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Chapter 5 - Receivables

IA 1- Receivables

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Chapter 5 - Receivables

IA 1- Receivables

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Comprchensice Reviewer in Financial Aceaunting and Reporting Dart 1 PROBLEM 4-31 Answers & Solutions Guide 1. ANSWER: B 2. ANSWER: C 3. ANSWER: C 4. ANSWER: C 5. ANSWER: D 6. ANSWER: C 7. ANSWER: D Book December 11/30/ 12/31 2021 Receipts. Disbursements 2021 ‘Unadjusted balances 637,850 306,220 367,660 576,95 Bank credit memo, 12/31 2,060 20 Erroneous disbursement, 12/31 (3,900) 306 2,020 (2.029, ‘Stop payment order (780) (780) Bank service charge, 11/30 (60) (0) [ Adjusted balances 307,500 365,840 579.46) Bank December 11/30/ 12/3) 2021 Receipts. Disbursements 2021. balances 685180 308,120 080 637,220 ‘Outstanding checks, 11/30 (4,140) (A140) ‘checks, 12/31 74,080 (74,080) Depost in transk, 11/30 15,260 (15,260) Depost in transk, 12/31 16,140 16,18 ‘Erroneous charge - November 1500 (1,500) roneous charge - December (2,420) 24% 8H Adjusted balances 637,800 307,500 365,840 579,460 152 Z CHAPTER 5, “#5: Hecounting for Receivables ACCOUNTING FOR RECEIVaBieEg PART eneral Concepts e of Receivable ‘A financial asset that represents a contra la ictual ri in financial asset from another party, Fight to receive cash or other > In simple terms, it represents the amount These are debit balances in accounts payable resulting from overpayments, returns and allowances, and advance payments to suppliers. Classified as current asset unless the amount is immaterial in which case an offset may be made against the accounts payable account, Adjusting journal entry: . Suppliers’ debit balances* XX Accounts payable x *Advances to suppliers account may also be debited. Special deposits on contract bids Generally classified as noncurrent asset unless collectible within 12 months from the reporting date. Fecrued income (je., dividend receivable, interest receivable, royalty receivable, rent receivable, etc.) Current asset Ciaims receivables (‘.e., claims against common carriers for losses and/or damages, claims for rebates and tax refunds, claims from insurance companies, etc.) sustomers’ credit balances > These are credit balances in accol returns and allowances, and advan Current asset nts receivable resulting. from ovérpayments, ce collections from customers, » Classified as current liabilities unless the amount is immaterial in which case an . offset may be made against the accounts receivable account. > Adjusting journal entry: Accounts receivable ‘Customers’ credit balances Recognition Principle > An entity shall recognize a financial xX asset in its statement of financial position when and only when, the entity becomes a party to the contractual provision of the instrument. 155 Comprehensive Reviewer in Ftaancial Aeemating and Reporting Pant | Measurement Principles At fair value plus Initial 4 directly attributable Measurement a At amortized cost Using the effective interest method Presentation > Trade receivables and non-trade receivables which are currently collectible shy, be presented on the statement of financial position under a single line item “trage and other receivables’, The details of which shall be disclosed in the notes to financial statements, PART 2: Accounts Receivable _ A nts, ivable » Open accounts arising from sale of goods and services in the normal course ¢ business. Measurement Principles Initial Measurement ‘At transaction price* Measurement of Accounts Receivable Subsequent Measurement At net realizable value| *The amount of payment to which an entity expects to be entitled in exchange fo transferring promised goods or services to a customer, excluding amounts collected i behalf of third parties (i,e., VAT). This is simply equal to the invoice price. short-term receivables are not discounted because the effect of discounting i Note: immaterial. Dis nett SOR SED Trade Discou Cash Discounts | > These are given to customers > These are given to credit custome: to encourage them to buy in to encourage them to pay their dues! bulk or large quantities. arty, | | > Known as quantity discounts. > Known as early payments discount. > Usually stated in percentage \ form, . - 150 ;—" > These are deducted from the | list price to arrive at Invoice price. > These are not recognized for financial accounting purposes. | List price Xxx Less: Trade discounts x) Invoice price* Xx ‘The amount to be recorded in the tooks. Note: Accounts receivable is always | recorded net of trade discounts. Metl unting for Cash Di These are stated in terms such as: * 210.030 2% discount is given if the account is paid within 10 days from the invoice date, gross amount is due in 30 days from the invoice date. % Y15nf60 * 3% discount is given if the account is paid within 15 days from the invoice date, gross amount is due in 60 days from the invoice date. + M0, Y15 n/30 | 2% discount is given if the | account is paid within 10 days from the invoice date, | 1% discount is given if the | account is paid within 15 | days, gross amountis due in | 30 days from the invoice | date. | Note that only one | discount will be given if the account is paid within 10 days which is usually the highest i j | discount percentage. _| > The timing of recognition of the cash discounts is based cin one of the following methods: (a) Gross method Sales and accounts receivable are recorded at gross invoice amount, meaning the cash discount offered is not yet deducted from the invoice amount. Cash discounts are recognized The most common and widely If a credit sale is still unpaid a: only when actually taken by customers. used method because itis simple to apply. \s of the end of the reporting period and is still within the discount period, an adjusting entry is made to recognize the sales discount related to that sale. © No adjusting entry is re quired when the outstanding account is already outside the discount period as of the end of oe reporting period. 157, Comprehensive Reviewer in Financial Accounting and Reporting Part t (b) Net method ° * Sales and accounts receivable are recorded at an amount net oy discount offered. * Cash discounts not taken by customers are credited to the sales Aen forfeited account, which is classified as other income in the Statemey ‘comprehensive income, * * Ifa credit sale is stil unpaid as of the end of the reporting periog a already outside the discount period, an adjusting entry is. may recognize the forfeited sales discount by debiting accounts Tecelvabley crediting sales discount forfeited, * © No adjusting entry is required when the outstanding accounts within the discount period as of the end of the reporting eriog, (©) Allowance method * Aetounts receivable is recorded at gross invoice amount while the s is recorded at the amount net of cash discount offered, the differen credited to allowance for sales discount account. Journal entries: Gross method Net method ‘Allowance method To record the sale on account AR Xx AR x AR x |_| Sales XX | Sales XX | Allow. for SD XX Sales Xx To record the return of defective goods SRA [XX SRA [XX SRA XX AR XxX [AR XX_| Allow. forSD |XX as] AR [x The buyer paid within the discount period = Cash |XX xX Cash XX SD XX XX_| Allow. forSD__ [XX AR x [AR The buyer paid ouizy : 7 Tx Yerba outside the ecu period x AR |X XX[ Allow.for SD [XX ' XCAR be SDF x 158 er a Chapter §: Accounting for Receiwables %y _rthe account of the buyer is still outstanding as of year-end, the year-end adjusting entries under each method are as follows: oy : Gross method [Net method Allowance method Hy YEAR-END ADJUSTHENT: The aczount swine dstoun pee, 3D No entry. No entry. ‘Allow. for SD XX ay YEAR-END ADJUSTMENT: The accounts already outside the discount period dey No entry. AR | XX ‘Allow. for SD_| XX 8% SOF XX | SOF XX 7 Q egends: i MWR Accounts receivable ‘SRA Sales returns and allowances ‘sD Sales discount Sh SDF Sales discount forfeited Mey allow. for SD Observations: Allowance for sales discount ¥ Only the gross method uses the sales discount account when the cash discount is { availed by the customer. ¥ Both the net method and the allowance method use the sales discount forfeited account when the cash discount is not availed by the customer. i Y Allthe three methods result into the same effect on the income statement whether or not the customer availed the cash discount. Accounting for Doubtful Accounts >There are two methods of accounting for doubtful accounts: (1) Direct write-off method, and (2) Allowance method > The following table summarizes the differences in journal entries under the two methods: Direct write-off Allowance ___ method method Estimation of Noentry.. ‘Doubtful accounts expense XK | doubtful accounts: ‘Allowance for doubtful accounts XX a ‘Wiite-off of Doubtful accounts expense [XX ‘Allowance for doubtful accounts XX worthless accounts ‘Accounts receivable XX | Accounts receivable bad Recovery of ccoonis |_Acoounis receivable xX ‘counts receivable w ees Bad debt recovery XX_| Allowance for doubtul accounts XX Cash xX Cash mx Accounts receivable XX | Accounts receivable XX, Note: Direct write-off method is not permitted under GAAP, This method is used only for income, tax purposes. 159 4 aed Comprehensive Reviewer in Financial Accounting ane Reporting Part 1 lethods of Est ting Doubtful Account ir the ywance Meth: > There are three methods of recognizing doubtful accounts under the ay method: oy (Y) Percentage of sales Income statement approach Doubtful accounts expense is computed as faows Sales" X: Uncollectability percentage (14) (Xx) Doubtful accounts expense XX “It may be gross sales, net sales, credit sales, or net credit sales, (2) Percentage of accounts receivable + Balance sheet approach + Procedures: (2) Determine the required ending balance of allowance for doy accounts, Accounts receivable, end . XX X: Uncollectability percentage (%) (XX) Allowance for doubtful accounts, end "XX (2) Determine the doubtful accounts expense. ; Required ending balance of allowance for doubtful accounts* XX «Less: allowance for doubtful accounts balance before adjustment _ Oo Doubtful accounts expense . : m *Computed in step 1. 9 (3) Aging of accounts receivable This method is similar to the percentage of accounts receivable met except that it involves an analysis where the accounts are clas according to their ages. An example of an aging of accounts receivat as follows: Age: ‘Amount: | Uncollectability % Not due PX XX% XX_| 1 to 30 days past due XX XX% XX_| 31-60 days past due XX XX% XX 61-90 days past due XX XX%6 XX 91-120 days past due XX XX% XX More than 120 days past due XX XX% XX, ‘Allowance for doublful accounts, end XX After performing the analysis above, determine the doubtful accounts expets Required ending balance of allowance for doubtful accounts* XX Less: allowance for doubtful accounts balance before adjustment. __(XX) “Doubtful accounts expense xX *Computed from the aging schedule above. 160 The age classifications are based on the company policy as to aging the ‘outstanding accounts of their customers, The credit terms will determine whether an account is past due. Let’s say, for "example, the credit term is 2/10 n/30, and the account is 50 days old, it is considered to be 20 days past due. iy : Vi ae ne » The longer the account is outstanding, the higher the uncolectabilty percentage will be assigned to that account. pebit balence in allowance for doubtful accounts > Allowance for doubtful accounts could have a debit balance during the year due to excessive write-offs. This can be fixed or adjusted at year-end through provision of doubtful accounts expense for the year. jiote: Changes in estimates of doubtful accounts is considered a change in accounting esate which accounted for currently and prospectively. Financial Statemen! ni ‘Accounts receivable > Classified as current assets on the statement of financial position. >. Presented at its net realizable value computed as: Accounts receivable XxX Less: Allowance for doubtful accounts XX - Allowance for sales returns XX Allowance for sales discounts XX__ (XX) Net realizable value XX 2. Doubtful accounts expense > Presented as part of administrative expenses in the statement of comprehensive income since the credit granting function is performed by the credit department. -/ Cor nents Accounts Receivable 2 Beginning bal xx XX Accounis with credit customers setled Jeginning balance ding the yar Credit sales xX. XX > Sales retums and allowances Restatement of accounts written off XX xX Accounts written-off ns XX_ Recoveries of accounts written off End balance XX “Collections from customers on account, gross of cash discounts 161 Comprehensive Reviewer ta Ftaancat Accounting and. Reporting Pant t Allowance for Doubtful Accounts Accounts writen-off XX Xx Beginning balance xX Doubtful accounts expense | _XX__ Recoveries of accounts written off x End balance Note: The components of the above T-accounts were derived from the journal eng in accounting for accounts receivable and doubtful accounts. PART 3: Notes Receivable Re > Nature of Notes Receivable > Those accounts supported by formal promises to pay in the form of promisy notes. Measurement Principles 1, Initial measureme! > Receivables are lly measured at fair value plus directly attributable coy > For measurement purposes, notes are classified into: (a) Short-term notes receivable (b) Long-term notes receivable > The following chart summarizes the initial measurements of notes receivaly Far Value, Face amaut Present abe > Conceptually, notes receivable shall be initially measured at present value. ¥ The present value is the sum of all future cash flows discounted using te prevailing market rate of interest (or the effective interest rate) at dated issuance of the note. > Cash flows attributable to short-term notes receivable are not discounted becalt the difference between its present value and face amount is not material. 162 song tem tes Recliabie ‘aed m= isheme st ee veune |_—_[ omg ts amit aeons rata sara ‘aed mee -aiee » The fundamental formula to compute for the present value of the note receivable is: re cash inflows (Principal and interest) XX ie Present value factor (PV factor) XX Present value at initial recognition xx Y Noninterest-bearing note . @) Principal is collectible lump-sum at maturity date v Face amount x PV of 1 ‘The present value of 1 factor may be determined by using the following formula: PVoft=(1+i)" or PVoft oo = 1 (1+ip- eriodic interest rate \ | Where: | number of periods ‘nis determined by simp - ; te 'Y multiplying the number of years over the life of the note by the number of pe ber of ye ' (@) Annual = °° Pe Year. Number of periods per year is determined as follows; (b) Semi-annual ~ 2 : (©) Quarterly — 4 t (@) Monthly ~ 12 Hh let us assume ; { 10%" Ne following: 163 Comprchensice Reviewer tn Financial Hecounting and Reporting Part | To compute for the present value of 1 at 10% for 5 periods using a g a Manual Caley benny the following steps: 5 Input 1.10. 2. Press the division sign "on your calculator twice. 3. Press the equal sign "=" 5 times (if your calculator shows a value of 1 ay first press, ignore it and press the equal sign another time to start the coy “n" times. Your calculator should show 0.9091 as the first period co (b) Principal is collectible in installments feces). + Collectible every end of the perioa ¥ Periodic collection x PV of an ordinary annuity of You should come up with 0.6209 (rounded off to four decimal + Collectible every beginning of the period ¥ Periodic collection x PV of an annuity due of 1 The present value of an ordinary annuity of 1 factor may be determined by using following formula: 2 [fe (t+iey | PV ofan ordinary annuity of 1 i “Wustration no, 2 ‘at us assume the following: i= 10% n=5 To compute for the present value of an ordinary annuity of 1 at 10% for 5 periods uy @ manual calculator, perform the following steps: 1. Input 1.10. 2. Press the division sign “+” on your calculator twice. 3. Press the equal sign "=" 5 times (if your calculator shows a value of 1 aftert first press, ignore it and press the equal sign another time to start the courts “n” times. Your calculator should show 0,9091 as the first period present vat 4. You should come up with 0.6209 (rounded off to four decimal places) att « point. - 5. Press the minus sign *-" then 1, 6. Lastly, divide the result by 0.10. After performing this, you should come up! 3.7908 (ignore the negative sign). Ga present value of an annuity due of I Factor may be detained by using the following formula: PV ofan annuity due of 1 = fan i Hustratis 2 fet us assume a the following: 10% n=5 To compute for the present value of an annuity due of 1 at 10% for 5 periods using a manual calculator, perform the following steps: 4, Input 1.10. 2. Press the division sign “=” on your calculator twice. 3. Press the equal sign "=" 4 times (if your calculator shows a value of 1 after the first press, ignore it and press the equal sign another time to start the counting “p” times. Your calculator should show 0.9891 as the first peridd present value) 4. You should come up with 0.6830 (rounded off to four decimal places) at this point. 5. Press the minus sign "-" then 1. 6. Divide the result by 0.10. After performing this, you should come up with 3.1699 (ignore the negative sign). 7. Remove the negative sign by pressing "+/-". 8. Lastly press the add sign “+” then 1. After performing this, you should come up with 4.1699. Y _Interest-bearing note (a) Stated rate = effective rate ¥ Its present value is simply equal to its face amount. (b) Stated rate + effective rate * Present value of face amount* id ‘Ac: Present value of interest collections (Periodic interest x PV ofan annuity of 1) Present value at initial recognition a *Can either be collectible lump-sum or in installments depending on the payment terms agreed by the parties. ¥ If collectible lump-sum, the present value of the face amount Js computed as: Face amount x PV of 1 ¥ If collectible in installments, the present value of the face amount is computed as: Periodic collection on the principal x PV of an annuity of 1 (ordinary annuity or annuity due) 165 Comprchension Reviewer ix Financial Accounting and Reporting Part | Note: v The difference between the face amount and the present value is called % discount or premium on note receivable. Face amount > Present value > Discount on notes receivable © Face amount < Present value > Premium on notes receivable ‘The discount or premium on notes is amortized over the term of the note sy the effective interest method. © Amortization of discount is an addition to interest income. © Amortization of premium is a deduction from interest income. Journal entries: | Amortization of discount | Discount on note receivable XX | Interest income xx ‘Amortization of premium | Interest income xx \___Premium on note receivable xX 2. Subsequent measurement > Long-term note receivable is subsequently measured at amortized cost u effective interest method. © The amortized cost is computed as follows: Outstanding face amount xx ‘Add (Deduct) Unamortized Premium (Discount) on notes receivable XX00) Amortized cost x > Apromissory note that is not paid at maturity date is said to be dishonored. © Dishonored notes should be transferred from note receivable to acta receivable account, Youre entry. ees receivable XX" receivable xx sh Xx Sal ncude the folowing: {Face amount Interest Other fees and charges (i.e., penalties paid) 166 sarang nl PART Receiv ture of Loan Receivable . ‘A financial asset arising from a loan granted by a financial institution (i.e., bank) > to @ borrower. Measurement Principles a Fair value plus Measurement Loan Receivable Subsequent Measurement > The fair value of loan receivable at initial recognition is equal to its transaction | price which is the amount of loan granted. Transaction costs that are directly attributable to the loan include direct origination costs. | + Direct origination costs are transaction costs incurred in conducting credit investigation which includes the following activities: | Evaluating the borrower's financial condition; | Evaluating guarantees, collateral and other security; | Negotiating the terms of the loan; | Preparing and processing loan documents; Closing and approving the loan transaction i v SAA 68 Indirect origination costs shall not form part of the initial measurement of the loan and should be expensed immediately. | | + Origination fees received from the borrower are recognized as unearned | interest income and amortized over the term of the loan, » Loan receivable is subsequently measured at amortized cost using the effective { interest method. ‘The journal entries to recognize the loan receivable are as follows: Io Loan receivable x Cash m pepaei tects x Gn a Unearned interest income 167 Comprehensive Revie in Finacial ecnanting and Reporting Pent 1 fl Unearned interest income x Cash XK ‘To record the payment of Indirect origination cost Expense x Cash x Besed on the journal entries above, the formula to compuite for the initial measuremeng the loan receivable is: Principal amount ~ Less: Origination fees received 0) ‘Add: Direct origination cost x Initial measurement of loan receivable XX _ ‘The jounal entry to record the amortization of unearned interest income is: Uneamed interest income Interest imcome XX Impairment of Long-Term Receivables = of Long-Term Receivable > An entity shall recognize a loss allowance for expected credit losses on fina assets measured at amortized cost. cc An entity shall measure the loss allowance for a financial instrument at amount equal to the lifetime expected credit losses if the credit risk on financial instrument has increased significantly since inital recognition. > Impairment loss is computed as follows: Carrying amount ofthe fong-term receivable Less: Present value of expected future cash flows at date of impairment tes Impairment loss *Should be discounted using the original effective interest rate. [aia The carrying amount of the bee -term receivable is computed as follows: u ng-term ei t face amount Outstanding principal amount at date of impairment testing == XX ‘Add: Unpaid interest (only if recognized by the entity) oa Carrying amount of the long-term receivable x 2 rm receivable issued with premium or dis Present value at date of impairment testing” xX ‘Add: Unpaid interest (only if recognized by the entity) XX _ Carrying amount of the long-term receivable xx 168 Chapter 5+ Aeesunting for Recelwables oustendeg, ‘principal amount as of the date of impairment testing ‘no (Deduct). Unamortized Premium (Discount) an long-term receivable sion Peesert value at date of impairment testing rhe present value of expected future cash flows at date of impairment testing Is computed as foflows: Future cash inflows XK X. Present value factor (PV factor) using the original effective interestrate _ XX Present value of expected future cash flows at date of impairment testing _ XX borne! entries: 1. Date of impairment testing Impairment loss xx Interest receivable XX ‘Allowance for impairment XX 2. Amortization of impairment Allowance for impairment XX Interest income Xx Stage L ___ Stage2 _| _ Stage 3 ‘Scope Debt instruments | Debt instruments | Debt instruments with low credit risk | that have declined | that have objective | or those that have | significantly in | evidence of not declined | credit quality since | impairment at the credit quality since | but do not have significantly in| initial recognition | reporting date. | initial recognition. | objective evidence | | | | of impairment. | | "Recognition of | 12-month expected Lifetime expected credit loss | | impairment credit loss ‘Computation base Face amaunt (or gross carrying amount) J Netcarying | _of interest income | L amount* J *Net carrying amount is computed in the following manner: Outstanding face amount XX Less: Allowance for loan impairment _(XX)_ Net carrying amount 2 169 Th le Fi © capability of an entity to generate cash out ofits receivables. forms of receivable financing are: Recei > All accounts receivable are pledged as collateral or security for a loan. © Also known as general assignment of accounts receivable or hypothecation ¢ account reevable because al account receeble serve as coltral secur loan, > ‘Accounting treatment: Note disclosure only, Pledged receivables are mi derecognized nor separated from other receivables. iignment of. its Receivable > A formal type of pledging of accounts receivable, > Also known. as specific assignment of accounts receivable because specit accounts receivable serve as a collateral security for the loan or borrowing, > Accounting treatment: A journal entry is needed to specifically identify ti assigned receivables from other receivables. > The assignment may be done either on a: (2) Non-notification basis - Customers are not informed that their accounts tat been assigned. Therefore, the customers continue to make payments to t¢ assignor (i.e., the entity), who in turn remits the collections to the assign (i.e., the bank). (b) Notification basis - Customers are notified to make their payments to tt assignee (ie., the bank). 170 _ Chapter 5: Aecounting for Receivables Provided below are the comparative journal entries when assignment is done on a non-notification and notification basis: =~ Non-notification basis Notificati To specifically identity the assigned receivables. “nis receivable — assigned XX ‘Accounts receivable - assigned XX a counts receivable * XX_| Accounts receivable xX To record the loan= Gash XX Cash XX Finance fee XX Finance fee XX [Notes payable — bank XX_| "Notes payable — bank XxX Relum of defective merchandise by the customer whose account is assigned | Salesretuns and allowances |XX Sales returns and allowances | XX “Accounts receivable ~ assigned XX_| Accounts receivable - assigned xX -——— White-off of accounts assigned | Alowance for doubtful accounts |XX Allowance for doubtfulaccounts | XX [_~ ‘Acvounts receivable — assigned XX_| Accounts receivable — assigned xx Collection from customer whose account has been assigned Cash XX No entry. [Sales discount XX “Accounts receivable — assigned xx Remittance of payment to the bank Totes payable — bank XX Notes payable — bank xX [Interest expense xX. Interest expense xx | Cash XX_| Salis discount xX _ ‘Accounts receivable — assigned XX Reverting the remaining balance of assigned accounts fo unassigned accounts | ‘Accounts receivable XX Accounts receivable XX ‘Accounts receivable ~ assigned XX Accounts receivable = assigned | x Presentation and Disclosure . > Assigned receivables are presented in the statement of financial position as regular receivables which is included under the line item “trade and other receivables”, However, the equity in the assigned accounts shall be disclosed in the notes. © Equity in assigned accounts is computed as follows: Accounts receivable — assigned, end. XX Less: Related liability balance (xX) Equity in assigned accounts XX > The assigned receivable and the related loan are presented separately in the statement of financial position and are not offset. . nari Comprchensive Reviewer in Financial Aecountiag and Reporting Pant 1 Factoring of. nts Receival > Asale of accounts receivable to a factor (i.e., financial institution) On @ Witha, recourse basis. > Since factoring is a sale transaction, gain or loss on factoring shall be recognizy This is computed in the following manner: Net selling price* Less: Carrying amount-of accounts receivable** bepex Gain (loss) on factor * Net selling price is computed as follows: Gross accounts receivable x Less: Factoring fees and charges _(XX)_ Net seling price Xx Note: > Net selling price > Carrying amount of accounts receivable > Gain on factoring > Net selling price <.Carrying amount of accounts receivable > Loss on factoring > Net selling price is not necessarily equal to the amount of cash received fron| factoring especially when the factor withholds a certain amount as a protection against customer returns, allowances, and other adjustments.” ‘© This amount is called the factor’s holdback. | > This is actually a receivable from the factor and to be settled only when the| factored receivables have been fully collected. © Factor’s holdback is deducted from the amount of net selling price to determine the amount of cash received from factoring. To summarize the computation of the amount of cash received’ from factoring, the; following formula can be used: fi Net selling price x Less: Factor's holdback Xe Cash received from factoring XX ** Carrying amount of accounts receivable Is computed as follows: Gross accounts receivable 1, Less: Allowance for doubtful accounts. _ (XX) Carrying amount of accounts receivable -_XX_ ee Journal entry: Cash Allowance for doubtful accounts Loss on factoring | Receivable from factor Accounts receivable Gain on factoring 3S 3S 33S RR 172 * The following table summarizes notes receivable: proceeds fom aiscounting “Gargng amount | the note receivable (ie., bank), ‘he different formulas applied in discounting of ee interest-bearing note = fe ir incipal amount + i of the note } Noninterest-bearing note = Face amour turer matty Maturity value x Discount tale x Discount paqa Iscount rate x Discount period . Maturity value = Discount : interest-bearing note = Princpal + Accrued hiereat between the date of the note and the date of disccunting Noninterest-bearing note = P “incipal ~ Unamortzed discount as of the date of discounting f Gain or [oss on Proceeds . XX 18 eScounting arrying amount of the note receivable xX Gain (loss) on discounting Note: > Proceeds > Carrying amount ofthe note > Gain on discounting > Proceeds < Carrying amount ofthe note > Loss on discounting LI Visual presentation: Entire term of the note bE Date of the note Date of the discounting Maturity date Period of accrual of interest Discount period 173 Compprchensice Reviewer tn Financial Atcounting and Reporting Part t, wunting for Note Receivable Discot : Gain oF loss op Ifthe discounting of the note is on a without recourse basis, the buyer of the cannot demand payment from the seller in case the note is dishonored or not pay by the maker at maturity because the sale is already absolute. » If the discounting of the note is on a with recourse basis, the buyer of the noy “__can demand payment from the seller in case the note is dishonored at maturity, Journal entries: 1, Discounting of note is on a without recourse basis. Cash x : Loss on discounting. XX Note receivable x Interest income XX Gain on discounting xX 2. Discounting of note is on a with recourse basis, (2) Accounted for as conditional sale with recognition of contingent lability Gash XX Loss on discounting XX Note receivable discounted* Xx Interest income * XX Gain on discounting Xx i * Note receivable discounted Is presented as a deduction from the note receivable Wt | disclosure of the contingent lability. Equal to the face amount of the note rece discounted, (b) Accounted for as secured borrowing Cash Xx Interest expense Xx Liability for note receivable discounted** XX Interest income, XX **Equal to the face amount of the note receivable discounted, 174 Chapter 5: Accounting for Receivables ERCISES 1 FINANCIAL ACCOUNTING AND REPORTING THEORIES Classification of Receivables ‘Which of the following is correct about trade receivables being classified as current assets? A. Trade receivables are classified as current assets if these are collectible within the company’s normal operating cycle. B, Trade receivables are classified as current assets if these are collectible within one year. €. Trade receivables are classified as current assets if these are collectible within one year or the company’s normal operating cycle, whichever is longer. D. Trade receivables are classified as current assets if these are collectible within one year or the company’s normal operating cycle, whichever is shorter. E. Trade receivables are never classified as current assets, 2. Which of the following is correct about non-trade receivables being classified as current assets? ‘A. Non-trade receivables are classified as current assets if these are collectible within the company’s normal operating cycle. B. Non-trade receivables are classified as current assets if these are collectible within one year. C. -Non-trade receivables are classified as current assets if these are collectible within one year or the company’s normal operating cycle, whichever is longer. D. Non-trade receivables are classified as current assets if these are collectible within one year or the company's normal operating cycle, whichever is shorter. E. Non-trade receivables are never classified as current assets, 3. Which is an example of trade receivable? A. Subscription receivable collectible within six months from the reporting date. B. Subscription receivable collectible eighteen months from the reporting date. C. Note receivable from a customer for merchandise sold. D. Note receivable from CEO. | 4. Which of the following is classified as a current nontrade receivable? i A. Suppliers’ debit balances. B. Customers’ credit balances. Accounts receivable. D. Advances to affiliates. 5. Customers’ credit balances are classified as Current assets Current liabilities Noncurrent assets Noncurrent liabilities Deductions from accounts receivable mona, 175 _ Ser ey Comprchensive Reviewer ia Financial Accounting and Reporting Dart 1 6. Subscription receivable is A. Classified as a trade receivable if collectible within 12 months fro, reporting date. B. Classified as a current nontrade receivable if collectible within 12 month the reporting date. C. Classified as a noncurrent nontrade receivable if collectible beyond 12 mg, from the reporting date. D. Choices B and C. 7. Accrued income such as dividend receivable are normally classified as A. Trade receivables B. Noncurrent trade receivables C. Current non-trade receivables D. Non-current non-trade receivables General Measurement Principles of Receivables Receivables, in general, are initially measured at A. Fair value. B. Fair value plus direct transaction costs. C. Fair value less direct transaction costs. D. Amortized cost. 9. Receivables, in general, are subsequently measured at Fair value. Amortized cost using the effective interest method. Amortized cost using the nominal interest method, Historical cost. pOer ~ scounts Receivable 10. Which of the following should be recorded in the accounts receivable account A. Interest receivable B, Dividend receivable C. Cash sales D. Credit sales 11. Accounts receivable shall be reported at ‘A. Realizable value . B. Present value C. Fair value D. Fair value less estimated transaction cost counting for Cash Discounts 12. Of the three methods of accounting for cash discounts, which method is consid to be theoretically correct? A. Gross method B. Net method C. Allowance method i od D. None of the three methods is theoretically correct. | I 176 De a ar aT unt sidet Chapter §: Aecaunting for Receivables 13. Of the three methods of accounting for cash discounts, which method is commonly ised? : A. Gross method B. Net method C._ Allowance method D. None of the three methods, 14, Sales discount account is found in which of the three methods of accounting for cash discounts? A. Gross method B. Net method C. Allowance method D. Choice "B” and “C” 15. Sales discount forfeited account is found in which of the three methods of accounting for cash discounts? ‘A. Gross method B. Net method CC. Allowance method D. Choice “B” and “C” 16. Under the gross method of accounting for cash discounts, sales discount should be reported in the statement of profit or loss as ‘A. An item of miscellaneous expenses. B. A deduction from sales. C. A deduction from cost of goods sold. D. An addition to cost of goods sold. 17, Under the net method of accounting for cash discounts, sales discount forfeited should be reported in the statement of profit or loss as ‘An addition to sales, An item of miscellaneous income. ‘An item of miscellaneous expense. A deduction from cost of goods sold. An addition to cost of goods sold, moom> Accounting for Doubtful Accounts 18. Which of the following methods of accounting for doubtful accounts is permitted under GAAP? Direct write-off method Allowance method Both A and B Neither A nor B pom> 77 7 Comprchensive Reviewer tn Financial Accounting and Reporting Part 1 19, When using the allowance method of accounting for doubtful accounts, wa, the effect of writing off an uncollectible account on the accounts recelvabiey the allowance for doubtful accounts? ‘Accounts Allowance for Teceivable doubtful accounts A. Increase Increase B. Decrease Decrease C— Increase Decrease D. Decrease Increase 20. Collection of accounts receivable previously written off results in an incresy. ich of the following? - A. Accounts receivable. B. Doubtful accounts expense. CC. Allowance for doubtful accounts. D. Retained earnings. 21. When an accounts receivable aging schedule is prepared, a series of comp.tat, is made to determine the estimated uncollectible accounts. The resulting are, from this aging schedule... A. Is the amount of doubtful accounts expense for the current year. B. Isthe amount of desired balance of the allowance for doubtful accounts ty reported at year-end. €. When added to the total accounts written off during the year is the desy credit balance of the allowance for doubtful accounts at year-end. D. Isthe amount to be written off at the end of the year. 22. Which of the following methods of estimating doubtful accounts uses the ina ‘statement approach? A. Percentage of sales. B. Percentage of accounts receivable, C. Aging of accounts receivable. D. Direct write-off method. Notes Receivable For the next two items: On July 1, 2022, an auditing firm obtained a three-year 10% note rec Services rendered. At that time, the market rate of interest was 12%. The face amout the note is due on the maturity date while the interest is due every June 30 starting 30, 2023. 23. The formula to compute for the amount of accrued interest receivable! December 31, 2022 is ‘A. Face amount x 5% B. Face amount x 6% C. Present value of note on July 1, 2022 x 5% D. Present value of note on July 1, 2022 x 6% 178 24, 2s. 26. 27. 28. Chapter 5: lecoanting for Recetoables The formula to compute for the amount of interest income on December 31, 2022 is Face amount x 5% Face amount x 6% Present value of note on July 1, 2022 x 5% Present value of note on July 1, 2022 x 6% poe> A company received a five-year zero interest note on January 1, 2022 in exchange for property sold. There was no established exchange price for the property and the note has no ready market, The prevailing rate of interest for a note of this type was 10% on January 1, 2022, 12% on December 31, 2022, and 9% on December 31, 2023. What interest rate should be used to compute for the interest income on the note for the years ended December 31, 2022 and 2023, respectively? mber 31, December 31, 2022 2023 A 0% 0% B. 10% 10% ic 12% 9% D. 10% 12% ‘Statement I: The interest rate to be used to compute for the interest income on a long-term receivable is the : Statement [[: The interest rate to be used to compute for the interest receivable (ona long-term receivable is the A. Stated interest rate; Market interest rate B. Market interest rate; Stated interest rate C. Stated interest rate; Stated interest rate D. Market interest rate; Market interest rate Which of the following items are true about discount on notes receivable? L The face value of the note is higher than its present value IL. The present value of the note is higher than its face value II. The nominal rate is higher than the effective rate IV. _The effective rate is higher than the effective rate A. Land LiL B. Land iv C. Mand 1 D. Mand Iv Which of the following items are true about premium on notes receivable? L The face value of the note is higher than its present value u, ‘The present value of the note is higher than its face value II. The nominal rate is higher than the effective rate IV. The effective rate is higher than the effective rate A. Land ll 8. Land IV C Mand I 179 Comprchensive Reviewer in Financial Accounting and Reporting Pant 1 D. Mand Iv 28. Which ofthe following statement is correct? Ifthe note is issued at a discoun, interest income to be recognized every period is. ‘A. Higher than the amount of cash received for interest. B. Loiver than the amount of cash received for interest. . Equal to the amount of cash received for interest. D. Either higher or lower than the amount of cash received for inte depending on the amount of the discount. 4 30. Which of the following statement is correct? If the note is issued at a preniy the interest income to be recognized every period is... ‘A. Higher than the amount of cash received for interest. B. Lower than the amount of cash received for interest. C. Equal to the amount of cash ‘received for interest. D. Either higher or lower than the amount of cash -received for int depending on the amount of the discount, 31, The amortization of discount on notes receivable is A. Anaddition to interest income, 8. An addition to accrued interest receivable. C. Adeduction from interest income, D. A deduction from accrued interest receivable, 32, The amortization of premium on notes receivable is ‘A. An addition to interest income. B. An addition to accrued interest receivable’ C. Adeduction from interest income, D. Adeduction from accrued interest receivable. Loan Receivable 33, How are origination fees accounted for in relation to the initial measurement loan receivable? A. Added to the initial measurement of the loan receivable. ! B. Deducted from the initial measurement of the loan receivable, C. Ignored, D. Aor B if the origination fees are at least 10% of the principal amount oft loan. 34, How are direct loan origination costs incurred by a financial institution accoutt for in relation to the initial measurement of a loan receivable? : ‘A. Added to the initial measurement of the loan receivable, B, Deducted from the initial measurement of the loan receivable. Ignored, : D. Aor Bif the direct loan origination cost is at least 10% of the principal and of the loan, 180 Chapter 5: Acconuting for Receivables 35, How are indirect loan origination costs incurred by a financial institution accounted for? A, Added to the initial measurement of the loan receivable. B. Deducted from the initial measurement of the loan receivable. C._Expensed as incurred. D. Ignored. jrment of Long-Term Receivables 36. eae of the following could conclude that a receivable is already impaired? Its recoverable amount exceeds its carrying amount. a Its fair Value is less than its carrying amount. C._ There is delay in the periodic payments on the receivable. 'D. Alloss event has occurred that is detrimental to the entity's ability to collect the contractual cashflows from the receivable. 37. ie recoverable amount of a loan or note receivable is ‘ The sum of principal plus interests, . te , The present value of the estimated future cash flows to be received over the remaining life of the receivable discounted at the current interest rate. C. The present value of the estimated future cash flows to be received over the remaining life of the receivable discounted at the original effective interest rate. D. The present value of the estimated future cash flows to be received over the remaining life of the receivable discounted at the original effective interest rate or current interest rate, whichever is more clearly determinable. 38, Before impairment, the carrying amount of a credit-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 accrued interest receivable. D. Less than the present value of the note receivable Receivable Financing 39. Which of the following is the primary reason why a company sell its receivables to another entity? A. To accelerate access to amounts collected. B, To improve the quality of its credit granting process. C. To comply with customer agreements. D.. To limit its legal liability. 40. This is also known as the general assignment of accounts receivable or hypothecation. & A. Pledging B. Assignment C. Factoring D. Discounting 181 Comprchensive Reviewer in Financial Accounting and. Reporting Pant t 41. What is the appropriate treatment for receivable pledging transactions A. Note disclosure only. B. They are accounted for by segregating the pledged receivables from y, receivables through’ a journal entry. i C. They need not be disclosed if the related loan does not require any cy security. in D. AandB 42. When specific accounts receivables are set up as collateral security for the accounts receivable are said to be... A. Pledged B, Assigned C. Factored D. Discounted bora, 43. What is the appropriate treatment for receivable assignment transactions) A. Note disclosure only. . : B. They are accounted for by segregating the assigned receivables other receivables through a journal entry. C.. Give rise to receivables from factor. D. BandC. frony 4. This receivable financing transaction involves outright sale of receivables, financial institution known as a factor. Pledging Assignment Factoring . Selling pop The obligation of the seller of the receivables to pay the purchaser in cag} debtor falls to pay. The obligation of the purchaser of the receivables to pay the seller in cast debtor fails to pay The obligation of the seller of the receivables to pay the purchaser in cast debtor returns the product related to the sale. .. The obligation of the purchaser of the receivables to pay the seller if allt receivables are collected. 45. What is "recourse" as it relates to sellifig receivables? A B. c 2 46. Geo Company factored accounts receivable without recourse to a bank Company received cash as a result of this transaction which is best describe ‘A. Bank loan collateralized by Geo Company's accounts receivable. B. Bank loan to be repaid by the proceeds from Geo Company's ace receivable. C. Sale of Geo Company's accounts receivable to the bank with the it) uncollectible accounts retained by the company. D. Sale of Geo Company's accounts receivable to the bank with the i uncollectible accounts transferred to the bank. 182 }-day 10% interest-beari . Clapton's, Receivables 7, A360 santing the note, also pet wes Giscounted at a b be of discou Iso the date of the nate ank at 12%. The date bank is equal to The amount: received from the A, Maturity value less discount at 10%, B. Maturity value less discount at 1 ¢._ Face value less discount at 1994 D. Face value less discount at 1296 )-day, 6% interest-bearing note was 4: 4g. A240: 2s discounted at a bay it held for 150 days. The proceeds Teceived from the bank Up deca beg bethe a A. Maturity value less the discount at 69% for 90 days, B. Maturity value ess the discount at 8% or oo days, C. Maturity value less the discount at ay for so days, D. Face value less the discount at 66 for 90 dar 183 Ainpriheion 1 in Financial Aecotng and Reporting Part | SUGGESTED KEY ANSWERS tLe} faa 2B 3i_[ A aileeBes| | |sei7|se6 2{ A 32_|_C 3[c Bl A 23| A 33_| B ra 44[_A 24|D 34 | A 5| 8 rH) 25| B 35 | C 6] B 16| B 26| 8B 36_| D 7| ¢ 17|_B 27| 2B 37 c 8| 8 18| 8B 28 Cc 38_| 8 o{ 8 19/8 29 |: A 39 | A io[ D 20[ ¢ 30| 8B 40 [A Lal : 184 Chapter 5: Aecaunting for Receivables 1. _ FINANCIAL ACCOUNTING AND REPORTING PROBLEMS PROBLEM 5-I Classification of Receivables Brigadier Company provided you the following information as of December 31, 2022: Item: joun! Trade accounts receivable, net of P160,000 credit balance in + customers’ accounts, including P12,000 uncollectible customer accounts 960,000 2 Credit card sale of merchandise to a customer 1,000,000 3 Trade accounts receivable — assigned 1,800,000 4 Trade accounts receivable — unassigned 1,200,000 5 Trade accounts receivable — factored 1,200,000 6 8% notes receivable - trade 800,000 7 Accounts payable, net of P120,000 debit balance in suppliers’ accounts 520,000 8 Special deposits on contract bids 440,000 60,000 9 Dividend receivables 10» Advances to officers (of which P240,000 is currently collectible) 1,200,000 11 Advances to affiliates 2,400,000 12 Subscription receivable (of which P75,000 is collectible within 300,000 90 days) . 13 Accrued interest receivable 150,000 Requirements: Based on the foregoing data, determine the following— 1. Trade receivables A. 5,748,000 c. 6,948,000 »B.» 5,908,000 D. 7,108,000 2. Trade and other receivables A. 6,393,000 Cc. 7,593,000 B. 6,553,000 D. © 7,753,000 3. Total items classified as noncurrent assets A. 3,800,000 Cc. 4,800,000 B. .4,025,000 D. 5,025,000 185 . Item Trade Trade and Noncurrent 1 1,108,000 1,108,000 2 41,000,000 1,000,000 3 1,800,000 1,800,000 : 1,200,000 1,200,000 6 800,000 800,000 ¥ 120,000 8 5 440,000 9 60,000 10 240,000 960,000 i 2,400,000 2 75,000 . - 2B 150,000_ 5,908,000 6,553,000 3,800,000 ‘Comments: Item no.1 | This is computed as follows: Trade accounts receivable 960,000 | | Add: Customers’ credit balances 160,000 | | Less: Uncollectible customer accounts ___(12,000) | Adjusted trade accounts receivable 1 | tem nos. 3&4 | Included under trade receivables whether a: ; Ttemno.5 | Already excluded because the accounts are already soid to a facia, Item no. 7 The suppliers’ debit balances are included under trade and of receivables account. Accounts payable is classified as a cure liability, dem no. 8 “Generally classified as noncurrent asset unless collectible within 1 months from the reporting date, Ttemno,9 | Accrued income accounts are included under trade and otfé receivables account. ‘tem no. 10 er trade and other receivables if ible within i months from the reporting date; Classified as noncurrent ass#t collectible beyond 12 months from the reporting dat —— ee — nerally classified as noncurrent asset unless collectible witha months from the reporting date. 186 ‘Tem 10, 12 Chapter 5: Accounting for Receiuables Included under trade and other receivables if collectible within 12 months from the reporting date; Presented as a deduction from subscribed share capital if collectible beyond 12 months from the reporting date. PROBLEM 5-2 Gross method vs. Net method vs. Allowance method The following transactions were completed by Nebraska Company during the month of December: December 3 December 5 December 10 December 11 December 13 December 20 December 25 Required: Sold goods with list price of P600,000 to Atlanta Company under credit terms of 2/10 1/15 n/30. Trade discounts granted are 5% and 3%. Sold goods worth P250,000 to Alabama Company under credit terms 3/10 2/15 1/20 n/30. Sold goods worth P100,000 to Columbia Company under credit terms 3/10 2/15 1/20 n/30. Atlanta Company returned defective goods worth P60,000. Collected the account of Atlanta Company in full. Collected the account of Alabama Company in full. Sold goods worth P175,000 to Brazil Company under credit terms 2/10 ” 7/30. 1. Journalize the foregoing transactions using the: (a) Gross method (b) Net method (©) Allowance method 2. Prepare the year-end adjusting entry under the: (a) Gross method (b) Net method (c) Allowance method 3. How much cash was collected during December? A B. 728,042 C. 999,542 742,900 D. 1,017,900 4, How much is the net sales to be reported at period-end under each method? A B. Cc D, Gross method Netmethod Allowance method 999,542 999,542 999,542. 1,003,042 999,542 999,542 999,542 994,042 994,042 1,003,042 994,042 994,042 187 q = \ Comprchensice Reviewer in Financial Hecounting and Reporting Pant t e 5. What is the profit impact of the foregoing transactions yp, eg i method? % Gross method Netmethod Allowance method A 999,542 999,542 999,542 B. 1,003,042, 999,542 999,542 c 999,542 994,042 - 994,082 . 1,003,042 994,042 994,042 PROBLEM S-2 Answers & Solutions Guide ‘ 1._ Answer Gross maid Keinetied December 3 [aR S20 AR 544 842.00 ‘Sales '552,900.00] Sales 541,842.00 December 5 [a 75000000 JAR 242,500.00 ‘Sales 25090000} Sales 242,500.00 Decenber 10 AR 700 00000 AR 7000.00 Sales +10000000} Sales 97,000.00) Alon. t SO : Sales December ff | [SRA 000000 SRA 5800.00 [SRA ‘AR 000000] AR '8.0000|Alow.frSD_ 1.20000" AR. cn Decanber 13 [cash 504200 east 48304200, cash 300200 [sD 9858.00 JAR 483,042.00 Allow. forSD_ 9,858.00, AR, 492.900.00, AR 92a Decenber 20 [Cash 745,000.00 [cash 245,000.00 cash 745,000.00 Iso 9000.00 AR 242,500.00 |Aow.for SD 7,500.00, AR 250.0000] SOF 2500.00) AR SOF December 5 [AR 17500000, AR 171 500.00 [AR “7600000 Sales 17500000] Sales 17150000 Alow. or 8D Sales 2. Answer : Gross method _ Net method ‘lowance method [AR 300000 i 000.00 [Alow.forSD__ 3000, i Nosy SOF 3000.00] oF sb Brezi Company f= Senn Noe Noenty ~ LAlow.forsp 3500.00 ed 7 | | | 188 Legends: . Chapter 5: Aecautiag fr Reccteabas i Sarees Fecetvable Hwtors0~ Rises 5. Answer: A canter naa Collections - Columbia Company 245,000.00 Collections - Brazil Company > Total cash collections - December 728,042.00 728,042.00 Comment: Answer will be the same regardless of the method used. 4. Answer: C : Gross method _ Netmethod —_ Allowance method sales ~ Aliana Company, 552,900.00 541,842.00 541,842.00 Sales - Alabama Company 250,000.00 eas cooiaa ee Sales - Columbia Company 100,000.00 97,000.00 97,000.00 Sales - Brazil Company 175,000.00 471,500.00 171,500.00 \Sdles retums & allowances (60,000.00) (58,800.00) (58,800.00) 'Sales discount - Atlanta Company (6,858.00) : ‘sales discount - Alabama Company (5,000.00) - . Sales discount - Brazil 3,500.00) : : : ‘Reported net sales 999,542.00 "99408200 994,042.00 Comment: Sales discounts forfeited are not included in the above computations because itis classified as other income account. __5. Answer: A Gross method Net method _Allowance method 999,542.00 994,042.00 994,042.00 Reported net sales : 2/500.00 2,500.00 SOF - Alabama Company 3,000.00 3,000.00 SDF - Columbia Company 999,542.00. _ 999,542.00 ‘999,542.00 a _ 3s i eee SC ee Impact on profit 189 Comprehensive Reviewer in Financia Hecounting and Reporting Part t , = 1 PROBLEM 5-3 Gross method vs. Net method vs. Allowance method On January 1, 2022, Trevor Co. sells goods with a list price of P1,000,000 on Account credit terms of 10%, 15%, 3/10 2/15 1/20 n/30. ‘ 1 ¥ 4. 5. 6. How much should be debited to Accounts receivable on Janua, under the gross method? "ya, y A. 742,050 Cc.” 765,000 B. 750,000 D. 1,000,000 How much should be debited to Accounts receivable on January 4 ; under the net method? t hy ‘A. 742,050 Cc. 765,000 B. 750,000 D. — 1,000,000 How much should be debited to Accounts receivable on January 1 under the allowance method? na A. 742,050 Cc 765,000 B. 750,000 D. 1,000,000 Assuming the customer settled its account on January 11, 2022 amount should be recognized as sales discount under the gross m, iy net method, and allowance method, respectively? eth Grossmethod Netmethod Allowance method A Zero » Zero Zero B. 22,950 Zero Zero c Zero 22,950 22,950 D. 22,950 22,950 22,950 ~ Assuming the customer settled its account on January 16, 2022, wit amount should be recognized as sales discount under the gross meth, net method, and allowance method, respectively? Gross method Netmethod Allowance method Zero Zero Zero B. 15,300 Zero Zero a Zero 15,300 15,300 D. 15,300 15,300 15,300 Assuming the customer settled its account on January 16, 2022, wi amount should be recognized as sales discount forfeited under thegt! method, net method, and allowance method, respectively? Gross method Netmethod Allowance method. A Zero Zero Zero B, Zero 7,650 Zero Cc. Zero 7,650 7,650 D. Zero 15,300 15,300 190 rE Chapter 5: Recounting for Receivables 7. Assuming the customer settled its account on January 21, 2022, what amount should be recognized as sales discount under the gross method, net method, and allowance method, respectively? Gross method Netmethod Allowance method A Zero Zero Zero B. 7,650 Zero * Zero c Zero 7,650 7,650 D. 7,650 7,650 7,650 8. Assuming the customer settled its account on January 21, 2022, what amount should be recognized as sales discount forfeited under the gross method, net method, and allowance method, respectively? Gross method Net method Allowance method A Zero Zero Zero B. Zero 15,300 Zero Cc Zero 15,300 15,300 D. Zero Zero “45,300 9, Assuming the customer settled its account on January 31, 2022, what amount should be recognized as sales discount under the gross method, net method, and allowance method, respectively? Gross method Net method Allowance method A Zero Zero Zero B. 22,950 Zero Zero C 15,300 Zero Zero D. 7,650 Zero Zero 10. Assuming the customer settled its account on January 31, 2022, what amount should be recognized as sales discount forfeited under the gross method, net method, and allowance method, respectively? Gross method: Netmethod Allowance method A Zero Zero Zero B. Zero 22,950 22,950 c Zero 22,950 Zero D. Zero Zero 22,950 PROBLEM 5-3 Answers & Solutions Guide 1. Answer: C 1/1/2022 Accounts receivable 765,000 Sales 765,000 P1,000,000 x [100% - 10%] x [100% - 15%] 1,000,000 x 90% x 85% Comment: Under the gross method, accounts receivable is debited at gross amount. Cash discounts will only be recognized when actually availed by the customer. 191

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