AE15: INTERMEDIATE ACCOUNTING

[TERMINOLOGIES/CONCEPTS/FORMULAS]
CHAPTER 4 – ACCOUNTS RECEIVABLES
A/R
Receivables are financial assets that represents a contractual right to receive cash or another financial
asset from another entity
TRADE AND NONTRADE RECEIVABLES
 Trade receivables refer to claims arising from sale of merchandise or services in the ordinary course
of business. (It includes accounts receivables and notes receivables)
 Accounts receivables are open accounts arising from the sale of goods and services in the ordinary
course of business and not supported by promissory notes
 Other names of accounts receivables are customers’ accounts, trade debtors, and trade accounts
receivables
 Notes receivables are 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.
LOANS RECEIVABLES
For banks and other financial 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.
CLASSIFICATION
 Trade receivables
 Nontrade receivables (If collectable beyond one year, it is classified as NCA)
Examples of nontrade receivables
Under Current Assets
 Advances to/or receivables (from shareholder, directors, officers or employees)
 Advances to suppliers
 Subscription receivables (If collectable within one year, otherwise it is preferably shown as a
deduction from subscribed share capital)
 Creditors’ account (if the debit bal is not material, an offset may be made against and only the net
may be presented)
 Special deposits on contract bids (if collectable currently)
 Accrued income (e.g. dividend rec., accrued rent)
 Claims receivables (e.g. damages/loses, tax refunds, claim from insurance entity)
Under Non-Current Assets
 Special deposits on contract bids (usually classified as NCA)
 Advances to affiliates
 Other receivables/advances if collectable beyond one year
PRESENTATION

Accounts Receivables xx
Allowance for Doubtful Accounts (xx)
Notes Receivables xx
Accrued Interest on Note Receivable xx
Advances To Officers and Employees xx
Dividends Receivables xx
Total Trade and Other Receivables xx

INITIAL MEASUREMENT OF ACCOUNTS RECEIVABLES (at original invoice amount)

 (PFRS 9, paragraph 5.1.1) Financial asset shall be recognized initially at fair value plus transaction
cost
 The fair value of financial asset usually the transaction price (meaning, the fair value of
consideration given)
 For short-term receivables, the fair value is equal to the face amount or original invoice amount
(invoice – amount that includes all transaction costs)
 Accordingly, accounts receivables shall be measured initially at face amount or original invoice
amount.
SUBSEQUENT MEASUREMENT (at amortized cost/NRV) / (kasunod na panahon & hindi ngayon – Sir
Win)
 (PFRS, paragraph 5.2.1) after initial recognition, a/r shall be measured at amortized cost
 The amortized cost is actually the net realizable value of accounts rec. (AM-pagbago ng value sa
paglipas ng panahon)
 The term amortized cost has more relevance in long-term note receivable.
The NET REALIZABLE VALUE OF ACCOUNTS RECEIVABLES is the amount of cash expected to
be collected or the estimated recoverable amount.
A/R xx
Less: All Allowances (xx)
NRV xx
TERMS RELATED TO FREIGHT CHARGE
FOB Destination and Freight Collect. Ownership of goods purchased is vested in the buyer upon
receipt and freight charge are not yet paid
JE: Collected JE:
A/R 500 Cash 475
Freight Out 10 Sales DC 15
Sales 500 Allowances for FC 10
Allowance for freight charge 10 A/R 500
FOB Destination and Freight Prepaid. Ownership of goods purchased is vested in the buyer upon
receipt and freight charge is already paid by the seller
JE: Collected JE:
A/R 500 Cash 485
Freight Out 10 Sales DC 15
Sales 500 A/R 500
Cash 10
FOB Shipping Point and Freight Prepaid. Ownership of the goods purchased is vested in the buyer
from point of shipment to destination.
JE: Collected JE:
A/R 500 Cash 485
Sales 500 Sales DC 15
A/R 500
FOB Shipping Point and Freight Prepaid. Ownership of the goods purchased is vested in the buyer
from point of shipment to destination but the seller already paid the freight charge.
JE: Collected JE:
A/R 510 Cash 495
Sales 500 Sales DC 15
Cash 10 A/R 510

ALLOWANCES FOR SALES RETURNS

JE:
Sales Return xx
Allowances for Sales Return xx
ALLOWANCES FOR SALES DISCOUNT
Sales DC xx
Allowances for Sales Discount xx
Discount.
 Trade Discount (tawad)
 Cash Discount (credit terms, e.g. 2/10 n/30)
Gross method – JE Collected JE: Within Dc period Collected JE: Beyond Dc period
Cash xx Cash xx
Sales DC xx A/R xx
A/R xx
A/R xx
Sales xx

Net Method – JE Collected JE: Within Dc period Collected JE: Within Dc period

A/R xx Cash xx Cash xx

Sales xx A/R xx A/R xx

Sales DC Forfeited xx

ACCOUNTING FOR BAD DEBTS

Two Methods:
1. Allowance Method. Requires recognition of a bad debt loss if the accounts are doubtful of collection.
JE:
Doubtful Accounts xx
Allowances for doubtful accounts xx
If found to be worthless or uncollectable
JE:
Allowances for doubtful accounts xx
A/R xx
If recovered of accounts written off
JE:
A/R xx
Allowances for doubtful accounts xx
Cash xx
A/R xx
2. Direct Writenoff Method. Requires recognition of a bad debt loss only when the accounts approved
to be worthless or uncollectable.
JE: found/proved to be worthless
Bad debts
Accounts receivables
If recovered of accounts written off
JE:
A/R xx
Bad debts xx
Cash xx
A/R xx
DOUBTFUL ACCOUNTS IN THE INCOME STATEMENT
1. Distribution Cost
2. Administrative Expense
CHAPTER 5 – ESTIMATION OF DOUBTFUL ACCOUNTS
METHODS OF ESTIMATING DOUBTFUL ACCOUNTS
1. Aging the accounts rec. or Statement of Financial Position Approach.
2. Percent of accounts rec. / Statement of Financial Position Approach.
3. Percent of sales or Income Statement Approach.
AGING OF ACCOUNTS RECEIVABLES. Involves
an analysis where the accounts are classified into not
due or past due. (This method could become
prohibitively time consuming if a large number of
accounts are involved.
Required allowance 50k
Less All Bal before adjustment (10k)
Doubtful Accounts Expense 40k
JE:
Doubtful Accounts 40k
Allowance for doubtful accounts 40k
When is an account past due? (e.g. if the credit terms were 2/10, n/30 and the account is 45 days old, it is
considered to be 15 days past due. (past due – refer to the period beyond the maximum credit term)
PERCENT OF ACCOUNTS RECEIVABLES. A certain rate is multiplied by the open accounts at the
end of the period in order to get the required allowance balance. (This procedure has the advantage of
presenting the accounts receivable at estimated net realizable value [NRV] and also simple to apply)
EXAMPLE: JE:
DAE 50k
Bal of A/R = 2M AFDA 50k
AFDA = 10k
EST. DA. = 3% Required allowance[3%x2M] 60k
Less: CB in All (10k)
DAE 50k
PERCENT OF SALES. The amount of sales for the year is multiplied by a certain rate to get the
doubtful account expense. (The rate may be applied on credit sales or total sales)
Bad debt losses
DAE = ----------------------
Charge sales
Argument for percent of sales method. When the “percent of sales” is used in computing doubtful
accounts, proper matching of cost against revenue is achieved.
Argument against percent of sales method. The main argument against this methos is that the A/R may
not be shown at estimated NRV because the AFDA may prove excessive or inadequate.
CORRECTION IN AFDAs
If inadequate amount – JE: If excessive amount – JE:

DAE xx AFDA xx

AFDA xx DAE xx

When the allowance is excessive, there is a corollary problem when the discrepancy is more than the
debit balance in the doubtful accounts expense account. (e.g. AFDA=30k, DAE=20k)
JE:
AFDA 30
DAE 20
Miscellaneous income 10

Debit balance in allowance account

AFDA normally has a credit balance. However, in certain instances, it may have a debit balance
because it may be the policy of the entity to adjust the allowance at the end of the period and record
accounts written off during the period.
EXAMPLE:
AFDA = 30k Writeoff JE:

Written off = 50k AFDA 50

A/R 50

AFDA has a debit balance of 20k(30k-50k) & the required amount is 40k
Adjustments: JE:
Required Allowance 40k DAE 60
Add: Debit balance in Allowance 20k
DAE 60k AFDA 60
 CHAPTER 6 – NOTES RECEIVABLES
N/R
 Notes receivables are claims supported by formal promises to pay usually in the form of notes.
 A negotiable promissory note is an unconditional promise in writing made by one person to another,
signed by the maker, engaging to pay on demand or at a fixed determinable future time a sum
certain in money to order or to bearer.
DISHONORED NOTES
 When a promissory note matures and is not paid, it is said to be dishonored.
 Theoretically, dishonored notes receivable should be removed from the notes receivable account
and transferred to accounts receivable.
 The amount debited to accounts receivable should include the face amount, interest and other
charges.
SUBSEQUENT MEASUREMENT
INITIAL MEASUREMENT
Short-term
Short-term
Interest Bearing. Face Value
Interest Bearing. Face Value
Non-interest Bearing. Face Value
Non-interest Bearing. Face Value
Long-term
Long-term
Interest Bearing. Face Value
Interest Bearing. Face Value
Non-interest Bearing. Amortized Cost
Non-interest Bearing. Present Value
Usury Law. allowing for freedom of contract in lending, though courts can void or reduce
unconscionable rates. (SW)
INTEREST BEARING NOTE
COST = 800k
SOLD = 1M
The entity received a 3-year note for P1,000,000 plus interest of 12% compounded annually
JE: First Year JE: Second Year
Notes Receivables 1,000,000 Accrued Interest Receivables 134,000
Land 800,000 Interest Income 134,000
Gain on sale of land 200,000
Face Value
Accrued Interest Receivable 120,000 1,000,000
Interest Income [12%x1M] 120,000 Interest accrued for first year 120,000
Total 1,120,000

Interest for second year (12%x1,120,000) 134,000

JE: Third Year Face Value 1,000,000
Cash 1,404,928 Interest accrued:
Notes receivables 1,000,000 First Year 120,000
Accrued interest receivables 254,400 Second Year 134,400 254,400
Interest income 150,528 Total 1,254,400

Interest for third year (12%x1,254,000) 150,528

CASH RECEIVED 1,404,928

NONINTEREST BEARING NOTE Face value of note 400,000

An entity manufactures and sells machinery. On Present value – cash sale price 350,000
UNEARNED INTEREST INCOME 50,000
January 1. 2020, the entity sold machinery
costing P280,000 for P400,000.
Cash sale price 350,000
The buyer signed a noninterest bearing note for Cost of machinery 280,000
P400,000, payable in four equal installments GROSS INCOME 70,000
every December 31 JE:
N/R 400,000
The cash sale price of the machinery is Sales 350,000
P350,000. Unearned interest income 50,000

On January 1, 2020, an entity sold an equipment withFace value

a cost of note for P400,000.
of P250,000 300,000
Present value of note [100kx2.4869] 248,690
The buyer paid a down of P100,000 and signed a UNEARNED INTEREST INCOME 51,310
noninterest bearing note for P300,000 payable in
equal annual installment of P100,000 every Present value of note 248,690
December 31. Cash received-down payment 100,000
Sales Price 348,690
The prevailing interest rate for a note of this type Cost of equipment 250,000
is 10%. The present value of an ordinary annuity GAIN ON SALE OF EQ 98,690
of 1 for three periods at 10% is 2.4869. JE:
Cash 100,000
The present value of the note is computed by N/R 300,000
multiplying the annual installment of P100,000 Equipment 250,000
by the present value factor of 2.4869 or Gain on sale of equipment 98,690
P248,690. Unearned interest income 51,310

EFFECTIVE INTEREST METHOD: Cash 100,000

N/R 100,000

Unearned 24,869
Interest income 24,869

 The interest income is computed by multiplying the present value by 10%.

 Thus, for 2020, 10% x P248,690 equals P24,869.
 The principal payment is equal to annual collection minus interest income.
 Thua, for 2020, P100,000 minus P24,869 equals P75, 131.
 The present value is equal to the preceding balance minus the annual principal payment.
 Thus, on December 31, 2020, P248,690 minus P75, 131 equals P173,559.
On January 1, 2020, an entity sold an Face value of note 400,000
equipment costing P600,000 with accumulated Present value of note [400kx.7513] 300,520
depreciation of P250,000. UNEARNED INTEREST INCOME 99,480
The entity received as consideration P100,000
The unearned interest income is sometimes described as
cash and a P400,000 noninterest bearing note "discount on note receivable".
due on January 1, 2023.
The prevailing rate of interest for a note of this Present value of note 300,520
Cash received 100,000
type is 10%. The present value of 1 at 10% for
Sales price 400,520
3 years in 0.7513.
Carrying amount of eq [600k-250k] 250,000
Observe that the note is collectible on a lump GAIN ON SALE OF EQ 50,520
sum basis after 3 years. JE:
Cash 100,000
N/R 400,000
A/D 250,000
Equipment 600,000
Gain on sale of equipment 50,520
Unearned interest income 99,480

Unearned 30,052
Interest income 30,052
 The effective interest method is used.
 The interest income is computed by multiplying the present value by 10%.
 Thus, for 2020, P300,520 x 10% equals P30,052.
 The unearned interest income is arrived at by deducting the interest income from preceding balance.
 Thus, on December 31, 2020, P99,480 minus P30,052 equals P69,428.
 The present value is arrived at by adding the interest income to the preceding present value balance.
 Thus, on December 31, 2020, P300,520 plus P30,052 equals P330,572.
 Or face value of note minus unearned interest income equals present value.
 Thus, on December 31, 2020, P400,000 minus P69,428 equals P330,572.

CHAPTER 7 – LOAN RECEIVABLE

L/R

A loan rec. is a financial asset arising from a loan granted by a bank or other financial institution to a
borrower. (most cases are periods cover several years)
INITIAL MEASUREMENT OF L/R (at fair value + transaction cost)
An entity shall measure a loan receivable at fair value plus transaction costs that are directly attributable
to the acquisition of the financial asset(L/R). [the amount of loan granted] [TC include direct
origination costs and should be in L/R comp.]
Indirect origination costs should be treated as outright expense. (OE-completely & immediately/need na
ma-recognized agad rather than carried out on the life of the note/deretso expensed)
SUBSEQUENT MEASUREMENT OF L/R
PFRS 9, paragraph 4.1.2, the financial asset shall be measured at amortized cost. (using the EFFECTIVE
INTEREST METHOD).
MEANING OF AMORTIZED COST
a. Minus principal repayment
b. Plus, or minus cumulative amortization of any difference between the initial CA and the principal
maturity amount.
c. Minus reduction for impairment or collectability
Initial amount < principal amount = added to the carrying amount (if IA mas mababa sa PA)
Initial amount > principal amount = deducted to the carrying amount (if IA mas mataas sa PA)
ORIGNATION FEES (fees charged by the bank against the borrower)
a. Evaluating the borrower’s financial condition
b. Evaluating guarantees, collateral and other security
c. Negotiating the terms of the loan (how loan should span/how long to pay)
d. Preparing and processing the documents related to the loan
e. Closing and approving the loan transaction.
ACCOUNTING FOR ORIGINATION FEES (direct – capitalized) (indirect – outright expense)
The origination fees received from the borrower are received as unearned interest income and amortized
over the term of the loan.
If not chargeable against the borrower it is known as “direct origination cost” (it is deferred and also
amortized over the term of the loan).
PROCESSING FEE
Transaction Price xx (amount na pinautang ng bank)
Direct Origination Cost xx (ginamit ng bank na pera)
TRANSACTION COSTS
Origination Fees Received (xx) (collected na ang unearned income)
Initial Carrying Amount xxx
JE:
Loan Receivable xx
Cash xx
To record loan transaction price Cash xx
Loan Receivable xx
Cash xx To record collection of loan
Unearned Interest Income xx
To record the origination fees received

Unearned interest income xx

Cash xx
To record direct origination cost
EFFECTIVE INTEREST METHOD (EIM)
Date Interest Received Interest Income Amortization Carrying
Amount
1/1/20x1 -- -- -- Transaction
Price +DOC-
OF
12/31/20x1 Principal/TP x C/Amt x Effective Interest Received – Amort. +
Interest Rate Interest rate Interest Income C/Amt
Keep going until carrying amount = Principal amount

STATEMENT PRESENTATION FOR C/Y

Loan Receivable xxx
Unearned Interest Income (xx) OFR – Amort of Current Year [interest received – interest income]
C/Amt – End xxx

IMPAIRMENT OF LOAN
PFRS 9, paragraph 5.5.1, entity shall recognize a loss allowance for expected credit losses on financial
asset measured at amortized cost. (In terms of financial instrument, it is measured at amount equal
to the lifetime expected credit loses if credit risk on that financial instrument increased significantly
since initial recognition/amount)
Credit losses are the present value of all cash shortfalls. (Where the actual cash received from borrowers
is less than the expected).
MEASUREMENT OF IMPAIRMENT
a. Probability-weighted outcome
b. Time value of money (expected credit losses should be discounted)
c. Reasonable and supportable information that is available without undue cost or effort
C/amt of L/R shall be reduced either directly or through allowance account.
Impairment Loss = C/amt of asset > Recoverable amt (the difference is IL)
*Recoverable Amt = Asset fair value less cost of disposal & *Value in use = PV of future cash flows
expected to be derived from asset
Impairment Loss = C/amt > of PV of future payments
Carrying amount of L/R xx
PV of estimated future cash
Flows discounted at the ORIG.
EFFECTIVE RATE (xx)
IMPAIRMENT LOSS (xx)