ACC 124 – Conceptual Framework and Intermediate Accounting 1 – Hand-out 6.

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Topic: Accounts Receivable
Instructor: Marj Jules Lorain V. Juntilla, CPA
REV: 0
ACCOUNTS RECEIVABLE

• Definition:
Trade receivables refer to claims arising from sale of merchandise or services in the ordinary course
of business. They are expected to be realized in cash within the normal operating cycle or one year,
whichever is longer, and are classified as current assets. It includes:
o Accounts receivable are open accounts arising from the sale of goods and services in the
ordinary course of business and not supported by promissory notes.
o Notes receivable is those supported by formal promise to pay in the form of notes.

Nontrade receivable represent claims arising from sources other then the sale of merchandise or services
in the ordinary course of business. If they are expected to be realized in cash within one year, the
length of the operating cycle notwithstanding, they are classified as current assets. If collectible
beyond one year, they are classified as noncurrent assets.

• Presentation:
Trade and nontrade receivables which are currently collectible shall be presented on the face of the
statement of financial position as one line item called trade and other receivables, the details of
which are disclosed in the notes to financial statements.

• Initial Measurement:
Accounts receivable shall be recognized initially at face amount or original invoice plus transaction
costs that are directly attributable to the acquisition. Cash flows relating to short-term accounts
are not discounted because the effect is usually immaterial (PFRS 9, par. 5.1.1).

EXERCISE 6.1 ACCOUNTS RECEIVABLE

Problem 1. Faith Company provided the following information relating to current operations:
Accounts receivable, Jan. 1 4,000,000
Accounts receivable collected 8,400,000
Cash sales 2,000,000
Inventory, Jan. 1 4,800,000
Inventory, Dec. 31 4,400,000
Purchases 8,000,000
Gross margin on sales 4,200,000
What is the balance of accounts receivable on December 31?

Problem 2. Steven Company provided the following information during the first operations:
Total merchandise purchases for the year 7,000,000
Merchandise inventory, Dec. 31 1,400,000
Collections from customers 4,000,000
All the merchandise was marked to sell at 40% above cost. All sales are on a credit basis and all receivables
are collectible.

What is the balance of accounts receivable on December 31?

• Subsequent Measurement:
After initial recognition, accounts receivable shall be measured at amortized cost. This is the net
realizable value of accounts receivable. The net realizable value is the amount of cash expected to be
collected or the estimated recoverable amount.

o In estimating the net realizable value of trade accounts receivable, the following deductions
are made:
▪ Allowance for Freight Charge
In understanding freight charge, it is important to take note of the following terms:
1. FOB Destination – the ownership of the goods purchased is vested in the buyer upon
receipt thereof. Thus, the seller shall be responsible for the freight charge up to
the point of destination.
2. FOB Shipping Point – ownership of the goods purchased is vested in the buyer upon
shipment thereof. Thus, buyer shall pay for the transportation charge from the point
of shipment to the point of destination.

Page 1 of 3
Sources:
Intermediate Accounting – Vol. 1 – 2022 Edition – Valix, C., Peralta, J., & Valix, C. A.
Practical Financial Accounting – Vol. 1 – 2018 Edition – Valix, C. & Valix, C. A.
 ACC 124 – Conceptual Framework and Intermediate Accounting 1 – Hand-out 6.0
Topic: Accounts Receivable
Instructor: Marj Jules Lorain V. Juntilla, CPA
REV: 0
3. Freight Collect – freight charge on the goods shipped is not yet paid. The common
carrier will collect it from the buyer. Thus, the freight charge is actually paid
by the buyer.
4. Freight Prepaid – freight charge from the goods shipped is already paid by the
seller.

EXERCISE 6.2 ACCOUNTS RECEIVABLE

Problem 3. An entity has a 100,000 account receivable at the end of accounting period. The terms are FOB
destination and freight collect. The customer paid freight charge of 5,000. How much is the increase in
accounts receivable? How much is the cash received as payment of customer from the transaction?

▪ Allowance for Sales Return

The measurement of accounts receivable shall recognize the probability that some
customers will return goods that are unsatisfactory or will make other claims requiring
reduction in the amount due. The journal entry to record probable return is:
Dr. Sales return
Cr. Allowance for sales return

▪ Allowance for Sales Discount

A cash discount is a reduction from an invoice price by reason of prompt payment. It is
known as:
1. Sales discount – on the part of the seller
2. Purchase discount – on the part of the buyer

For example: 5/10, n/30 – This means that if the buyer pays within the 10-day period,
a discount of 5% will be availed. If the buyer pays beyond that period, no discount
will be claimed, and the credit must be settled within 30 days.

Accounting for cash discounts has two methods:

1. Gross Method – the accounts receivable and sales are recorded at gross amount of
the invoice.

2. Net Method – the accounts receivable and sales are recorded at net amount of the
invoice or at the invoice price minus cash discounts whether taken or not.

Gross Method Net Method

1. Sales of merchandise for 100,000, terms 5/10, n/30.
Accounts receivable 100,000 Accounts receivable 95,000
Sales 100,000 Sales 95,000
2. Assume: Collection is made within the discount period.
Cash 95,000 Cash 95,000
Sales discount 5,000 Accounts receivable 95,000
Accounts receivable 100,000
3. Assume: Collection is made beyond the discount period.
Cash 100,000 Cash 100,000
Accounts receivable 100,000 Accounts receivable 95,000
Sales discount forfeited 5,000

▪ Allowance for Doubtful Accounts

An entity that sells on credit assumes risk that some customers will not pay their
accounts. When the receivable becomes uncollectible, the entity has sustained a bad debt
loss. There are two methods to account for bad debt loss:
1. Allowance Method – this requires recognition of a bad debt loss if the accounts are
doubtful of collection. It uses the account “Allowance for doubtful accounts” to
record possible losses. This account is a reduction to accounts receivable. This is
the method required by GAAP because it conforms with the matching principle, and
accounts receivable will be properly measured at net realizable value.

If the doubtful accounts are subsequently found to be worthless, the accounts are
written off as uncollectible.

Page 2 of 3
Sources:
Intermediate Accounting – Vol. 1 – 2022 Edition – Valix, C., Peralta, J., & Valix, C. A.
Practical Financial Accounting – Vol. 1 – 2018 Edition – Valix, C. & Valix, C. A.
 ACC 124 – Conceptual Framework and Intermediate Accounting 1 – Hand-out 6.0
Topic: Accounts Receivable
Instructor: Marj Jules Lorain V. Juntilla, CPA
REV: 0

However, if recovery on accounts previously written off as uncollectible has been

made, the entity must first recharge the customer’s account, meaning, the writeoff
entry must be reversed (regardless whether the recovery is during the year or
subsequent there to. Then, the collection will be normally recorded by debiting cash
and crediting accounts receivable.

2. Direct Writeoff Method – this requires recognition of a bad debt loss when the
accounts proved to be worthless or uncollectible. The BIR recognizes this method
for tax purposes. However, it violates the matching principle, and is not permitted
under IFRS.

If the accounts are worthless, this is recorded by debiting bad debts and crediting
accounts receivable. If the accounts are only doubtful of collection, no adjustment
is necessary.

If recovery is made subsequent to the year of writeoff, the collection will be

credited to other income.

Doubtful accounts in the income statement can either be:

a. Distribution Cost – if it is under the sales manager

b. Administrative Cost – if it is under an officer other than the sales manager, or if
the problem is silent

EXERCISE 6.3 ACCOUNTS RECEIVABLE

Problem 4. Germany Company started business at the beginning of the current year. The entity established an
allowance for doubtful accounts estimated 5% of credit sales. During the year, the entity wrote off 50,000
of uncollectible accounts.

Further analysis showed that merchandise purchased amounted to 9,000,000 and ending merchandise inventory
was 1,500,000. Goods were sold at 40% above cost.

The total sales comprised 80% sales on account and the rest are cash sales. Total collections from customers,
excluding cash sales, amounted to 6,000,000.

Requirements:
1. What is the cost of goods sold?
2. What is the amount of sales on account?
3. What is the net realizable value of accounts receivable at year-end?

- END OF HAND-OUT -

Page 3 of 3
Sources:
Intermediate Accounting – Vol. 1 – 2022 Edition – Valix, C., Peralta, J., & Valix, C. A.
Practical Financial Accounting – Vol. 1 – 2018 Edition – Valix, C. & Valix, C. A.