Chapter 6 – Notes Receivable Amortized cost

 Minus principal payment

Notes Receivable
 Plus or minus cumulative amortization of any
- Are claims supported by a formal promise to difference between the initial carrying amount
pay in the form of notes. and the principal maturity amount
- Claims arising from the sale of merchandise or  Minus reduction for impairment or
service uncollectibility.
- Notes received from officers, employees,
shareholders, and affiliates are designated Amortized cost= present value + amortization of
separately. discount

Negotiable Promissory note Amortized cost= face amount - unamortized unearned

interest income
- Unconditional promise in writing made by one
person to another, signed by the maker,
engaging to pay on demand.
Maker- promises to pay
Payee- the person being paid.
Dishonored notes
- When a promissory note matures and it is not
paid.
- Removed from notes receivable but transferred
to accounts receivable.
The amount debited to accounts receivable must
include the
 Face amount
 Interest
 Other charges
Present Value- Notes receivable should be measured
initially at.
- Sum of all future cash flows discounted using
the prevailing market rate of interest for similar
notes.
Effective interest rate- A prevailing market rate of
interest.
Face amount- Short-term notes receivable should be
measured at.
Interest-bearing notes- long-term notes measured at
face amount.
Noninterest-bearing notes- long-term notes measured
at present value.
Amortized cost- subsequent to initial recognition, long
term notes are measured using the effective interest
method.
Chapter 7 – Loans Receivable Credit losses- are the present value or discounted value
of all cash shortfalls.
Loan receivable
Directly or through an allowance account- The carrying
- Financial asset arising from loan granted by a amount of loans receivable shall be reduced either.
bank or other financial institution to a borrower
or client.
Fair value or Transaction price- initial recognition of
loans receivable measurement.
Direct origination costs- costs that should be included in
the initial measurement of the loan receivable.
Indirect origination costs- costs treated as an outright
expense.
Amortized cost- subsequently, loans receivable should
be measured using the effective interest method.
Amortized cost
 Minus principal payment
 Plus or minus cumulative amortization of any
difference between the initial carrying amount
and the principal maturity amount
 Minus reduction for impairment or
uncollectibility.
Added to carrying amount- if the initial amount
recognized is lower than the principal amount, the
amortization of the difference is.
Deducted to carrying amount- if the initial amount
recognized is higher than the principal amount, the
amortization of the difference is.
Origination fees- fees charged by the bank against the
borrower
Origination fees received from borrower- are
recognized as unearned interest income and amortized
over the term of the loan.
Direct origination costs- Origination fees not chargeable
against the borrower.
Amortization will increase the interest income- If the
origination fees received exceed the direct origination
costs, the difference is unearned interest income and.
Amortization will decrease the interest income- If the
direct origination costs received exceed the origination
fees, the difference is charged to direct origination costs
and.
Origination fees and Direct origination costs- included
in the measurement of the loan receivable.
Chapter 10 – Inventories - Seller is legally responsible for freight charges
and other expenses up to the point of
Inventories destination.

- Are assets held for sale in the ordinary course of FOB Shipping Point or FOB seller- ownership is
business, in the process of production for such transferred upon shipment of the goods and therefore
sale, or in the form of materials to be consumed the goods in transit are the property of the buyer.
in the production process.
- Goods in transit are the property of the Buyer
- Classified as current assets.
- Buyer is legally responsible for freight charges
Inventory Classification and other expenses up to the point of
destination.
 Inventories of a trading concern
 Inventories of a manufacturing concern Freight Collect- means that the freight charge on the
goods shipped is not yet paid. Paid by the buyer
Trading concern- is the one that buys and sells goods in
the same form purchased Freight prepaid- means that the freight charge on the
goods shipped is already paid by the seller.
- Merchandise inventory- is generally applied to
goods held by a trading concern. Periodic and Perpetual system- Two systems are offered
in accounting for inventory.
Manufacturing Concern- This is the one that buys goods
that are altered or converted into another form before Periodic system- the cost of goods sold is computed
they are made available for sale. only at the end of the reporting period by deducting the
physical inventory from the cost of goods available for
- Finished goods, goods in process, raw sale.
materials, and factory or manufacturing
supplies. Periodic Inventory procedure- is generally used when
the individual inventory items have a small peso
Finished goods- are completed products ready for sale. investment.
Passing of title- is a legal language that means the point Perpetual system- requires maintenance of records
of time at which ownership changes. called stock cards that usually offer a running summary
Consignment- method of marketing goods in which the of the inventory inflow and outflow.
owner called the consignor transfers physical possession Perpetual Inventory Procedure- Commonly used where
of certain goods to an agent called the consignee who the inventory items treated individually represent a
sells them on the owner’s behalf. relatively large peso investment.
Consigned goods- shall be included in the consignor’s Inventory Shortage- is usually closed to cost of goods
inventory, and excluded in the consignee’s inventory. sold because this is often the result of normal shrinkage
Freight and other handling charges- Charges on goods and breakage in inventory.
out on consignment are part of the cost of goods Abnormal and Material Shortage- Shall be separately
consigned. classified and presented as other expense.
Installment contracts- This may provide for retention of Trade discounts- are deductions from the list or catalog
title by the seller until the selling price is fully collected. price in order to arrive at the invoice price which is the
- Intallment Receivable xx amount actually charged to the buyer.
Installment Sales xx - Trade discounts are not recorded.
FOB destination or FOB buyer- ownership of the goods Cash discounts- are deductions from the invoice price
purchased is transferred only upon receipt of the goods when payment is made within the discount period.
b y the buyer at the point of destination.
- Are recorded as purchase discounts by the
- Goods in transit are the property of the seller buyer and sales discount by the seller.
Purchase Discount – Deducted from purchases to arrive
at net purchases and sale discount is deducted from the
sales to arrive at net sales revenue.
Methods of recording Purchases
 Gross method- Purchases and accounts payable
are recorded at gross amount of invoice.
 Net method- purchase and accounts payable
are recorded at net amount of the invoice.
Cost of inventory- shall comprise cost of purchase, cost
of conversion and directly attributable cost incurred in
bringing the inventory to the present location and
condition.
Cost of purchase- Comprises the purchase price, import
duty, irrecoverable tax, freight, handling and other cost
directly attributable to the acquisition.
- Trade discounts, rebates and other similar
items, are deducted in determining the cost of
purchase.
Cost of conversion- includes cost directly related to the
units of production such as direct labor.
Chapter 11 – Inventory Cost Flow
The cost of inventory is determined by using either:
 FIFO
 Weighted Average
Fifo method- goods first purchased are first sold.
- First come, first sold

Weighted average – Periodic

Beginning Inventory Cost
+ Cost of purchases
Total
/Units purchased
+Beginning inventory Units
= Weighted Average Unit Cost

Average Unit Cost= Total COGAS / Total Units Available

for Sale

Weighted Average – Perpetual

- A new weighted average unit cost must be
computed after every purchase and purchase
return.
Moving Average Method- In conjunction to the
perpetual system, Weighted Average Method is also
known as.
Inventory Cost= New Weighted Average Unit Cost *
Units on hand

LIFO method- Goods last purchased are first sold

Specific Identification- Means that specific costs are
attributed to identified items of inventory.
Inventory Cost= Units on hand * Actual unit cost
Specific Identification Method- may be used in either
periodic or perpetual inventory system.
Standard cost- are predetermined product costs
established on the basis of normal levels of materials
and supplies, labor, efficiency, and capacity utilization.
Chapter 12 – Lower Cost and Net
Realizable Value
Net realizable value- Is the estimated selling price in the
ordinary course of business less the estimated cost of
completion and the estimated cost of disposal.

Accounting for inventory write-down

- If the cost is lower than NRV, there is no
problem.
- If the NRV is lower than the cost, the inventory
is measured at NRV and the decrease in value is
recognized.

Methods of accounting for the inventory writedown

 Direct method or Cost of Goods sold method
 Allowance method or Loss method

Direct Method- Inventory is recorded at the lower of

cost or net realizable value.
- Also known as cost of goods sold method
because any loss on inventory write-down or
gain on reversal of inventory write-down is not
accounted for separately but “buried” in the
cost of goods sold
Allowance method- known as the loss method because
a loss on inventory write-down is debited and an
allowance for inventory write-down is credited.
Purchase commitments- are obligations of the entity to
acquire certain goods sometime in the future at a fixed
price and fixed quantity.
- Must be noncancelable