies on a balance sheet?
a. As offset to capital
b. By means of footnotes only
c. As assets but separately from other receivables
d. As trade notes and accounts receivable if they otherwise qualify as current assets

3. When a customer purchases merchandise inventory from a business organization, she may be given a
discount which is designed to induce prompt payment. Such discount is called a(an)
a. Trade discount
b. Nominal discount
c. Enhancement discount
d. Cash discount

4. Trade discounts are

a. Not recorded in the accounts; rather they are a means of computing a price
b. Used to avoid frequent changes in catalogues
c. Used to quote different prices for different quantities purchased
d. All of the above

5. If a company employs the gross method of recording accounts receivable from customers, then sales
discounts taken should be reported as
a. A deduction from sales in the income statement
b. An item of “other expense” in the income statement
c. A deduction from accounts receivable in determining the net realizable value of accounts
receivable
d. Sales discounts forfeited in the cost of goods sold section of the income statement
FINANCIAL ACCOUNTING AND REPORTING

6. Assuming that the ideal measure of short-term receivables in the balance sheet is the discounted value of
the cash to be received in the future, failure to follow this practice usually does not make the balance
sheet misleading because
a. Most short-term receivables are not interest-bearing
b. The allowance for uncollectible accounts includes a discount element
c. The amount of the discount is not material
d. Most receivables can be sold to a bank or factor

7. Which of the following methods of determining bad debt expense does not properly match expense and
revenue?
a. Charging bad debts with a percentage of sales under allowance method
b. Charging bad debts with an amount derived from a percentage of accounts receivable under
allowance method
c. Charging bad debts with an amount derived from aging accounts receivable under allowance
method
d. Charging bad debts as accounts written off as uncollectible

8. Which of the following methods of determining annual bad debt expense best achieves the matching
concept?
a. Percentage of sales
b. Percentage of ending accounts receivable
c. Percentage of average accounts receivable
d. Direct write off

9. Which of the following rates may be used to compute for the interest income on receivable?
a. Stated rate
b. Effective rate
c. Either A or B
d. Neither A nor B

10. Which of the following rates may be used to compute for the interest receivable on a notes receivable?
a. Stated rate
b. Effective rate
c. Either A or B
d. Neither A nor B

11. Pledge transations

a. Are disclosed only
b. Are accounted for by segregating the pledged receivables from the other receivables through
journal entry
c. Need not be disclosed if the related loan does not require any collateral security
d. A and B

12. It involves outright sale of receivables to a financing institution known as factor.

a. Pledging
b. Assignment
c. Factoring
d. Selling

13. What is “recourse” as it relates to selling receivables?

a. The obligation of the seller of the receivables to pay the purchaser in case the debtor fails to pay
b. The obligation of the purchaser of the receivables to pay the seller in case the debtor fails to pay
c. The obligation of the seller of the receivables to pay the purchaser in case the debtor returns the
product related to the sale
d. The obligation of the purchaser of the receivables to pay the seller if all of the receivables are
collected

14. Before impairment, the carrying amount of an impaired loan or note receivable
a. Is equal to the unpaid principal
b. Is equal to the unpaid principal plus any recorded accrued interest receivable
c. Excludes any accrues interest receivable
d. Less than the present value of the note receivable

15. A receivable is credit-impaired if

a. A loss event has occurred that is detrimental to the entity’s ability to collect contractual cash
flows from the receivable
b. Its recoverable amount exceeds its carrying amount
c. There is delay in the periodic payments on the receivable
d. Its fair value is less than its carrying amount
FINANCIAL ACCOUNTING AND REPORTING

MULTIPLE CHOICE QUESTIONS

1. Jay Company provided the following data relating to accounts receivable for the current year:
Accounts receivable, January 1 650,000
Credit sales 2,700,000
Sales returns 75,000
Accounts written off 40,000
Collections from customers 2,150,000
Estimated future sales returns at December 31 50,000
Estimated uncollectible accounts at 12/31 per aging 110,000
What amount should be reported as net realizable value of accounts receivable on December 31?

a. 1,200,000 b. 1,125,000 c. 1,085,000 d. 925,000

2. At the end of January, the unadjusted trial balance of Vivid, Inc., included the following accounts:
Debit Credit
Sales (90% represent credit sales) 800,000
Accounts Receivable 550,000
Allowance for doubtful accounts 4,280

The company uses the income statement approach in estimating uncollectible accounts expense is
estimated to be 2% of credit sales. The net realizable value of the company’s accounts receivable in the
January 31 balance sheet is:

a. 705,000 b. 535,600 c. 529,720 d. 531,320

3. When examining the accounts of Brute Company, it is ascertained that balances relating to both
receivables and payables are included in a single controlling account called “receivables control” with a
debit balance of P4,850,000.

An analysis of the make-up of this account revealed the following:

Debit Credit
Accounts receivable – customer 7,800,000
Accounts receivable – officers 500,000
Debit balances – creditors 300,000
Post-dated checks from customers 400,000
Subscriptions receivable 800,000
Accounts payable for merchandise 4,500,000
Credit balances in customer’s accounts 200,000
Cash received in advance from customers for goods
Not yet shipped 100,000
Expected bad debts 150,000

After further analysis of the aged accounts receivable, it is determined that the allowance for doubtful
accounts should be P200,000. What amount should be reported as “trade and other receivables” under
current assets?

a. 8,950,000 b. 8,800,000 c. 8,600,000 d. 8,850,000

4. XYZ Company prepared an aging of accounts receivable on December 31, 2018 and determined that the
net realizable value of the accounts receivable was P2,500,000.
Allowance for doubtful accounts on January 1 280,000
Accounts written off as uncollectible 230,000
Accounts receivable on December 31 2,700,000
Uncollectible accounts recovery 50,000
What amount should be recognized as doubtful account expense for the current year?

a. 230,000 b. 200,000 c. 150,000 d. 100,000

5. Mill Company’s allowance for doubtful accounts was P1,000,000 at the end of 2015 and P900,000 at the
end of 2014. For the year ended December 31, 2015, the entity reported doubtful accounts expense of
P160,000 in the income statement.

What amount was debited to the appropriated account to write off uncollectible accounts in 2015?

a. 60,000 b. 100,000 c. 160,000 d. 260,000

FINANCIAL ACCOUNTING AND REPORTING

6. On September 31, 2018, Pop Company borrowed P1,500,000 for 9 months from BPI. The bank’s discount
rate is 12%. As a security for the loan, Pop hypothecated its accounts receivable amounting to
P3,000,000.

How much cash was received on September 30 as a result of hypothecation?

a. 1,356,000 b. 1,320,000 c. 1,230,000 d. 1,500,000

How much shall be reported as gain or loss on hypothecation in 2018?

a. 0 b. 45,000 c. 135,000 d. 180,000

7. On December 1, 2018, Light Co. assigned specific accounts receivable totaling P200,000 as collateral on a
P150,000, 12% note from BDO. Light Co. will continue the assigned accounts. In addition to the interest
on the note, BDO charged a 5% finance fee deducted in advance on the P150,000 value of the note. The
December collections of assigned accounts amounted to P100,000 less cash discounts of P5,000. On
December 31, 2018, Light Co. remitted the collections to the bank.

Which of the following is the correct journal entry on December 1, 2018?

a. Cash 142,500
Finance Fee 7,500
Note Payable-BDO 150,000

b. Cash 142,500
Finance Fee 7,500
Accounts Receivable 150,000

c. Cash 124,500
Finance Fee 25,500
Note Payable-BDO 150,000

d. Cash 124,500
Finance Fee 25,500
Accounts Receivable 150,000

What is the carrying amount of the liability to the bank on December 31, 2018?

a. 50,000 b. 55,000 c. 56,500 d. 73,000

What amount shall be disclosed as the equity of Light Co. in assigned accounts on December 31, 2018?

a. 27,000 b. 43,500 c. 45,000 d. 50,000

8. Dairy Company sold accounts receivable without recourse with face amount of P12,000,000. The factor
charged 15% commission on all accounts receivable factored and withheld 10% of the accounts factored
as protection against customer returns and other adjustments.

The entity had previously established an allowance for doubtful accounts of P400,000 for these accounts.

What amount of cash was initially received from the factor?

a. 9,000,000 b. 10,200,000 c. 10,800,000 d. 12,000,000

What amount of loss on factoring shall be recognized?

a. 0 b. 400,000 c. 1,400,000 d.
1,800,000

9. Baby ribs company received a P40,000 note receivable from a customer on June 30,2018. The note, along
with interest at 6%, is due on April 30, 2019. On September 1, 2018, Baby Ribs discounted the note with
recourse at BPI. The bank’s discount rate is 10%.

What amount of cash did the company receive from BPI?

a. 41,300 b. 39,333 c. 38,160 d. 39,200

FINANCIAL ACCOUNTING AND REPORTING

10. Frame Company has an 8% note receivable dated June 30, 2015, in the original amount of P1,500,000.
Payments of P500,000 in principal plus accrued interest are due annually on July 1, 2016, 2017 and
2018.

What is the balance of note receivable on July 1, 2016?

a. 1,500,000 b. 1,000,000 c. 500,000 d. 0

In the June 30, 2017 statement of financial position, what amount should be reported as a current asset
for interest on the note receivable?

a. 120,000 b. 40,000 c. 80,000 d. 0

11. Pangasinan Company is a dealer in equipment. On December 31, 2015, the entity sold an equipment in
exchange for a noninterest bearing note requiring five annual payments of P500,000. The first payment
was made on December 31, 2016.

The market interest for similar notes was 8%. The PV of 1 at 8% for 5 periods is .68, and the PV of
ordinary annuity of 1 at 8% for 5 periods is 3.99.

On December 31, 2015, what is the carrying amount of the note receivable?

a. 2,500,000 b. 1,995,000 c. 1,700,000 d. 1,495,000

What amount of interest income should be reported for 2016?

a. 505,000 b. 101,000 c. 159,600 d. 119,600

What is the carrying amount of the note receivable on December 31, 2016?

a. 1,654,600 b. 2,000,000 c. 2,154,000 d. 1,495,000

12. Appari Bank granted a loan to a borrower on January 1, 2015. The interest rate on the loan is 10%
payable annually starting December 31, 2015. The loan matures in five years on December 31, 2019.

Principal amount 4,000,000

Origination fee received from borrower 350,000
Direct origination cost incurred 61,500

The effective rate on the loan after considering the direct origination cost incurred and origination fee
received is 12%.

What is the carrying amount of the loan receivable on January 1, 2015?

a. 4,000,000 b. 4,650,000 c. 4,411,500 d. 3,711,500

What is the interest income for 2015?

a. 400,000 b. 558,000 c. 529,380 d. 445,380

What is the carrying amount of the loan receivable on December 31, 2015?

a. 4,000,000 b. 3,756,880 c. 4,243,120 d. 3,600,000