Module 4 Loans and Receivables

AUDITING & ASSURANCE: CONCEPTS AND APPLICATIONS 1
MODULE 4: LOANS AND RECEIVABLES

Glen De Vera De Leon, CPA, MBA, AFBE, FRIAcc, Ph. D
TOPIC OVERVIEW:
This chapter discusses loans and receivables, its characteristics and classifications, initial and
subsequent measurement of each type of receivable and provision for bad debts.
LEARNING OBJECTIVES:
After studying this chapter, you should be able to:
1. Define and identify the different classification of receivables.

2. Explain the initial recognition, initial measurement, subsequent measurement, financial
statement presentation and derecognition of receivables.
3. Explain the accounting of discounts and freight and how will it affect receivables
account.
4. Apply the different methods of accounting for bad debts.
5. Explain and identify the different methods of receivable financing.
6. Calculate the correct balances of receivables and related accounts.
RECEIVABLES
Receivable is a financial asset that represents a contractual right to receive cash or another
financial asset from another entity. It represents the amount collectible from customers and
others, most frequently arising from sale of merchandise, claims for money lent, or the
performance of services.
Under PFRS 15 paragraph 108, a receivable is an entity’s right to consideration that is

unconditional. A right to consideration is unconditional if only the passage of time is required
before payment of that consideration is due.
Classification of receivables
A. As to source
1. Trade receivables – refer to claims arising from sale of merchandise or services in
the ordinary course of the business operations. This includes:
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a. Accounts Receivable/customer’s accounts/trade debtors – these are open
accounts not supported by promissory note arising from sale of merchandise or
services in the ordinary course of business.
b. Notes Receivable – is a formal claim against another that is evidenced by a
written promise called promissory note, or a written order to pay at a later time
called time draft. Negotiable promissory note is an unconditional written
agreement to pay a certain sum of money on a specific or determinable date to
order of the payee or to bearer.
Note: Only negotiable promissory note is included as part of notes receivable.
Dishonored notes receivable do not qualify as note receivable in the statement of
financial position as well as overdue notes. They are reclassified as accounts
receivable together with the accrued interest.
2. Nontrade receivables – these are the receivables that arise from sources other than
from the sale of goods or services in the normal course of the business.
Examples of Nontrade Receivables
1. Loans to officers, shareholders, directors and employees Noncurrent if due more than
12 months from the reporting
date
2. Advances to affiliates Long-term investment, unless
collectible within one year
(short-term investment)
3. Advances to supplier for acquisition of merchandise Current asset
4. Accrued income receivables such as dividends receivable, Current asset
accrued rent income, accrued royalties income and
accrued interest on bonds investments
5. Deposits to guarantee performance or payment or to cover Current asset
possible damages or losses
6. Deposit with creditors, claims for losses and damages Current asset
7. Claims receivables from common carriers for damaged or Current asset
lost goods; claims against creditors for returned, damaged
or lost goods
8. Claims for tax funds or rebates Current asset
9. Special deposit on contract bids Normally classified as other
noncurrent assets unless
collectible within one year
(current assets)
10. Debit balance of creditors account that may arise from Current asset if material,
overpayments or returns and allowances otherwise it may be netted
against accounts payable with
credit balance.
Issue on Subscription Receivable

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Under the Securities and Exchange Commission of the United States of America (USA)
and Section 22.7.c of the PFRS for SME, subscriptions receivable must be netted against
the Subscribed Share Capital. However, under the old Statement of Financial Standards
of the Philippines (SFAS), it is presented as current assets if collectible currently,
otherwise it is deducted from subscribed share capital.
B. As to Statement of Financial Position Classification

1. Current
a. Trade receivables – generally classified as current because of the concept of
normal operating cycle notwithstanding the period from the reporting date
b. Nontrade receivables – classified as current only if they are reasonably expected
to be realized in cash within 12 months after the reporting date
Normal operating cycleis the period between the acquisition of material entering
into a process (or the purchase of goods for resale) and its realization in cash or an
instrument that is readily convertible into cash.
2. Non-current – nontrade receivables that are not reasonably expected to be realized in

cash within 12 months after the reporting date.
INITIAL RECOGNITION
Receivables are recognized simultaneously with the recognition of revenue under PFRS 15. An
entity shall recognize revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services. [PFRS 15.2]
Interrelationship of Revenue, Receivable and Inventory
Once an entity is permitted to recognize revenue under PFRS 15, the seller should recognize the
corresponding debit as a receivable or contract asset and should derecognize the inventory.
Conversely, the buyer should recognize the inventory and payable in its books.
OTHER Revenue Recognition Issues
Bill and hold sales
A ‘bill-and-hold’ arrangement is a contract under which an entity bills a customer for a product
but the entity retains physical possession of the product until it is transferred to the customer at a
point in time in the future. For example, a customer may request an entity to enter into such a
contract because of the customer’s lack of available space for the product or because of delays in
the customer’s production schedules.
Revenue is recognized when the customer to have obtained control of a product. A customer has
obtained control when all of the following criteria are met:
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(a) The reason for the bill-and-hold arrangement must be substantive (for example, the
customer has requested the arrangement);
(b) The product must be identified separately as belonging to the customer;
(c) The product currently must be ready for physical transfer to the customer; and
(d) The entity cannot have the ability to use the product or to direct it to another customer.
Revenue is not recognized when there is simply an intention to acquire or manufacture the
goods in time for delivery.
Goods shipped subject to conditions
1) Installation and inspection conditions

Revenue is normally recognized when the buyer accepts delivery, and installation and
inspection are complete. However, revenue is recognized immediately upon the buyer’s
acceptance of delivery when:
(i) The installation process is simple in nature, for example the installation of a factory
tested television receiver which only requires unpacking and connection of power
and antennae; or
(ii) The inspection is performed only for purposes of final determination of contract
prices, for example, shipments of iron, ore, sugar or soya beans.
2) On approval when the buyer has negotiated a limited right of return
If there is uncertainty about the possibility of return, revenue is recognized when the
shipment has been formally accepted by the buyer or the goods have been delivered
and the time period for rejection has elapsed.
Layaway sales
Layaway sales are sales where the goods are delivered only when the buyer has paid a final
installment in a series of payments.
Revenue from such sales is recognized when the goods are delivered. However, when
experience indicates that most such sales are consummated, revenue may be recognized when a
significant deposit is received provided the goods are on hand, identified and ready for delivery
to the buyer.
Sales to distributors or other intermediate parties
Revenue from such sales is generally recognized when the control has been transferred.
However, when the buyer is acting in substance as an agent, the sale is treated as a consignment
sale.
Orders when payment (or partial payment) is received in advance
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Orders when payment (or partial payment) is received in advance of delivery for goods not
presently held in inventory, for example, the gods are still to be manufactured or will be
delivered directly to the customer from a third party.
Revenue is recognized when the control of goods are transferred to the buyer. Normally, control
is transferred when delivery takes place.
Subscriptions to publications and similar items
When the items involved are of similar value in each time period, revenue is recognized on a
straight-line basis over the period in which the items are dispatched. When the items vary in
value from period to period, revenue is recognized on the basis of the sales value of the item
dispatched in relation to the total estimated sales value of all items covered by the subscription.
Installment sales
Installment sales are sales under which the consideration is receivable in installments.
Revenue attributable to the sales price, exclusive of interest is recognized at the date of sale.
The sale price is the present value of the consideration, determined by discounting the
instalments receivable at the imputed rate of interest. The interest element is recognized as
revenue as it is earned using the effective interest method.
Credit Card Sales
Credit card is a plastic card which enables the holder to obtain credit up to a predetermined limit
from the issuer of the card for the purchase of goods and services. Service is usually charged
ranging from 1% to 5%.
ILLUSTRATION: Credit Card Sales
On January 1, of the current year, Oxide sold merchandise to customers using BPI Master Card
totalling P 1,000,000/ On January 6, BPI Master Card remitted in full the amount minus service
charge of 5%.
Required:
Prepare all the necessary journal entries.
SOLUTION:
Jan 1 Accounts receivable – BPI Master Card P 1,000,000

Sales P 1,000,000
Jan 6 Cash (1M x 95%) 950,000

Service charge (5% x P 1,000,000) 50,000
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Accounts receivable – BPI Master Card P 1,000,000
INITIAL MEASUREMENT
Receivables are recognized simultaneously with the recognition of revenue under PFRS 15.
Under PFRS 15 Revenue from Contract with Customers, revenue should be measured at the
amount of the transaction price (which excludes estimates of variable consideration), while
under PFRS 9 Financial Instruments, financial asset (e.g., receivables) are initially measured at
fair value plus transaction cost.
The transaction price is the amount of consideration to which an entity expects to be entitled in
exchange for transferring promised goods or services to a customer, excluding amounts collected
on behalf of third parties (for example, some sales taxes). The consideration promised in a
contract with a customer may include fixed amounts, variable amounts, or both.
Upon initial recognition of a receivable from a contract with a customer, any difference between
the measurement of the receivable in accordance with PFRS 9 and the corresponding amount of
revenue recognized shall be presented as an expense (for example, as an impairment loss).
SUBSEQUENT MEASUREMENT
Receivables are subsequently measured at amortized cost (net realizable value) using the
effective interest rate method.
Amortized cost is the amount at which the receivable is measured initially minus principal
repayments, plus or minus the cumulative amortization of any difference between the initial
amount recognized and the principal maturity minus reduction for impairment or uncollectibility.
The amortizedcost is also mentioned under PFRS 9 as the gross carrying amount of the asset
less allowance for expected credit loss.
SHORT-TERM RECEIVABLES
INITIAL MEASUREMENT: SHORT-TERM RECEIVABLES
Short-term receivables with no stated interest rates can be measured initially at transaction price
(e.g. invoice price) when the effect of discounting is immaterial.
Financing Element
As provided under paragraph 60 of PFRS 15, an entity shall adjust the promised amount of
consideration for the effects of the time value of money if the timing of payments agreed to by
the parties to the contract (either explicitly or implicitly) provides the customer or the entity with
a significant benefit of financing the transfer of goods or services to the customer. However
under paragraph 63 of PFRS 15, as a practical expedient, an entity need not adjust the promised
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amount of consideration for the effects of a significant financing component if the entity expects,
at contract inception, that the period between when the entity transfers a promised good or
service to a customer and when the customer pays for that good or service will be one year or
less.
Trade Discount/Volume discount/Quantity discount
Trade discounts are given to encourage prospective customers to buy the goods in large
quantities. These discounts are deducted from the list price to arrive at the invoice price and are
never recognized in the accounting record since the journal entry is based on the amount on the
sales invoice.
Note: Sales (revenue) and related receivables are always recorded net of trade discounts, which
is the same with the transaction price.
Cash Discount/Settlement Discount
Cash discounts are reductions from invoice price as an inducement for prompt payment of an
account within the discount period (e.g., 2/10, n/30). This is also called sales discount from the
point of view of the seller, while it is termed as purchase discount from the point of view of the
buyer.
1) Gross price method – sales and receivables are recorded at the gross amount. Sales
discounts taken by customers are debited to the Sales Discounts account which is
reported as a reduction of sales. This is considered to be more practical than the net
method.
Note: Discount is computed based on invoice price, not including freight paid by the
seller.
2) Net price method – sales and receivables are recorded at the net amount. Sales discounts
not taken by customers are credited to the Sales Discount Forfeited (discounts not taken)
account, which is reported in the “other income” line item of the statement of
comprehensive income. This method is considered to be theoretically correct since the
receivable and sales are recorded using the cash price equivalent.
3) Allowance method – account receivable and sales are recorded at gross amount and a
corresponding allowance for sales discount is recorded.
Journal Entries: Gross and Net Method
Gross Method Net Method

To record sales:
Accounts receivable xxx Accounts receivable xxx
Sales (invoice price) xxx Sales (invoice price less xxx
sales discount)
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To record sales return:
Sales return (invoice price) xxx Sales return (invoice price – xxx
sales discount)
To record collection within discount period:
Cash xxx Cash xxx
Sales discount xxx Accounts receivable xxx
Accounts receivable xxx
To record collection beyond the discount period:
Cash xxx Cash xxx
Accounts receivable xxx Sales discount forfeited xxx
ILLUSTRATION: Gross vs. Net Method
Naragsak Company entered into the following during the year:
Jan. 02 Sold 10,000 units of merchandise to Rex Company at a selling price of P 100
terms 2/10, 1/20, n/30.
Jan. 04 Sold 15,000 units of merchandise to Zeus Company at a selling price of P 100
with terms 2/10, 1/20, n/30.
Jan. 06 Rex returned 2,000 units of goods to the company.
Jan. 10 Rex paid his account availing of the cash discount.
Feb. 02 Zeus Company paid his account.
Required: Prepare all the necessary entries assuming the company used:
1) Gross Method 2) Net Method
Journal Entries: Gross Method
Date Account title Debit Credit
Jan. 02 Accounts Receivable 1,000,000
Sales 1,000,000

Sales 1,500,000
Jan. 06 Sales Return 200,000

Accounts Receivable 200,000
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Jan. 10 Cash 784,000
Sales Discount (P 800,000 x 2%) 16,000
Feb. 02 Cash 1,500,000

Accounts Receivable 1,500,000
Journal Entries: Net Method

Date Account title Debit Credit
Jan. 02 Accounts Receivable 980,000
Sales (P 1,000,000 x 98%) 980,000

Sales (P 1,500,000 x 98%) 1,470,000
Jan. 06 Sales Return (P 200,000 x 98%) 196,000

Jan. 10 Cash (P 980,000 – P 196,000) 784,000

Feb. 02 Cash 1,500,000

Sales Discount Forfeited (P 1.5 M – P 30,000
1,470,000)
Accounts Receivable 1,470,000
Freight Charge
Terms related to freight charge
1) FOB – means either ‘Free on Board’ or ‘Freight on Board’

2) FOB Destination – means ownership of the goods will be transferred to the buyer only
upon the receipt of goods at the point of destination
3) FOB Shipping Point – means ownership of the goods will be transferred upon shipment
of the goods by the seller to the buyer
4) Freight Collect – means that the freight charge on the goods shipped is not yet paid by
the seller and the common carrier shall collect the same from the buyer
5) Freight Prepaid – means that the freight charge on the goods shipped was already paid
by the seller
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Synthetic FOB Destination
Synthetic FOB Destination is a shipping term in which a consumer product entities may ship
goods “FOB shipping point” but have arrangements with their customers under which the seller
continues to bear risk of loss or damage (either explicitly or implicitly) that is not covered by the
carrier while the product is in transit.
Accounting Treatment
This arrangement may give rise to two performance obligations: (1) sale of a product and (2)
protection against the risk of loss during transit. Instead of deferring all revenue recognition,
consumer products entities would need to allocate the transaction price to each identified
performance obligation and assess the satisfaction of each performance obligation separately. In
those cases, revenue recognition could be accelerated depending on the determination of when
control related to the underlying performance obligations is transferred.
Summary Table for Freight
Freight Terms Buyer Seller

FOB Freight collect Reduction of A/P Reduction of A/R
Destination Freight prepaid No effect No effect
FOB Freight collect No effect No effect

Shipping Freight prepaid Addition to A/P Addition to A/R
Point
Formula for the computation of net collection or payment:
Invoice price of merchandise sold or purchased XX

Less: Invoice price of merchandise returned (XX)
Net invoice price XX
Less: Sales or Purchase discount (% x Net invoice price above)
(If collection or payment is within the discount period) XX
Net collection or payment before freight XX
Less: Freight paid by buyer – (if the term is FOB Destination, freight collect) (XX)
Add: Freight paid by seller – (if the term is FOB Shipping Point, freight prepaid) XX
Total Net Cash Collection or Payment XX
Note:
 If the terms are FOB Destination, freight prepaid and FOB Shipping Point, freight
collect; the total net cash collection or payment should be before freight. The freight
payment is ignored because it was paid by the appropriate parties.
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Summary Journal Entries – Accounting For Freight
SELLER BUYER
FOB Destination, Freight prepaid
Freight Out xxx No journal entry
Cash xxx
FOB Destination, Freight collect
Freight Out xxx Accounts Payable xxx
Accounts receivable xxx Cash xxx
FOB Shipping Point, Freight collect
No journal entry Freight-In xxx
Cash xxx
FOB Shipping Point, Freight prepaid
Accounts receivable xxx Freight-In xxx
Cash xxx Accounts payable xxx
Notes:
 If the term is FOB Destination, the seller will record freight-out.

 If the term is FOB Shipping Point, the buyer will record a freight-in account.
 Freight-out is also called cartage-out, transportation-out and delivery expense.
 Freight-in is also called cartage-in and transportation-in.
ILLUSTRATION: Freight Terms
Assume the following data for Nafoolish Company:

List price of the merchandise purchased P 200,000
Trade discount 10, 20
Purchase discount 3/10, 2/15, n/30
Invoice price of the merchandise returned on Jan. 8 P 10,000
Date of purchase January 5, 2017
Date paid January 20, 2017
Freight cost P 2,000
Assume the following freight terms:

Case No. 1: FOB Destination, freight prepaid
Case No. 2: FOB Destination, freight collect
Case No. 3: FOB Shipping Point, freight collect
Case No. 4: FOB shipping point, freight paid
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Required: Using the above independent cases:
1.) Prepare the journal entries for the freight both on the part of the buyer and seller.
2.) Compute for the net cash collection on January 20, 2017.
SOLUTION:
Case No. 1: FOB destination point, freight paid
Requirement No. 1
SELLER BUYER
Freight out ₱2,000 No journal entry
Cash ₱2,000
Requirement No. 2
Invoice price of merchandise sold
(₱200,000 x 90% x 80%) ₱144,000
Less: Invoice price of merchandise returned 10,000
Net invoice price ₱134,000
Less: Sales discount (2% x ₱134,000) 2,680
Total cash collection ₱131,320
Case No. 2: FOB destination, freight collect

Requirement No. 1
SELLER BUYER
Freight out ₱2,000 Accounts payable ₱2,000
Accounts receivable ₱2,000 Cash ₱2,000
Requirement No. 2
(₱200,000 x 90% x 80%) ₱144,000
Collection before freight 131,320
Less: Freight paid by buyer - (FOB Destination, freight collect) 2,000
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Total net cash collection ₱129,320
Case No. 3: FOB shipping point, freight collect

Requirement No. 1
SELLER BUYER
No journal entry Freight-in ₱2,000
Cash ₱2,000
Requirement No. 2
(₱200,000 x 90% x 80%) ₱144,000
Case No. 4: FOB shipping point, freight prepaid

Requirement No. 1
SELLER BUYER
Accounts receivable 2,000 Freight-in 2,000
Cash 2,000 Accounts payable 2,000
Requirement No. 2
(₱200,000 x 90% x 80%) ₱144,000
Collection before freight 131,320
Add: Freight paid by buyer - (FOB shipping point, freight prepaid) 2,000
Maritime shipping terms (Incoterms)
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1.) FAS or free alongside: A trade term requiring the seller to deliver goods to a named port
alongside a vessel designated by the buyer. The buyer has to bear all costs and risks of loss of or
damage to the goods from that moment it has been placed alongside the vessel.
2.) CFR or cost and freight: A trade term in which the seller must pay the costs and freight
necessary to bring the goods to the named port of destination. The title and risk of loss of or
damage to the goods shall pass to the buyer after the goods have been delivered on board the
vessel.
3.) CIF or cost, insurance and freight: A trade term which is the same with CFR but in
addition, the seller is required to procure marine insurance during carriage.
4.) Ex-ship: A trade term in which the seller bears all expenses and risk of loss until the goods
are unloaded up to the port of destination at which time and risk of loss shall pass to the buyer.
SUBSEQUENT MEASUREMENT: SHORT TERM RECEIVABLES

Short-term receivables are subsequently measured at their net realizable value. The net realizable
value may be determined as follows:
Face Value XX
Less: Allowance for freight charge (XX)
Allowance for sales discount (XX)
Allowance for doubtful accounts (XX)
Net realizable Value XX
Methods of Accounting for Bad Debts

1.) Direct write-off (tax): When a specific account is ascertained or proven to be uncollectible
(which may not occur in the period of sale), Bad Debt Expense is debited and Accounts
Receivable is credited. This method is theoretically undesirable because it:
a. Makes no attempt to match revenues and expenses;
b. Does not result in receivables being stated at net realizable value in the statement of financial
position.
2.) Allowance method (GAAP): At the end of each accounting period, an estimate is made
of expected losses from uncollectible accounts. This estimate is debited to Bad Debt Expense
and credited to the Allowance for Doubtful Accounts. This method is justified because a
company has incurred a loss the moment customers receive goods or services that they will never
pay for. This is true even if the specific identity of such customers will not be known for some
time.
Comments: Matches cost against revenue and receivable would be properly measured at net
realizable value.
Methods of estimating bad debt expense under the allowance method
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1.) Percentage of sales (Income Statement Approach): Bad debt expense is estimated
directly by multiplying a percentage to a sales account (e.g. credit sales, net credit sale, net sales,
gross sales).
Advantage: Proper matching of cost against revenue is achieved.
Argument: Accounts receivable may not be shown at estimated realizable value because the
allowance for doubtful accounts may prove excessive or inadequate.
2.) Percentage of A/R (Balance Sheet Approach)

a. First, the required ending balance in the Allowance for Doubtful Accounts is estimated by
multiplying a percentage (a single composite rate) times the ending outstanding receivables.
b. Then, bad debt expense is equal to the difference between the required ending balance and
the existing balance in the Allowance account.
Advantage: It present accounts receivable at estimated realizable value. It is also simple to apply.
Argument: It violates matching principle and loss experience rate may be difficult to obtain nd
may not be reliable.
3.) Aging the A/R (Balance Sheet Approach): This is the same procedure in apercentage of
receivables; the only difference is the percentage use for each term in the aging schedule.
Advantage: It is more accurate and scientific computation of the allowance for doubtful
accounts; thus, the accounts receivable are fairly presented in the statement of financial position
at net realizable value.
Argument: It violates matching principle and time consuming if large number of accounts are
involved.
Past due accounts refers to the period beyond the maximum credit term.
Note:
 Change in estimating bad debts treated as change in accounting estimate. Accordingly,
the effect should be treated currently and prospectively.
Doubtful accounts in the Income Statement

Doubtful account, which is also termed as bad debts and credit losses, are classified as
administrative expense in the P&L since under a good internal control, the granting of credit is
granted to the credit department and not on the sales department.
T- ACCOUNT: ACCOUNTS RECEIVABLE
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Accounts receivable
Beginning balance XX XX Ending balance
Sales on account XX XX Sales returns and allowance*
Recoveries XX XX Sales discount
XX Collections including recoveries
XX Accounts written-off
Total =
T- ACCOUNT: ALLOWANCE FOR DOUBTFUL ACCOUNTS

Allowance for doubtful accounts
Accounts written off XX XX Beginning balance
Balance end XX XX Doubtful accounts expense
XX Recoveries
Total =
The items in the T- accounts are derived from the following journal entries:
1. To record sales on account Dr Cr

Accounts receivable XX
Sales XX
2. To record sales return by the customer

Sales returns and allowance XX
3. To record collection within the discount period

Cash XX
Sales discount XX
4. To record accounts written off

Allowance for doubtful accounts XX
5. To record re-establishment of accounts previously written off

Allowance for doubtful accounts XX
6. To record collection of accounts previously written off
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Cash XX
7. To record the provision for bad debts during the year

Bad debts XX
Allowance for bad debts XX
ILLUSTRATION: Different Methods of Accounting for Bad Debts

Roxas Company’s unadjusted trial balance at December 31 includes the following accounts:
Debit Credit
Accounts receivable ₱1,500,000
Allowance for doubtful accounts ₱40,000
Sales 10,000,000
Sales returns and allowances 700,000
The following analysis pertains to the accounts receivable reported in the trial balance:
Classification Balance of Percentage

A/R collectible
0-1 month category ₱500,000 98%
1-6 months category 800,000 95%
Over 6 months 200,000 80%
₱1,500,000
Required:
1.) Roxas Company estimates its bad debt expense to be 2% of net sales.
Determine its bad debt expense for the year.
2.) Assuming the same method of estimating bad debts in number 1, compute for the allowance
for doubtful account end of the year.
3.) Roxas Company estimates its bad debt expense to be 5% of accounts receivable. Compute
for the allowance for doubtful account end of the year.
4.) Assuming the same method of estimating bad debts in number 3, determine its bad debt
expense for the year.
5.) Assuming the same method of estimating bad debts in number 3, compute for the net
realizable value of the accounts receivable.
6.) Roxas Company estimates its bad debt expense based on aging. Compute for the allowance
for bad debts at the end of the year.
7. Assuming the same method of estimating bad debts in number 6, compute for the net
realizable value of the accounts receivable.
SOLUTION:
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Requirement No. 1
Net Sales (₱10,000,000 - ₱700,000) ₱9,300,000
Multiply by: Percentage of uncollectible 2%
Bad debts expense ₱186,000
Requirement No. 2
Allowance for bad debts, beg. ₱ 40,000
Add: Bad debts expense (No.1) 186,000
Allowance for bad debts, end ₱ 226,000
Requirement No. 3
Accounts receivable, end ₱ 1,500,000
Multiply by: Percentage of uncollectible 5%
Allowance for bad debts, end ₱ 75,000
Requirement No. 4
Allowance for bad debts, beg. ₱ 40,000
Add: Bad debts expense (squeeze) 35,000
Allowance for bad debts, end ₱75,000
Requirement No. 5
Accounts receivable, end ₱ 1,500,000
Less: Allowance for bad debts - end 75,000
Net realizable value ₱ 1,425,000
Requirement no.6 Required Balance

Classification
0-1 month Category (500,00 x .02) 10,000
1-6 months category (800,000x .05) 40,000
Over 6 months (200,000x .20) 40,000
Allowance for bad debts end P 90,000
Requirement No. 7
Accounts receivables end 1,500,000
Less: allowance for bad debts 90,000
Net realizable value P1,410,000
Note: The allowance method will still be used in solving problems and expectex to be used in
problems in the board for several years before it will be replaced by the impairment methodology
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of PFRS 9 on January 1, 2018. For more deatiled discussion on impairment under PFRS 9
(v2014), please refer to chapter 14 and 15.
Allowance for sales Discount (PAS 18)
Allowance for sales discount may be recognized when it is probable that the cusdtomers will
avail cash discounts in the future and the company is usieng the gross method in accounting for
its sales. The journal entry to recors an allowance is as follows:
Sales discount xx
Allowance for sales discount xx
Financial statement presentation
Statement of Financial position
Current Assets :
Acct. Receivable xx
Less: allowance For sales dis. xx xx
Income statement
Sales xx
Less: sales discount xx xx
Allowance for sales discount (PFRS 15) Under PFRS 15,revenue is measured at transaction
price. Transaction price is the amount of consideration to which an entity expects to be entitled
in exchange for transferring promised goods or services to a costumer excluding amounts
collected on behalf of third parties( for example , some sales taxes ). The company should
therefore determine on initial recognition the variable consideration consiydering the discount
and recognize revenue net of expected discount. Hence, aallowance for sales discount under
PFRS 15 256 is not used. However, sales discount may be recorded if the actual cash discount
available by the customer exceeds the expectation.
ILLUSTRATION: Sales Discount (PAS 18 vs. PFRS 15)

Judycel Company originated a receivable of ₱100,000 on December 25, 2017. It is accounting its
sales under the gross method. The credit term is 2/10, n/30. The entity, however, estimates that
only 50% cash discounts will be availed by the customer. 60% of the customer paid on January
4, 2017.
Required:
Prepare the journal entry to record the sale, allowance for sales discount (if any) and cash
discount availed by the customer under PAS 18 and PFRS 15.
SOLUTION: (PAS 18)

Accounts receivable ₱100,000
Sales ₱100,000
19
Sales discount (₱100,000 x 2% x 50%) 1,000
Allowance for sales discount 1,000
Cash (₱100,000 x 60% x 98%) 58,800

Allowance for sales discount 1,000
Sales discount [₱100,000 x (60%-50%) x 2%] 200
Accounts receivable (₱100,000 x 60%) 60,000
On December 31, 2016, the receivable then is included in the statement of financial position as
follows:
Accounts receivable, end ₱100,000
Less: Allowance for sales discount 1,000
Net realizable value ₱ 99,000
SOLUTION: (PFRS 15)

Refund liability ₱ 1,000
Sales [₱100,000 - (₱100,000 x 2% x 50%) 99,000
Cash (₱100,000 x 60% x 98%) 58,800

Sales discount [₱100,000 x (60%-50%) x 2%] 200
Refund liability 1,000
Accounts receivable (₱100,000 x 60%) 60,000
On December 31, 2016, the receivable then is included in the statement of financial position as
follows:
Accounts receivable = net realizable value ₱ 100,000
Allowance for sales return

Allowance for sales return is recognized when buyers are given the right to return goods, and it
becomes probable that the recorded accounts receivables may not be wholly recoverable.
Sale with a right of return (PAS 18)

Under PAS 18 Revenue, if the entity retains significant risks of ownership, the transaction is not
a sale and revenue is not recognized. Example is when the buyer has the right to rescind the
purchase for a reason specified in the sales contract and the entity is uncertain about the
probability of return.
However, revenue can be recognized at the time of sale provided the seller can reliably estimate
future returns and recognize an allowance for sales returns based on previous experience and
other relevant factors.
Pertinent journal entry would be:

20
Sales returns XX
Allowance for sales return XX
Sale with a right of return (PFRS 15)

Sale with a right return is an arrangement in which entity transfers control of a product to a
customer and also grants the customer the right to return the product for various reasons (such as
dissatisfaction with the product) and receive of any consideration paid;
(a) a full or partial refund of any consideration paid;
(b) a credit that can be applied against amounts owed, or that will be owed, to the entity; and
(c) another product in exchange.
To account for the transfer of products with a right of return (and for some services that are
provided subject to a refund), an entity shall recognize all of the following:
(a) revenue for the transferred products in the amount of consideration to which the entity
expects to be entitled (therefore, revenue would not be recognized for the products expected to
be returned);
(b) a refund liability; and
(c) an asset (and corresponding adjustment to cost of sales) for its right to recover products from
customers on setting the refund liability.
In other words an entity would recognize revenue only to the extent that it is highly probable that
a significant reversal in the amount of cumulative revenue recognized will not occur when the
uncertainly associated with the right of return is subsequently resolved.
Pertinent journal entry would be:
Accounts receivable / Contract asset XX

Asset for right to recover product to be returned XX
Asset XX
Refund liability XX
Sale on approval when the buyer has negotiated a limited right of return (PAS 18 and
PFRS 15)
If there is uncertainty about the possibility of return, revenue is recognized when the shipment
has been formally accepted by the buyer or the goods have been delivered and the time period
for rejection has elapsed.
ILLUSTRATION 1: Allowance for Sales Return PAS 18 and PFRS 15)

On December 31, 2017, Jimar Co. sold goods costing ₱100,000 and with sales price ₱150,000 to
Rex, Inc. on account. To induce sale, Jimar Co. provides its buyers the right to return goods
21
within 30 days upon purchase if the buyers are not satisfied with the goods. The company uses
perpetual inventory system in recording its inventories.
Required:
Provide all the necessary entries under PAS 18 and PFRS 15 assuming:
1.) Jimar Co. can reliably estimate that 30% of the goods sold will be returned within the agreed
period of time. On January 5, 2018, 45% of the goods were actually returned and the balance of
receivable was collected.
2.) Jimar Co. cannot reliably estimate future returns. On February 1, 2018, the customer did not
return any of the goods.
SOLUTION:
Requirement No. 1 PAS 18
2017:
Dec. 31 Accounts receivable ₱150,000
Sales ₱150,000
Cost of sales 100,000

Merchandise inventory 100,000
Sales returns (₱150,000 x 30%) 45,000

Allowance for sales return 45,000
2018:
Jan. 5 Cash [₱50,000 - (45% x ₱150,000)] 82,500
Sales returns [(45% - 30%) x ₱150,000] 22,500
Allowance for sales returns 45,000
Accounts receivable 150,000
Requirement No. 2 PAS 18
2017:
Dec. 31 No journal entry. No revenue is recognized because the company cannot estimate
reliably any future returns.
2018:
Feb. 1 Accounts receivable ₱ 150,000
Sales ₱150,000

22
Note: Revenue is recognized since the time period for rejecting/accepting has elapsed.
Requirement No. 1 PFRS 15

2017:
Dec. 31 Accounts receivable ₱105,000
Sales [₱ 150,000 x (100% - 30%)] ₱105,000
Cost of sales (₱100,000 x 70%) 70,000

Asset for right to recover product to 30,000
be returned
2018:
Jan. 5 Cash [₱50,000 - (45% x ₱150,000)] 82,500
Sales returns [(45% - 30%) x ₱150,000] 22,500
Accounts receivable ₱ 105,000

be returned
Requirement No. 2 PFRS 15

2017:
Dec. 31 Asset for right to recover product to 100,000
be returned
2018:
Feb. 1 Accounts receivable ₱ 150,000
Cash ₱ 150,000

be returned
LOAN RECEIVABLE
For banks and other financial institutions, loans receivable arise from loans to heterogeneous
customers.
INITIAL MEASUREMENT-LOANS RECEIVABLE
23
Loans receivable should be initially measured at fair value plus transaction cost. In other words,
the following items should be considered in the initial measurement of loans receivable which is
directly related in granting a loan to a customer or borrower.
1) Origination fees include compensation for activities such as evaluating the borrower’s
financial condition, evaluating guaranties, collateral and other security, negotiating the terms of
the loan, preparing and processing documents and closing the loan transaction. Origination fees
received from the borrower is recorded as unearned interest income.
2) Direct origination cost refers to origination cost or transaction cost not chargeable to
costumers.
3) Indirect origination cost shall be treated as expense
Therefore, the initial carrying amount of the loans receivable may be computed as follows:
Principal Amount xx
Less: Origination fee received (xx)
Add: Direct origination cost xx
Initial present value or carrying amount xx
Journal entries
1. To record the loan
Loan receivable xx
Cash xx
2. To record the receipt of origination fees

Cash xx
Unearned interest Income xx
3. To record the payment of direct origination costs

Unearned interest income xx
Cash xx
4. To record collection of loan receivable

Cash xx
Loan Receivable xx
5. To record amortization of unearned interest income

Unearned interest income xx
Interest Income xx
24
SUBSEQUENT MEASUREMENT: LOAN RECEIVABLE
Loans receivable is subsequently measured amortized cost using effective interest method. Since
loans receivable frequently involves transaction cost, a new effective rate should be computed
through interpolation. When computing the effective interest rate, always remember the rule on
present value, that ‘’the higher the interest rate, the lower the present value,’’
Illustration: Computation of effective Interest rate through Interpolation

On January 1, 2017, Loner granted a 4-year loan to a borrower in the amount of P5,000,000. The
company incurs P200,000 of direct loan origination cost receives nonrefundable origination fee
amounting to P500,000. The stated interest is 10% payable annually every December 31.
Required:
A. Compute the following:
1. Effective interest rate.
2. Interest income on December 31, 2017
3. Carrying amount of the loans receivable, December 31, 2017
4. Current portion of the loans receivable, December 31, 2017
5. Non current portion of the loans receivable, December 31, 2017
B. Prepare all the necessary entries in 2017.
SOLUTION:
Requirement No. 1 – Steps:
1. Compute for the initial present value of the loan receivable.
Principal ₱5,000,000
Add: Direct origination cost incurred 200,000
Less: Origination fees received 500,000
Initial present value of loan receivable ₱4,700,000
2. Get the present value using a lower rate (in this example 11%, the present value is
₱4,844,700.)
Note: There is a discount if effective rate is greater than nominal rate premium if otherwise.
Present value of Principal (₱5,000,000 x .6587) ₱3,293,500

Add: Present value of interest payments (₱5M x 10%
x 3.1024) 1,551,200
Total present value ₱4,884,700
3. Compute the present value using a higher rate (in this example, the present value using 12% is
₱4,696,150).
25
The present value of lower rate must be higher than the net proceeds while the present value of
the higher rate must be lower than the net proceeds.
Present value of Principal (₱5,000,000 x .6355) ₱3,117,500
Add: PV of interest payments (₱5M x 10%x 3.0373) 1,518,650
Total present value ₱4,636,150
4. Use the following formula in computing the effective interest rate.

Gap Gap
Effective rate Present rate Differences Percentage
11% ₱4,844,700
₱ 144,700
? ₱ 4,700,000
1%
12% ₱ 4,696,150 ₱ 3,850
Total gap difference ₱ 148,550
Computation using the lower rate as a starting point:
X = Lower rate + (HR-LR) x (PV of LR – PV of X)
PV of LR – PV of HR
X = 11% + (12% - 11%) x ₱ 144,700

₱ 148,550
X = 11.97%
Computation using the higher rate as a starting point:
X = Higher rate - (HR-LR) x (PV of X – PV of HR)
PV of LR – PV of HR
X = 12% - (12% - 11%) x ₱ 3,850

₱ 148,550
X = 11.97%
Legend: LR – Lower rate HR – Higher rate PV – Present value
Amortization Table – using 11.97%

Date Interest Interest Income Discount Present value
Collection Amortization
26
01/01/2017 ₱ 4,700,000
12/31/2017 500,000 562,590 62,590 4, 762, 590
12/31/2018 500,000 570,082 70,082 4,832,672
12/31/2019 500,000 578,471 78,471 4,911,143
12/31/2020 500,000 587,864 88,857 5,000,000
Requirement No: 2
Interest income = ₱ 562,960 (see amortization table above)
Requirement No: 3
Principal amount collectible beyond one year ₱ 5,000,000
Less: unearned interest income 237,410
Carrying amount of notes receivable ₱ 4,762,590
Requirement No: 4
Zero, the entire note receivable is collectible beyond one year.
Requirement No: 5
Principal amount collectible beyond one year ₱ 5,000,000
Less: Unearned interest income 237,410
Carrying amount of notes receivable ₱ 4,762,590
The entire principal amount of notes receivable is treated as noncurrent asset since it is
collectible beyond one year from the reporting date.
Journal entries for 2017 are as follows:

Jan. 1 Loans receivable ₱ 5,000,000
Cash ₱ 5,000,000
Unearned interest income 200,000

Cash 200,000
To record the direct origination cost incurred
Jan. 1 Cash 500,000

To record the origination fees received
Dec. 31 Cash 500,000

Interest income 500,000
27
LOANS AND RECEIVABLE IMPAIRMENT

At each reporting date, an entity shall recognize a loss allowance fro expected credit losses on a
lease receivable, a contract asset or a loan commitment and a financial guarantee contract as
follows:
1. Lifetime expected credit loss – if the credit risk on that financial instrument has increased
significantly since initial recognition.
2. 12-month expected credit loss – if the credit risk on that financial instrument has not
increased significantly since initial recognition.
Impairment gain or loss

In accordance with paragraph 5.5.8 of PFRS 9, an entity shall recognize in profit or less, as an
impairment gain or loss, the amount of expected credit losses (or reversal) that is required to
adjust the loss allowance at the reporting date. Note the following difference.
Description PAS 39 PFRS (2014)
1. Impairment loss P&L P&L
2. Impairment gain P&L, with limit* P&L, no limit
3. Discount rate Original effective rate Original effective rate
or credit –adjusted
effective interest rate
for purchased or
originated credit-
impaired financial
assets.
*The reversal shall not result in a carrying amount of the financial asset that exceeds what the
amortized cost would have been had the impairment not been recognized at the date the
impairment is reversed. The gain on reversal of impairment may be determined as follows:
Present value of future cash
flows using original effective
rate (e.g. ₱5M) Lower amount
(e.g. ₱5M)
Would have been amortized
Gain on impairment
cost had been there no Vs.
impairment (e.g. ₱5M) recovery (₱.2M)- P&L
Actual amortized cost, date of
reversal (e.g. ₱5M)
Impairment of Receivable
28
Carrying amount of the receivable xx
Less: Present value of expected future cash flows discounted
using the original effective rate xx
Receivable impairment loss xx
Carrying amount of loan receivable:

1. For receivable (e.g. loan) originally issued without premium or discount, its effective rate is
equal to the nominal rate.
Principal xx
Add: Accrued interest (if recorded by the company) xx
Carrying amount of loan receivable xx
2. For receivable (e.g. loan) originally issued with premium or discount:

Carrying amount of loan receivable = Present value at the date of impairment plus any unpaid
accrued interest recorded by the company.
Present value of expected future cash flows:

Date end of Cash flow Present value Total
(CF) Factor (PVF) (CF x PVF)
Year 1 xx xx xx
Year 2 xx xx xx
Year n xx xx xx
Total present value of future cash flow xx
The date is from the date of impairment until date of receipt of cash.
Journal entries are as follows:

1. Date of impairment
Loan impairment xx
Accrued interest receivable (if any) xx
Loss allowance xx
2. Amortization of loan impairment

Loss allowance xx
Interest income xx
Illustration:Impairment Loss
On January 1, 2016, Kinakaya P Company granted a five year loan to a borrower amounting to
₱5,000,000. The loan bears interest of 10% and is collectible every December 31.
29
On December 31, 2017, Kinakaya Pa considers the loan impaired and that only ₱4,000,000
principal amount will be collected. No cash was received in 2017. The prevailing rate of interest
for a loan of this type is 12%.
Assuming the following independent cases:

Case No. 1:Kinakaya pa Company accrued the interest on December 31, 2017 and the entire
₱4,000,000 will be collected on the maturity date.
Case No. 2:Kinakaya pa Company did not accrue the interest on December 31, 2017 and the
entire ₱4,000,000 will be collected on the maturity date.
Case No. 3:Kinakaya pa Company did not accrue the interest on December 31, 2017 and the
₱4,000,000 will be collectible as follows:
Date Amount
December 31, 2018 ₱1,500,000
December 31, 2019 ₱2,500.000
Case No. 4: Kinakaya Pa Company did not accrue the interest on December 31, 2017 and the
₱4,000,000 will be collectible as follows:
Date Amount
January 1, 2018 ₱1,000,000
December 31, 2018 ₱2,000,000
December 31, 2019 ₱1,000,000
Required:
A. Compute for the following:
1) Loan impairment loss in 2017.
2) Interest income in 2018.
3) Carrying amount of the loan, December 31, 2018.
B. Prepare the necessary entries from the date of impairment to 2018.
SOLUTION:
CASE NO. 1
Requirement No. 1
Carrying amount of receivable:
Principal 5,000,000
Add: Accrued interest
(₱5,000,000 x 10% x 12/12) 500,000 5,500,000
Less: Present value of expected cash flows
(₱4,000,000 x .7513) 3,005,200
Loan impairment - 12/31/2017 2,494,800
30
Amortization Table
Date Interest Income Present value
12/31/2017 3,005,200
12/31/2018 300,520 3,305,720
12/31/2019 330,572 3,636,292
12/31/2020 363,708 4,000,000
Requirement No. 2
Interest Income = ₱300,520 (see amortization table above)
Requirement No. 3
Carrying amount = ₱3,305,720 (see amortization table above)
Presentation in the Statement of Financial Position

Loan Receivable ₱5,000,000
Less: Allowance for loan impairment (1,994,800 – 300,520) 1,694,280
Carrying amount of Loan receivable ₱3,305,720
Journal entries:
12/31/2017 Loan Impairment ₱2,494,800
Accrued interest receivable ₱500,000
Allowance for loan impairment 1,994,800
12/31/2018 Allowance for loan impairment 300,520

CASE NO. 2
Requirement No. 1
Carrying amount of receivable = Principal ₱5,000,000
Less: Present value of excepted cash flows
(₱4,000,000 x .7513) 3,005,200
Loan impairment - 12/31/2017 ₱1,994,800
Amortization Table
12/31/2017 3,005,200
12/31/2018 300,520 3,305,720
12/31/2019 330,572 3,636,292
12/31/2020 363,708 4,000,000
31
Requirement No. 2
Requirement No. 3

Loan Receivable ₱5,000,000
Carrying amount of Loan receivable ₱3,305,720
Journal entries
12/31/2017 Loan Impairment ₱1,994,800
Allowance for loan impairment ₱1,994,800

CASE NO. 3
Requirement No. 1
Less: Present value of excepted cash flows 3,429,650
Loan impairment - 12/31/2017 ₱1,570,350
Present value of expected cash flows:

Date Cash flow Present value Total
End of (CF) Factor (PVF) (CF x PVF)
12/31/2018 ₱1,500,000 0.9091 ₱1,363,650
12/31/2019 2,500,500 0.8264 2,066,000
Total present value of future cash flows ₱3,429,650
Amortization Table
Annual Interest Present
Date Collection Income Amortization Value
12/31/2017 ₱3,429,650
12/31/2018 1,500,000 342,965 1,157,035 2,272,615
12/31/2019 2,500,000 227,262 2,272,615
Requirement No. 2
32
Requirement No. 3

Loan Receivable (₱5,000,000 – 1,500,000) ₱3,500,000
Carrying amount of loan receivable ₱2,272,615
Journal entries:
12/31/17 Loan Impairment ₱1,570,350

Cash 1,500,000
Loan Receivable 1,500,000
CASE NO. 4
Requirement No. 1
Less: Present value of excepted cash flows 3,644,600
Loan impairment - 12/31/2017 ₱1,355,400
Present value of excepted cash flows:

Date Cash flow Present value Total
End of (CF) Factor (PVF) (CF x PVF)
01/01/2018 ₱1,000,000 1.0000 ₱1,000,000
12/31/2018 2,000,000 0.9091 1,818,200
12/31/2019 1,000,000 0.8264 826,400
Total present value of future cash flows ₱3,644,600
Amortization Table
Date Annual Interest Income Amortization Present value
Collection
12/31/2017 ₱3,644,600
12/31/2018 1,000,000 1,000,000 2,644,600
12/31/2018 2,000,000 264,460 1,735,540 909,060
33
12/31/2019 1,000,000 90,906 909,060 -
Requirement No. 2
Requirement No. 3
Carrying amount = ₱909,060 (see amortization table above)

Loan Receivable (₱5,000,000 - ₱1,000,000 – 2,000,000) ₱2,000,000
Carrying amount of loan receivable ₱909,060
Journal entries:
12/31/18 Cash 1,000,000


Cash 2,000,000
Illustration: Reversal of Impairment Loss
On January 1, 2018, Kinakaya Pa Company granted a five year loan to a borrower amounting to
₱5,000,000. The loan bears interest of 10% and to be collectible every December 31.
On December 31, 2019, Kinakaya Pa considers the loan impaired and that only ₱4,000,000
principal amount will be collected. No cash flows received in 2019 and the company did not
accrue the interest because of the impairment. The prevailing rate of interest for a loan of this
type is 12%.
On December 31, 2020, the financial condition of the borrower has improved and that it can pay
its entire unpaid obligation, including principal and interest at maturity.
Required:
34
1.) Compute for the gain on reversal of impairment loss in 2020 under
a.) PAS 39
b.) PFRS 9 (2014)
2.) Prepare all the necessary entries in 2019 and 2020 under:
a.) PAS 39
b.) PFRS 9 (2014)
SOLUTION:
Recall that the loan impairment is computed follows:
Less: Present value of expected cash flows
(4,000,000 x .7513) 3,005,200
Loan impairment – 12/31/2019 ₱1,994,800
Amortization Table
12/31/2019 3,005,200
12/31/2020 300,520 3,305,720
12/31/2021 330,572 3,636,292
12/31/2022 363,708 4,000,000
Requirement No. 1a PAS 39

Present value of future cash flows using original effective rate:
Add: Unpaid interest
(₱5M x 10% x 4years) 2,000,000
Total cash flow ₱7,000,000
Multiply by: PV of 1 for 2 periods 0.8264 5,784,800 Lower
Would have been amortized cost, no impairment 5,000,000 5,000,000
Less: Actual amortized cost/ present value 3,305,720
Gain on impairment recovery ₱1,694,280
Requirement No. 2a PAS 39

Journal entries for 2019 and 2020 are:
35
Gain on impairment recovery 1,694,280
Statement of Financial Position, 12/31/2020
Loan Receivable (₱3,305,720 + ₱1,694,280) ₱5,000,000
Requirement No. 1a PFRS 9 (2014)

Present value of future cash flows using original effective rate:
Add: Unpaid interest (₱5M x 10% x 4 years) 2,000,000
Total cash flow ₱7,000,000
Multiply by: PV of 1 for 2 periods 0.8264
Present value of future cash inflows ₱5,784,800
Less: Actual amortized cost/present value 3,305,720
Gain on impairment recovery ₱2,479,080
Requirement No. 2a PFRS 9 (2014)



Gain on impairment recovery 2,479,080
Statement of Financial Position, 12/31/2020

Loan Receivable (₱3,305,720 + ₱2,479,080) ₱5,784,800
RECEIVABLE FINANCING
Sufficient cash is an essential part of running the operations of a business. However, there are
some occasions in which an entity may have insufficient funds to use for its operations. An entity
may generate cash from various source of financing. One form of raising fund is through
receivable financing which is the capability or financial flexibility of the company to generate
cash out its receivables.
The most common forms of receivable financing are as follows:
36
1. Pledging of receivable
2. Assignment of receivable
3. Factoring of receivable
4. Discounting of receivable
PLEDGING/ HYPOTHECATING
Pledging or hypothecating of receivables refers to borrowing of money from the bank or any
financial institution in which receivables in general are used as collateral or security for a loan.
Since receivables in general are used as collateral, pledging is sometimes called general
assignment.
Illustration: Pledging of Accounts Receivable

On October 1 of the current year, Blackberry Company borrowed ₱1,000,000 for a one year from
Samsung Bank with a stated interest rate of 12%. As a security for the loan, Blackberry
Company hypothecated its accounts receivable amounting ₱1,500,000. Samsung Bank deducted
the one year interest in advance.
Required:
Prepare the entries in relation to the assignment of the accounts receivables, assuming
amortization of interest deducted in advance is to be made equally for the entire loan term.
SOLUTION:
Journal entries are:
Oct. 1 Cash (₱1,000,000 - ₱120,000) ₱880,000
Discount on Notes payable
(₱1,000,000 x 12% x 12/12) 120,000
Notes payable-bank ₱1,000,000
Dec. 31 Interest expense (₱120,000/12 x 3) 30,000

Discount on Notes payable 30,000
Financial Statement Presentation

Statement of Financial Position- Current Liability:
Loans ₱1,000,000
Less: Discount on loans payable (₱120,000 - ₱30,000) 90,000
Income Statement
Interest expense ₱ 30,000
37
ASSIGNMENT
Assignment is a more formal borrowing arrangement in which the specific receivables are
identified and used as security. The assignor or borrower transfers its rights in some of its
accounts receivables to a lender or assignee in consideration for a loan. The following are some
of the characteristics of an assignment.
a.) The loan is at a specified percentage of the face value of the collateral and interest and
service fees are charged to the assignor (borrower).
b.) The debtors are occasionally notified to make payments to the assignee (lender) but most
assignments are not on a notification basis.
c.) Assigned accounts are segregated from other accounts. The notes payable should be
deducted from the balance of A/R assigned to determine the equity in assigned accounts
receivable.
Assignment may either be:

1. Non-notification basis- buyer is not informed of the assignment arrangement and will
continue to remit its payment to the seller (assignor).
2. Notification basis- buyer is informed of the assignment arrangement and will continue to
remit payment directly to the assignee (e.g bank).
Journal entries: non-notification vs. notification
Non-notification Notification
To separate the assigned accounts:

A/R - assigned xx A/R - assigned xx
Accounts receivable xx Accounts receivable xx
To record the loan:

Cash xx Cash xx
Service charge xx Service charge xx
Notes payable bank xx Notes payable bank xx
Issued credit memo (i.e. sales return):

Sales return xx Sales return xx
38
To record collection:
Cash xx Notes payable bank
Sales discount xx Sales discount xx
To record remittance:
N/P – bank xx Interest expense xx
Interest expense xx Cash xx
Cash xx
To record write-off of accounts assigned:

Allowance for bad debt xx Allowance for bad debt xx
A/R assigned xx A/R assigned xx
To transfer the remaining balance of A/R – assigned

Accounts receivable xx Accounts receivable xx
The amount to be transferred to unassigned accounts may be compute as follows:

Total accounts receivable – assigned xx
Less: Collections xx
Sales discount xx
Sales return xx
Worthless accounts xx (xx)
Balance xx
As you may have observed from the foregoing journal entries, the difference between
notification and non-notification is on the recording of remittance to the bank. Non-notification
calls for the buyer to pay directly to the seller and the seller will remit the total payment (i.e.
principal and interest) to the bank, while notification basis calls for the buyer to remit directly to
the bank and the seller will pay an additional amount to cover the interest.
Illustration: Assignment – Non-notification Basis

On November 1, of the current year, Nokia Company assigned customers’ accounts in the
amount of ₱1,000,000 to Brayden Company as a security for a loan in the amount of ₱750,000
and a stated interest rate of 10%. Brayden Company charges 5% in relation to the amount
borrowed. Nokia Company will continue to collect the accounts from customers and will remit
payment to Brayden Company.
39
On December 30, of the current year, cash collections on the assigned accounts amounted to
₱450,000.
On December 31, Nokia Company remitted in full the amount collected plus interest due on the
outstanding balance of the loan.
Required:
1.) Compute for the cash received from assignment.
2.) Prepare the journal entries in relation to the assignment of the accounts receivables.
3.) Compute for the amount of equity over the assigned accounts to be disclosed on
December 31.
SOLUTION:
Requirement No. 1
Notes payable ₱750,000
Less: Service charges (5% x ₱750,000) 37,500
Cash received ₱712,500
Requirement No. 2
Nov.1 Accounts receivable – assigned ₱1,000,000
` To separate the accounts
Cash (₱750,000 - ₱37,500) 712,500

Service charge (5% x ₱750,000) 37,500
Notes payable-bank 750,000
Dec. 30 Cash 450,000

Accounts receivable-assigned 450,000
Dec. 31 Notes payable-bank 450,000

Interest expense (10% x ₱750,000 x
2/12) 12,500
Cash 462,500
Requirement No. 3
Account receivable-assigned (₱1,000,000- ₱450,000) ₱550,000
Less: Notes payable (₱750,000- ₱450,000) 300,000
Equity in assigned accounts to be disclosed in the notes ₱250,000
Illustration: Assignment – Notification Basis

40
Canon Company finances some of its current operations by assigning accounts receivable on a
notification basis to Josiah Finance. On July 1 of the current year, it assigned, under guarantee,
specific accounts amounting to ₱2,000,000. Josiah Finance shall advance to Canon Company
80% of the accounts assigned, less a finance charge of 1% of the total accounts assigned.
On August 1, Canon Company received a statement that Josiah had collected ₱1,100,000 of
these accounts and had made an additional charge of 1% of the total outstanding payable as of
July 31. This charge is to be deducted at the time of the first remittance due to Canon Company
from the Josiah Finance.
On September 1, Canon Company received a second statement from Josiah Finance, together
with a check for the amount due. The statement indicated that the Josiah had collected an
additional of ₱600,000 and had made a further charge of 1% of the balance outstanding as of
August 31.
Required:
1.) Compute for the cash received from assignment.
2.) Prepare the entries in relation to the assignment of the accounts receivable.
SOLUTION:
Requirement No. 1
Notes payable (₱2,000,000 x 80%) ₱1,600,000
Less: Finance charges (1% x ₱2,000,000) 20,000
Cash received ₱1,580,000
Requirement No. 2
Jul. 7 Accounts receivable-assigned ₱2,000,000
To separate the accounts
Cash 1,580,000
Service charge 20,000
Notes payable-bank 1,600,000
Aug. 1 Notes payable-bank (₱1.1M - ₱16,000) 1,084,000

Service charge (1% x ₱1,600,000) 16,000
Accounts receivable-assigned 1,100,000
Sep. 1 Notes payable-bank (₱1.6M-₱1,084,000) 516,000

Service charge (1% x ₱516,000) 5,160
Cash 78,840
41
Accounts receivable (₱2M-₱1.1M-₱600,000) 300,000

FACTORING
Factoring involves the sale of receivables to a finance company, which is called the factor. The
factor or buyer assumes the risk of collectivity and generally handles the billing and collection
function.
Factoring may either be:
1. Casual factoring- this is treated as an outright sale of receivable. A gain or loss is
recognized for the difference between the proceeds received and the net carrying amount of the
receivables factored. Casual factoring may either be with or without recourse basis.
2. Regular factoring –the cost of factoring is debited to appropriate expense account. Just
like in casual factoring, factoring of this kind may either be with or without recourse basis.
Factors holdback
Factors holdback is the portion retained for a particular price to cover probable sales return,
discount and allowance. Receivable from factoris presented as current asset.
Formulas (whether Casual or Regular Basis):

Gross amount of receivable XX
Less: Factoring fee (XX)
Finance charge and interest expense (XX)
Net Selling Price XX
Less: Factors holdback (XX)
Net cash received XX
Gross amount of receivable XX

Less: Factoring fee (XX)
Finance charge and interest expense (XX)
Net Selling Price XX
Less: Recourse obligation (if any) (XX)
Net Proceeds XX
Less: Book value of Accounts receivable (XX)
Gain (loss) on sale XX
Casual Factoring: Without recourse vs. With Recourse
Without Recourse With Recourse
42
To record factoring:
Cash xxx Cash xxx
Allowance for bad debt xxx Allowance for bad debt xxx
Loss on factoring xxx Loss on factoring xxx
Receivable-factor xxx Receivable-factor xxx
To record the excess cash returned by the factor less sales return:
Cash xxx Cash xxx
Sales return xxx Sales return xxx
Receivable-factor xxx Receivable - factor xxx
To record transfer of recourse obligation- no further payment was made:

N/A Estimated recourse xxx
Obligation
Gain on recourse obligation xxx
To record transfer of recourse obligation- additional payment was made:

N/A Loss on factoring xxx
Cash xxx
Regular Factoring: Without recourse vs. With Recourse
Without Recourse With Recourse
To record factoring:
Cash xxx Cash xxx
Allowance for bad debt xxx Allowance for bad debt xxx
Factoring fee (net of Factoring fee (net of
allowance for bad debt) xxx allowance for bad debt) xxx
Interest expense xxx Interest expense xxx
Receivable-factor xxx Loss on factoring* xxx
Accounts receivable xxx Receivable-factor xxx
Estd. recourse obligation xxx
To record the excess cash returned by the factor less sales return:
Cash xxx Cash xxx
Sales return xxx Sales return xxx
Receivable-factor xxx Receivable - factor xxx
43
To record transfer of recourse obligation- no further payment was made:
N/A Estimated recourse xxx
Obligation
Gain on recourse obligation xxx
To record transfer of recourse obligation- additional payment was made:

N/A Loss on factoring xxx
Cash xxx
*(equal to estimated recourse obligation)
Statement of Financial Position

Receivable from factor is treated as current asset. Estimated recourse obligation is treated as
current liability.
Illustration: Factoring of Accounts Receivable

Corny Company factored ₱100,000 of its accounts receivable to Horny Company for ₱85,000.
An allowance for bad debts equal to ₱3,000 was previously established for the account factored.
Horny Company withheld 5% of the purchase price as protection against sales returns and
allowance.
Case No. 1: Sale of receivable is without recourse.
Case No. 2: Sale of receivable is with recourse and the recourse obligation has an estimated fair
value of ₱5,000.
Required:
1.) Cash received
2.) Cost of factoring
3.) Journal entry to record the transaction
SOLUTION:
Case No. 1: Factoring without recourse
Requirement No.1
Net selling price ₱85,000
Less: Factors holdback (5% x ₱85,000) 4,250
Net cash received ₱80,750
Requirement No. 2
44
Less: Recourse obligation (if any) 0
Net Proceeds 85,000
Less: Book value of Accounts receivable (₱100,000-₱3,000) 97,000
Gain (loss) on sale (₱12,000)
Cost of factoring is equal to loss on factoring of ₱12,000.
Requirement No. 3 Journal entries

Cash ₱80,750
Allowance for doubtful accounts 3,000
Loss on factoring 12,000
Receivable-factor 4,250
Case No. 2: Factoring with recourse

Requirement No. 1
Less: Factors holdback (5% x ₱85,000) 4,250
Requirement No. 2
Less: Recourse obligation (if any) 5,000
Net Proceeds 80,000
Less: Book value of Accounts receivable (₱100,000-₱3,000) 97,000
Gain (loss) on sale (₱17,000)
Cost of factoring is equal to loss on factoring of ₱17,000.
Requirement No. 3 Journal entries

Cash ₱80,750
Allowance for doubtful accounts 3,000
Loss on factoring 17,000
Receivable-factor 4,250
Estimated recourse obligation 5,000
Illustration: Factoring of Accounts Receivable

Andrix Company factored ₱600,000 of its accounts receivable to Sabado Company on October
1. Control was surrendered by Andrix Company. The factor assessed a fee of 3% and retained a
holdback equal to 5% of the accounts receivable. In addition, the factor charged 15% interest
45
computed on a weighted average time to maturity of the accounts receivable of 54 days. (Use
365 days in the computation of the interest)
Required:
1.) What is the amount of cash initially received by Andrix Company from the factoring?
2.) If all accounts are collected, what is the cost of factoring the accounts receivable?
SOLUTION:
Requirement No. 1
Gross amount of receivable ₱600,000
Less: Factoring fee (3% x ₱600,000) 18,000
Interest expense (₱600,000 x 15% x 54/365) 13,315
Less: Factors holdback (₱600,000 x 5%) 30,000
Requirement No. 2
The cost of factoring is equal to:
Factoring fee (3% x ₱600,000) ₱18,000
Interest expense (₱600,000 x 15% x 54/365) 13,315
Total cost of factoring (₱31,315)
Alternatively, the cost of factoring may be computed as follows:

Less: Recourse obligation (if any) 0
Net proceeds ₱568,865
Less: Book value of Accounts receivable 600,000
Loss on sale = cost of factoring (₱31,685)
DISCOUNTING OF NOTES
Discounting of notes is a sale of the note to a third party, usually a bank. The sale is usually on a
with recourse basis which means that upon the default of the debtor, the seller of the note
becomes liable for its maturity value.
Discounting may either be:
1. Without recourse – endorser avoids future liability even if the maker refuses to pay the
endorsee on the date of maturity.
2.With recourse – the endorser shall pay the endorsee if the maker dishonors the note. This is
the contingent or secondary liability of the endorsee. Discounting with recourse may be
accounted as either:
46
a. Conditional sale recognizing contingent liability
b. Secured borrowing
The following formulas are used in the discounting of note receivable:

1) Proceeds = Maturity value – discount
2) Maturity value (MV)
a) Interest bearing note = Principal + Interest
b) Noninterest bearing note = Principal or Face value
3) Interest to maturity = PRT
Principal = Face value
T = Entire term of the note
Maturity date = when the note is due and payable
4) Discount = MV X DR X discount period
Discount rate (DR) = rate of interest used by bank in computing discount
Discount period = period from the time of discounting to maturity date
5) Carrying amount of note receivable
Principal xx
Add: Accrued interest receivable from the date
Of the note to the date of discounting xx
Carrying amount of note receivable xx
6) Gain or loss on discounting
Net Proceeds xx
Less: Carrying amount of note receivable (xx)
Gain (or loss) on discounting xx
Graphical presentation:
Entire term of the note
Term for accrued interest Discount term
Date of the note Date of discounting Date of maturity
47
Discounting Without Recourse
FS Presentation in Current Asset Section:
Accounts Receivable xx
Less: Allowance for doubtful accounts (xx)
Add: Notes Receivable, net of NR discounted xx
Trade and other Receivable xx
Discounting With Recourse – Contingent Liability

Less: Allowance for doubtful accounts (xx) xx
Notes Receivable
[Total – before deducting NR discounted] xx
Less: Notes receivable discounted (xx) xx
Trade and other Receivable xx
Notes receivable discounted is also disclosed in the notes to financial statements.
Discounting Without Recourse – Secured Borrowing

Less: Allowance for doubtful accounts (xx)
Add: Notes Receivable
[Total – before deducting NR discounted] xx
Trade and other Receivables xx
Illustration: Notes Receivable Discounting

On January 16, Gerry Co. accepted a ₱600,000, 10%, 90 day note from a customer. On February
15, the note was discounted at 12%.
At maturity date, the note was dishonored and the bank charged a ₱2,500 protest fee.
Required:
Prepare all the necessary entries assuming the notes receivable was
1) Discounted without recourse
2) Discounted with recourse
48
a) Conditional sale recognizing contingent liability
b) Secured borrowing
SOLUTION:
Maturity Value = Principal + Interest
= ₱600,000+ (₱600,000 x 10% x 90/360)
= ₱615,000
Net Proceeds = ₱615,000 - (₱615,000 x 12% x 60/360)
= ₱602,700
Net Proceeds ₱602,700

Less: Carrying amount of note receivable:
Principal ₱600,000
Add: Accrued interest (600k x 10% x 30/360) 5,000 605,000
Loss on N/R discounting (₱ 2,300)
Requirement No. 1
1) Discounted without recourse
Cash ₱602,700
Loss on NR discounting 2,300
Note receivable ₱600,000
Interest income (actual interest earned on
The date of discounting) 5,000
Requirement No. 2 Discounted with recourse

2.a) Conditional sale recognizing contingent liability:
Cash ₱602,700
Loss on NR discounting 2,300
Note receivable discounted ₱600,000
NR dishonored (or AR) (₱615,000 + ₱2,500) 617,500

Cash (MV plus protest fee and other bank charges) 617,500
Note receivable discounted 600,000
Notes receivable 600,000
2.b) Secured borrowing:

Cash ₱602,700
Interest expense* 2,300
Liability for NR discounted ₱600,000
49
NR dishonored (or AR) (₱615,000 + ₱2,500) 617,500

Cash (MV plus protest fee and other bank charges) 617,500
Liability for NR discounted 600,000
Notes receivable 600,000
Special note in computing interest:

Unles
Unless otherwise stated, interest rate is quoted annually. Therefore, even if the term of the loan,
bond, notes or any other debt securities is less than 1 year (e.g. 90 days), the denominator in
computing the interest should be 1 year, 12 months, 360 days or 365 days.
DISCOUNTING OWN NOTE

Discounting own note accounted for as a regular loan. Discounting simply means that the
interest is deducted in advance. The pertinent journal entry to record discounting of company's
own note would be:
Cash xx
Discount on notes payable xx
Notes payable – bank xx
Discount on notes payable is a contra-liability account which his to be amortization as an interest

expense over the period of financing. The journal entry for the amortization of discount on notes
payable would be:
Interest expense xx
Discount on Notes payable xx
Illustration: Discounting Own Note

On July 1, 2016, Boy Co. discounted its "own" ₱500,000, 1-year note at a bank, at a discount
rate of 12%, when the prime rate is 10%.
Required:
1) Determine the following:
a) Net proceeds from discounting
b) Effective rate
2) Prepare all the necessary entries in 2016.
50
SOLUTION:
Requirement No. 1
Note payable ₱500,000
Less: Discount on note payable (₱500,000 x 12%) ( 60,000)
Net proceeds (1.a) ₱440,000
Effective interest rate = Discount / Ne proceeds

= ₱60,000 / ₱440,000
= 13.6% (1.b)
Requirement No. 2
July 1 Cash ₱440,000
Discount on notes payable 60,000
Notes payable-bank ₱500,000
Dec. 31 Interest expense (₱60,000 /12 x 6) 30,000

Discount on Notes payable 30,000
Note:
 Prime rate or prime lending rate is the interest rate that bank charge to their most-credit
worthy customers. This is the lowest possible rate that banks charge to its customer.
Depending on the credit standing or credit risk of the borrower, the bank will add a
mark-up which is called the ‘spread' to determine its nominal or stated rate. The higher
the risk involved in the borrower, the higher the spread.
 Nominal or stated rate = Prime rate Spread
DERECOGNITION OF RECEIVABLES
An entity shall derecognize a financial asset (e.g. receivable) when and only when:
a) The contractual rights to the cash flows from the financial asset expire, or
b) An entity transfers the transactions the financial asset and the transfer qualifies for
derecognition.
Examples of events or transactions in which receivable are derecognized or removed from the
statement of financial position is when it is:
1) Collected:
2) Sold (e.g., factored or discounted without recourse;
3) Exchanged to another asset (e.g. accounts receivable to notes receivable);
4) Used to settle an existing obligation (asset swap);
5) Condoned; or
6) No future economic benefits is expected to be realized (e.g., worthless).
Gain or loss on derecognition
51
The difference between the carrying amount (measured at the date of derecognition) and the
consideration received (including any new asset obtained less any new liability assumed) shall be
recognized in profit or loss.
FINANCIAL STATEMENT PRESENTATION

In accordance with PAS 1 Presentation of financial statement, trade receivables and non-trade
receivable which is currently collectible should be presented on the statement of financial
position as one line item called "Trade and Other receivable".
Non-trade receivable which is not currently collectible may either be presented in the statement
of financial position as long –term investments and other noncurrent assets.
Receivable denominated in foreign currency should be translated in the reporting date at the
exchange rate on reporting (i.e., closing rate).
Customers credit balance, if material is presented as current liability. However, if it considered

not material, it may be netted to receivable with debit balance.
Illustration:
On December 31, Miami Co’s “Accounts receivable” balance per ledger of ₱1,250,000 includes:
1. MasterCard or VISA credit card sale of merchandise to customer ₱10,000

2. Overpayment to supplier for inventory purchased on account 20,000
3. Insurance claim on automobile accident 2,000
4. Advance to sales manager due in one year 4,000
5. 5-year Note receivable due from company president
(This was issued by the president for the loan granted
to him.) 300,000
6. Interest due on 5-year note from company president,
interest payable annually. 6,000
7. Acceptance of 6-month note for past due-account
arising from sale of inventory 5,000
8. Accrued interest receivable on the note above 100
9. Overpayment by customer of an account receivable (5,000)
10. Accounts receivable to customers definitely uncollectible 4,000
11. Other Trade Accounts receivable-unassigned 50,000
12. Trade Accounts receivable-assigned 10,000
13. Note receivable customer (This note is for a cash loan
made to this customer collectible in 3 years. ) 30,000
14. Claim for a tax refund from last year 3,000
52
15. Prepaid insurance – 4 months remaining in the policy 4,000
period
16. Advances to or receivable from stockholders,
(₱100,000 is collectible currently) 250,000
17. Advance to affiliates 125,000
18. Subscription receivables 150,000
19. Special deposits on contract bids 30,000
20. Dividend receivables 10,000
21. Notes receivable dishonored 5,000
22. Accrued rent receivables 6,000
23. Claims against common carriers 4,900
24. Acceptance of 8-month note from employees arising
from sale of inventory6,000
25. Trade installment receivable due within 16 months,
Gross of unearned interest income of ₱20,000 220,000
TOTAL ₱1,250,000
Required:
Based on the above data, compute for the following:
1. Trade Accounts receivable as of December 31
2. Trade Notes Receivables as of December 31
3. Trade and other receivables to be presented in the Current Asset section
of the balance sheet
4. Noncurrent receivables as of December 31
5. Non-trade receivables as of December 31
SOLUTION:
Requirement No. 1
1. MasterCard or VISA credit card sale of merchandise to
customer ₱10,000
11. Other Trade Accounts receivable-unassigned 50,000
12. Trade Accounts receivable-assigned 10,000
21. Notes receivable dishonored 5,000
25. Trade installment receivable due within 16 months, net
(₱220,000 - ₱20,000) 200,000
Total Trade Accounts Receivable ₱275,000
Requirement No. 2
7. Acceptance of 6-month note for past due-account
arising from sale of inventory ₱5,000
24. Acceptance of 8-month note from employees arising
53
from sale of inventory 6,000
Total Trade Notes Receivable ₱11,000
Requirement No. 2
Total Trade Accounts Receivable (No. 1) ₱275,000
Total Trade Notes Receivable (No. 2) 11,000
2. Overpayment to supplier for inventory purchased on account 20,000
3. Insurance claim on automobile accident 2,000
4. Advance to sales manager due in one year 4,000
6. Interest due on 5-year note from company president,
interest payable annually. 6,000
8. Accrued interest receivable on the note above 100
14. Claim for a tax refund from last year 3,000
16. Advances to or receivable from stockholders 250,000
20. Dividend receivables 10,000
22. Accrued rent receivables 6,000
23. Claims against common carriers 4,900
Total Trade and other receivables current asset ₱442,000
Requirement No. 4
5-year Note receivable due from company president
5. (This was issued by the president for the loan granted
to him.) ₱300,000
13. Note receivable customer (This note is for a cash loan
made to this customer collectible in 3 years. ) 30,000
16. Advances to or receivable from stockholders,
(₱250,000-₱100,000) 150,000
17. Advance to affiliates 125,000
19. Special deposits on contract bids 30,000
Total Noncurrent Receivables ₱635,000
OR
Unadjusted Accounts receivable (net of ₱20,000
Unearned interest income and ₱4,000 uncollectible
acct) - ₱1,250,000 - ₱20,000 - ₱4,000 ₱1,226,000
9. Add: Overpayment by customer of an AR 5,000
Total 1,231,000
15. Less: Prepaid insurance – 4 months 4,000
Subscription receivables – noncurrent 150,000
Total Trade and other receivables current asset 442,000
Total Noncurrent Receivables ₱635,000
54
Requirement No. 5
Unadjusted Accounts receivable (net of ₱20,000
Unearned interest income and ₱4,000 uncollectible
acct) - ₱1,250,000 - ₱20,000 - ₱4,000 ₱1,226,000
9. Add: Overpayment by customer of an AR 5,000
Total 1,231,000
15. Less: Prepaid insurance – 4 months 4,000
Total Trade Accounts Receivable (No. 1) 275,000
Total Trade Notes Receivable (No. 2) 11,000
Subscription receivables – noncurrent 150,000
Total Nontrade Receivables ₱ 791,000
Notes:
 Prepaid insurance for 4 months is a separate item in the current asset section of the statement
of financial position.
 Overpayment by customer of an account receivable is a current liability.
 Subscription receivable is deducted from the subscribed share capital in the shareholders’
equity section of the statement of financial position.
55

Module 4 Loans and Receivables

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AUDITING & ASSURANCE: CONCEPTS AND APPLICATIONS 1

MODULE 4: LOANS AND RECEIVABLES

After studying this chapter, you should be able to:

1. Define and identify the different classification of receivables.

Under PFRS 15 paragraph 108, a receivable is an entity’s right to consideration that is

Examples of Nontrade Receivables

Issue on Subscription Receivable

B. As to Statement of Financial Position Classification

2. Non-current – nontrade receivables that are not reasonably expected to be realized in

Interrelationship of Revenue, Receivable and Inventory

OTHER Revenue Recognition Issues

Bill and hold sales

Goods shipped subject to conditions

1) Installation and inspection conditions

Sales to distributors or other intermediate parties

Orders when payment (or partial payment) is received in advance

Subscriptions to publications and similar items

Credit Card Sales

ILLUSTRATION: Credit Card Sales

Prepare all the necessary journal entries.

Jan 1 Accounts receivable – BPI Master Card P 1,000,000

Jan 6 Cash (1M x 95%) 950,000

INITIAL MEASUREMENT: SHORT-TERM RECEIVABLES

Trade Discount/Volume discount/Quantity discount

Cash Discount/Settlement Discount

Journal Entries: Gross and Net Method

Gross Method Net Method

ILLUSTRATION: Gross vs. Net Method

Naragsak Company entered into the following during the year:

Jan. 04 Accounts Receivable 1,500,000

Jan. 06 Sales Return 200,000

Feb. 02 Cash 1,500,000

Journal Entries: Net Method

Jan. 04 Accounts Receivable 1,470,000

Jan. 06 Sales Return (P 200,000 x 98%) 196,000

Jan. 10 Cash (P 980,000 – P 196,000) 784,000

Feb. 02 Cash 1,500,000

Terms related to freight charge

1) FOB – means either ‘Free on Board’ or ‘Freight on Board’

Summary Table for Freight

Freight Terms Buyer Seller

FOB Freight collect No effect No effect

Formula for the computation of net collection or payment:

Invoice price of merchandise sold or purchased XX

 If the term is FOB Destination, the seller will record freight-out.

ILLUSTRATION: Freight Terms

Assume the following data for Nafoolish Company:

Assume the following freight terms:

Case No. 2: FOB destination, freight collect

Case No. 3: FOB shipping point, freight collect

Case No. 4: FOB shipping point, freight prepaid

Maritime shipping terms (Incoterms)

SUBSEQUENT MEASUREMENT: SHORT TERM RECEIVABLES

Methods of Accounting for Bad Debts

Methods of estimating bad debt expense under the allowance method

2.) Percentage of A/R (Balance Sheet Approach)

Doubtful accounts in the Income Statement

T- ACCOUNT: ACCOUNTS RECEIVABLE

T- ACCOUNT: ALLOWANCE FOR DOUBTFUL ACCOUNTS