FINANCIAL ACCOUNTING & REPORTING

FAR.0724-Trade and Other Receivables FAR 724-Online

LECTURE NOTES

Nature of loans and receivables (L&R)

Loans and receivables are non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market, other than:

(a) those that the entity intends to sell immediately or in the near term, which shall
be classified as held for trading, and those that the entity upon initial
recognition designates as at fair value through profit or loss;

(b) those that the entity upon initial recognition designates as available for sale; or

(c) those for which the holder may not recover substantially all of its initial
investment, other than because of credit deterioration, which shall be classified
as available for sale.

Note: This definition is deleted in PFRS 9

Financial assets at amortized cost (FA@AC)

A financial asset shall be measured at amortized cost if both of the following
conditions are met
(a) The asset is held within a business model whose objective is to hold assets in
order to collect contractual cash flow
(b) The contractual terms of the financial asset give rise on specified dates to cash
flows that are solely payment of principal and interest on the principal
outstanding.

Interest is consideration for the time value of money and for the credit risk
associated with the principal amount outstanding during a particular period of time.

Receivables normally qualify as financial assets at amortized cost.

Recognition of loans and receivables

An entity shall recognize a financial asset on its statement of financial position
when, and only when, the entity becomes a party to the contractual provisions of
the instrument.

Measurement of loans and receivables

Initial recognition
Receivables are initially recognized at its fair value plus transaction costs that are
directly attributable to the acquisition of the financial asset.
Fair value is the amount for which an asset could be exchanged, or a liability
settled, between knowledgeable, willing parties in an arm’s length transaction.

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The fair value of a financial instrument at initial recognition is normally the

transaction price (ie the fair value of the consideration given or received. However,
if part of the consideration given or received is for something other than the
financial instrument, an entity shall measure the fair value of the financial
instrument. For example, the fair value of a long-term loan or receivable that
carries no interest can be measured as the present value of all future cash receipts
discounted using the prevailing market rate(s) of interest for a similar instrument
(similar as to currency, term, type of interest rate and other factors) with a similar
credit rating. Any additional amount lent is an expense or a reduction of income
unless it qualifies for recognition as some other type of asset.

Transaction costs are incremental costs that are directly attributable to the
acquisition, issue or disposal of a financial asset or financial liability. An incremental
cost is one that would not have been incurred if the entity had not acquired, issued,
or disposed of the financial instrument.

Subsequent to initial recognition

Amortized cost using effective interest method.

The amortized cost of a financial asset is the amount at which the financial asset is
measured at initial recognition minus principal repayments, plus or minus the
cumulative amortization using the effective interest method of any difference
between that initial amount and the maturity amount, and minus any reduction
(directly or through the use of an allowance account) for impairment or
uncollectibility.

The effective interest method is a method of calculating the amortized cost of a

financial asset and of allocating the interest income over the relevant period.

The effective interest rate is the rate that exactly discounts estimated future cash
payments or receipts through the expected life of the financial instrument or, when
appropriate, a shorter period to the net carrying amount of the financial asset or
financial liability. When calculating the effective interest rate, an entity shall
estimate cash flows considering all contractual terms of the financial instrument (for
example, prepayment, call and similar options) but shall not consider future credit
losses. The calculation includes all fees and points paid or received between parties
to the contract that are an integral part of the effective interest rate (see PAS 18),
transaction costs, and all other premiums or discounts.

Types of loans and receivables

Trade receivables
 Result from the normal operating activities, i.e., credit sales of goods or services
to customers.
 May be evidenced by a formal written promise to pay and classified as notes
receivable.
 In most cases, they are unsecured, “open” accounts reflecting a short-term
extension of credit to a customer for a period of 30-90 days, with the potential
for interest charges if the account is not paid within such period.

Nontrade receivables

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 All other types of receivables.

 Arise from a variety of transactions:
(1) Advances to officers and employees
(2) Advances to subsidiaries and affiliates
(3) Sale of securities or property other than inventory.
(4) Dividends and interest receivable.
(5) Others

Presentation of loans and receivables

Trade
Section: Current assets (CA)
Line item: Trade and other receivables

Non-trade
 Realizable within 12 months
Section: Current assets (CA)
Line item: Trade and other receivables

 Not realizable within 12 months

Section: Noncurrent assets (NCA)
Line item: If material separate item
if not material
Related to NCI – Noncurrent investment
Others – Other NCA

Accounts Receivable
 Theoretically, all receivables should be valued at an amount representing the
present value of the expected future cash receipts.
 However, given the relatively short-term nature of accounts receivable, they are
instead reported at “net realizable value” (or expected cash value) and no
implicit interest element is therefore recognized.
 Accounts receivable, recorded net of trade discounts, should be further reduced
and reported net of allowances for certain estimations - uncollectible items, cash
discounts, and returns and allowances.
 Objective—to record the receivables at the amount of claims from customers
actually expected to be collected in cash.

Accounting for sales revenue

 The amount of sales or revenues is normally the largest item on a company’s
income statement and accounts receivable is typically one of the largest current
assets on the statement of financial position.

 Discounts - decreases in the gross, or list, price of goods sold to customers.

1. Trade discount—an amount deducted from the list price to obtain the “net”
sales price actually charged the customer.
a. A means of varying price, usually relating to purchase volumes.
b. The net price is the amount at which the receivable and revenue should be
recorded.
2. Cash (or sales) discount—a price reduction granted to encourage early
payment.

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a. Known as a purchase discount to the purchaser and a sales discount to the

seller.
b. Usually granted for payment within periods of no more than 30 days, and
are reflected by sales clauses such as, “2/10, n/30”, which indicates a 2%
discount is available for paying within 10 days or else the entire amount is
due within 30 days.
c. Receivables are generally recorded at their gross amounts, a simple and
widely used method.
d. The net method of accounting for sales discounts records the sales and
receivable net of the discount, and any additional amounts subsequently
collected in association with payment beyond the “discount” period are
reflected as financing revenue or other income.

 Sales returns and allowances.

1. When goods are returned or an allowance is necessary for damage or
imperfections otherwise (wrong color, size, etc.).
2. Net sales and accounts receivable are reduced, and inventory may need
adjusting in relation to returns.
3. The charge could be made directly to sales, but using a separate contra
account generally provides more useful information to management.

Accounting for Freight

Who should pay? Who actually paid
Buyer FOB shipping point Freight collect
Seller FOB destination Freight prepaid
Deduct from AR FOB destination Freight collect
Add to AR FOB shipping point Freight prepaid

Traditional Methods of Accounting for Bad Debts

Direct Write-off Allowance
Doubtful of collection No journal entry D/A expense PXX
ADA PXX
Definitely uncollectible D/A expense Pxx ADA Pxx
AR Pxx AR Pxx
Recovery Cash Pxx AR Pxx
BD Recovery PXX ADA Pxx

Cash Pxx
AR Pxx

Direct write-off method

 Debit bad debt expense or doubtful accounts expense and credit accounts
receivable as uncollectibles are discovered
 Direct write-off method, however, does not provide for matching of expense
with current revenues and does not report receivables at their realizable value.

Allowance method
 An end-of-period is made containing a debit to the same account (bad debt
expense) as the direct write-off method, but the amount represents an estimate
of future uncollectible and is credited to an allowance account (allowance for bad
debts or allowance for doubtful accounts).

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 Allowance for bad debts is a contra asset account with a credit balance and is
offset against accounts receivable to help achieve net realizable value reporting
in the statement of financial position.

Estimating uncollectibles based on percentage of sales

 An assumed percentage is applied to current total or credit sales.
 The assumed percentage is derived from the relationship over previous
periods between the amount of total, or credit, sales and the actual amount of
uncollectible account losses.
 The existing allowance is ignored.

Estimating uncollectible based on accounts receivable balance

 Emphasizes the relationship between the accounts receivable and allowance
for uncollectible accounts balances.
 To determine the desired value for the allowance account, an assumed
percentage is applied to the balance of accounts receivable or multiple
percentages are applied to the account receivable balance as broken into
various categories, where such categories are determined by an “aging of
receivables” process: the process of analyzing individual accounts to classify
and sum them according to their length of time past due.
 The periodic adjusting entry is the same in form as that utilized under the
percentage of sales method, though one must be careful to first compare the
results of the initial calculations with any existing balance already in the
allowance account: the difference will be the final amount actually recorded in
the journal entry and will ensure that the previously determined “target”
balance for the allowance account is reported in the statement of financial
position.
 The aging method is the most satisfactory approach for achieving the net
realizable value reporting in the statement of financial position.

Writing off an uncollectible account under the allowance method

 Under the allowance method, bad debts expense is not recorded at the time
an account is discovered to be uncollectible – such recognition has already
occurred via the end-of-period adjustment previously made.
 Credits is to accounts receivable and debit is to the allowance account.
 Because both the asset and the allowance account decrease by the same
amount as a result of write-off, there is no impact on the reported value of
accounts receivable in the statement of financial position (i.e., no change in
net realizable value)
 Occasionally, accounts previously written off may turn out to be collectible;
this merely requires reversing the original write-off entry and recording a
normal collection on account.

Correction to the allowance account

 Occasional analytical reviews of the allowance account balance may identify a
balance that is excessive of inadequate, prompting a correcting entry to the
bad debts expense and allowance accounts as well as possible revisions of the
estimation rate or method employed.

- done -

REVIEW QUESTIONS: Multiple Choice Problems

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1. The Skywarp Company has the following items included in its receivables and
payable account:

Items Debit Credit

Due from customers P156,000
Payable to creditors for merchandise P62,000
Note receivable, long-term 80,000
Allowance for bad debts 4,000
Due from employees 2,200
Cash dividend payable 24,000
Special receivable, dishonored note* 22,000
Accrued wages 2,400
Rent received in advance 1,600
Insurance premiums paid in advance 1,200
Mortgage payable 40,000

*Collection probable in two years

Compute the amount to be reported as trade and other receivable.

a. P158,200 b. P154,200 c. P156,000 d. P152,000

2. New Corp., which has started operations in the current year, has the following
data relating to accounts receivable for the year ended December 31.

Cash sales P1,000,000

Credit sales 5,000,000
Collection on credit sales 3,000,000
Sales returns and allowances on credit sales 100,000
Accounts written off 20,000
Allowance for doubtful accounts, 12/31 (5% of accounts receivables ?
Allowance for sales discount, 12/31 10,000
Allowance for sales return, 12/31 15,000
Allowance for freight, 12/31 3,000

What is the net realizable value of the accounts receivable on December 31?
a. P2,708,000 b. P1,880,000 c. P1,758,000 d. P1,752,000

3. One June 9, Seller Corp. sold merchandise with a list price of P5,000 to Buyer on
account. Seller allowed trade discount of 30% and 20%. Credit terms were
2/15, n/40 and the sale was made FOB shipping point. Seller prepaid P200 of
delivery costs for Buyer as an accommodation. On June 25, Seller received from
Buyer a remittance n full payment amounting to
a. P2,744 b. P2,940 c. P2,944 d. P3,000

4. The Pacifier Company uses the net price method of accounting for cash
discounts. In one of its transactions on December 15, Pacifier sold merchandise
with a list price of P500,000 to a client who was given a trade discount of 20%
and 15%. Credit terms were 2/10, n/30. The goods were shipped FOB
destination, freight collect. Total freight charges paid by the client amounted to
P7,500. On December 20, the client returned damaged goods originally billed at
P60,000.

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What is the net realizable value of this receivable on December 31?

a. P272,500 b. P274,400 c. P280,000 d. P333,200

5. Dancing Shoes sold P21,000 of merchandise during the month of December,

which was charged to a national credit card. On December 15, Dancing bills the
independent national credit card company for these sales and is assessed a 5%
service charge. On December 21, a customer returned merchandise originally
sold for P2,000 and Dancing notifies the credit card company of the return. On
December 29, the credit card company remitted amount owed to Dancing.

How much was received by Dancing from the credit card company?
a. P21,000 b. P19,950 c. P19,000 d. P18,050

6. Bangui Company provides for doubtful account expense at the rate of 3 percent
of credit sales. The following data are available for last year.

Allow. For Doubtful Accounts, Jan 1 P54,000

Accounts written off as uncollectible 60,000
Collections of accounts written off 15,000
Credit sales, year-ended December 31 3,000,000

The allowance for doubtful accounts balance at December 31, after adjusting
entries, should be
a. P45,000 b. P84,000 c. P90,000 d. P99,000

7. On January 1, 2016, the balance of accounts receivable of Burgos Company was

P5,000,000 and the allowance for doubtful accounts on same date was P800,000.
The following data were gathered:

Credit sales Writeoffs Recoveries

2013 P10,000,000 P250,000 P20,000
2014 14,000,000 400,000 30,000
2015 16,000,000 650,000 50,000
2016 25,000,000 1,100,000 145,000

Doubtful account are provided for as percentage of credit sales. The accountant
calculates the percentage annually by using experience of the three years prior
to the current year. How much should be reported as 2016 doubtful accounts
expense?
a. P750,000 b. P812,500 c. P330,000 d. P875,000

8. John Corp. has the following data relating to accounts receivable for the year
ended December 31, 2016

Accounts receivable, January 1, 2016 P480,000

Allowance for doubtful accounts, January 1, 2016 19,200
Sales during the year, all on account, terms 2/10, 1/15, n/60 2,400,000
Cash received from customers during the year 2,560,000
Accounts written off during the year 17,600

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An analysis of cash received from customers during the year revealed that
P1,411,200 was received from customers availing the 10-day discount period,
P792,000 from customers availing the 15-day discount period, P4,800
represented recovery of accounts written-off, and the balance was received from
customers paying beyond the discount period.

The allowance for doubtful accounts is adjusted so that it represents certain

percentage of the outstanding accounts receivable at year end. The required
percentage at December 31, 2016 is 125% of the rate used on December 31,
2015.
The doubtful accounts expense for the year ended December 31, 2016 is
a. P6,880 b. P7,120 c. P8,720 d. P8,960

9. The accounts receivable subsidiary ledger of Besao Corporation shows the

following information:

Customer 12/31 Account Invoice

Balance Date Amount
Maybe, Inc. P140,720 12/06 P56,000
11/29 84,720
Perhaps, Co. 83,680 09/02 48,000
08/20 35,680
Pwede Corp. 122,400 12/08 80,000
10/25 42,400
Perchance Co. 180,560 11/17 92,560
10/09 88,000
Possibly Co. 126,400 12/12 76,800
12/02 49,600
Luck, Inc. 69,600 09/12 69,600
Total P723,360 P723,360

The estimated bad debts rate below are based on the Corporation’s receivable
collection experience.
Age of accounts Rate
0-30 days 1%
31-60 days 1.5%
61-90 days 3%
91-120 days 10%
Over 120 days 50%

The Allowance for Doubtful Accounts had a credit balance of P14,000 on

December 31, 2016, before adjustment.

The adjusting journal entry to adjust the allowance for doubtful accounts as of
December 31, 2016 will include a debit to doubtful account expense of
a. P52,795 b. P38,795 c. P24,795 d. P14,000

SOLUTION:
Category Balance Rate Allow.
0 – 30 days P262,400 1% P2,624
31 – 60 days 177,280 1.5% 2,659
61 – 90 days 130,400 3% 3,912

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91 – 120 days 117,600 10% 11,760

Over 120 days 35,680 50% 17,840
P723,360 P38,795

10. Badoc Corporation's books disclosed the following information for the year
ended December 31, 2016:

Net credit sales P1,500,000

Net cash sales 240,000
Accounts Receivable at beginning of year 200,000
Accounts Receivable at end of year 400,000

Badoc's accounts receivable turnover is

a. 3.75 times b. 5.00 times c. 4.35 times d. 5.80 times

REVIEW QUESTIONS

MULTIPLE CHOICE THEORY

1. In accordance with PAS 39, “loans and receivables” are non-derivative financial
assets with fixed or determinable payments that are not quoted in an active
market other than:
a. Those that the entity intends to sell immediately or in the near term, which
shall be classified as held for trading, and those that the entity upon initial
recognition designates as at fair value through profit or loss;
b. Those that the entity upon initial recognition designates as available for sale;
or
c. Those for which the holder may not recover substantially all of its initial
investment, other than because of credit deterioration, which shall be
classified as available for sale.
d. All of the above

2. In accordance with PFRS 9, loans and receivables can be measured at amortized

cost if
a. The asset is held within a business model whose objective is to hold assets in
order to collect contractual cash flows.
b. The contractual terms of the financial asset give rise on specified dates to cash
flows that are solely payments of principal and interest on the principal
amount outstanding.
c. Both a and b.
d. Either a or b.

3. Which statement is incorrect regarding loans and receivables?

a. An entity shall measure loans and receivables on initial recognition at fair
value plus transaction costs that are directly attributable to the acquisition of
the financial asset.
b. The fair value of a long-term loan or receivable that carries no interest can be
estimated as the present value of all future cash receipts discounted using the
prevailing market rate of interest for a similar instrument with a similar credit
rating.
c. Short-term receivables with no stated interest rate may be measured at the
original invoice amount if the effect of discounting is immaterial.

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d. Loans and receivables are derivative financial assets with fixed or

determinable payments that are not quoted in an active market.

4. Morley Manufacturing has notes receivable that have a fair value of P810,000
and a carrying amount of P620,000. Morley decided to use the fair value option
for these recently acquired receivables. Which of the following statements is
correct regarding the election of the fair value option by Morley?
a. Morley can elect to use the fair value option or amortized cost at each
statement of financial position date.
b. Morley reports the receivables at fair value, with any unrealized holding gains
and losses reported as a separate component of comprehensive income.
c. The unrealized holding gain is the difference between the fair value and the
carrying amount.
d. All of the choices are correct regarding the fair value option.

5. PFRS requires all of the following when classifying receivables except

a. Indicate the receivables classified as current and non-current in the statement
of financial position.
b. Disclose any receivables pledged as collateral.
c. Disclose all significant concentrations of credit risk arising from receivables.
d. All of the choices are required by PFRS when classifying receivables.

6. The category "trade receivables" includes

a. Advances to officers and employees.
b. Income tax refunds receivable.
c. Claims against insurance companies for casualties sustained.
d. Open accounts resulting from short-term extensions of credit to customers.

7. Which of the following should be recorded in Accounts Receivable?

a. Receivables from officers c. Dividends receivable
b. Receivables from subsidiaries d. None of these

8. Receivables from subsidiaries and affiliates, if significant should be classified as

a. Current assets
b. Noncurrent assets
c. Either as noncurrent or current depending on the expectation of realizing them
within one year or over one year
d. Intangible assets

9. Receivables from officers, directors and employees for goods sold or services
rendered in the ordinary course of business
a. Are considered current if proper control is exercised in granting credit and the
accounts are currently collectible
b. Are not included in trade accounts receivable
c. Are included in current assets even if the receivables are actually loans and
advances and the collection is unlikely within a year
d. Are always classified as noncurrent

10. Credit balances in accounts receivable should be classified as

a. Current liability c. Noncurrent liability
b. Part of accounts payable d. Deduction from accounts receivable

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11. Bruce Cycle Shop sells a bicycle to E. Nygma, a customer who uses Express
Charge (a national credit card, but not issued by a bank). In recording this sale,
Bruce Cycle Shop should record:
a. an account receivable from E. Nygma
b. a cash receipt
c. an account receivable from Express Charge
d. a small increase in the allowance for doubtful accounts

12. Accounts receivable are normally reported at the:

a. Present value of future cash receipts.
b. Current value plus accrued interest.
c. Expected amount to be received.
d. Current value less expected collection costs.

13. Assuming that the ideal measure of short-term receivables in the statement of
financial position is the discounted value of the cash to be received in the future,
failure to follow this practice usually does not make the statement of financial
position misleading because
a. Most short-term receivables are not interest-bearing.
b. The allowance for uncollectible accounts includes a discount element.
c. The amount of the discount is not material.
d. Most receivables can be sold to a bank or factor.

14. Trade discounts are

a. Not recorded in the accounts; rather they are a means of computing a price.
b. Used to avoid frequent changes in catalogues.
c. Used to quote different prices for different quantities purchased.
d. All of the above.

15. If a company employs the gross method of recording accounts receivable from
customers, then sales discounts taken should be reported as
a. A deduction from sales in the income statement.
b. An item of "other income and expense" in the income statement.
c. A deduction from accounts receivable in determining the net realizable value
of accounts receivable.
d. Sales discounts forfeited in the cost of goods sold section of the income
statement.

16. Of the approaches to record cash discounts related to accounts receivable,

which is more theoretically correct?
a. Net approach.
b. Gross approach.
c. Allowance approach.
d. All three approaches are theoretically correct.

17. All of the following are problems associated with the valuation of accounts
receivable except for
a. Uncollectible accounts.
b. Returns.
c. Cash discounts under the net method.
d. Allowances granted.

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18. Why is the allowance method preferred over the direct write-off method of
accounting for bad debts?
a. Allowance method is used for tax purposes.
b. Estimates are used.
c. Determining worthless accounts under direct write-off method is difficult to do.
d. Improved matching of bad debt expense with revenue.

19. Which of the following concepts relates to using the allowance method in
accounting for accounts receivable?
a. Bad debt expense is an estimate that is based on historical and prospective
information.
b. Bad debt expense is based on the actual amounts determined to be
uncollectible.
c. Bad debt expense is an estimate that is based only on an analysis of the
receivables aging.
a. Bad debt expense is management's determination of which accounts will be
sent to the attorney for collection.

 - end - 

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