IMPAIRMENT OF RECEIVABLES

On June 1, 2019, XY Manufacturing Company wrote off an account of its customer in the
amount of P70,000 which has been overdue for several years now. Subsequently, on August 8, 2019,
XY recovered and collected the account.

2019
June 1 Allowance for Bad Debts 70,000
Accounts Receivable 70,000

Aug. 8 Accounts Receivable 70,000

Allowance for Bad Debts 70,000

Aug. 8 Cash 70,000

Accounts Receivable 70,000

MEASURING IMPAIRMENT LOSS

Three Stages in Impairment Measurement and Recognition (IFRS 9):

Stage 1
Recognize in profit or loss, through an allowance account an impairment loss based on 12-month
expected credit losses.

Stage 2
Recognize in profit or loss lifetime expected credit losses, if credit risk increases significantly.
Effective interest is calculated based on the gross carrying amount of the receivables.

Stage 3
Access individually the receivables when the receivables are considered credit-impaired.
In this stage, the effective interest rate is calculated based on the receivable balance net of any
related allowance.

CASE A
XYZ Company's ledger balance for Notes Receivable includes a note receivable from Company
X. Company X is undergoing bankruptcy and has negotiated for restructuring of its note, with face
amount of P7,200,000 and accrued interest of P864,000 based on interest rate of 12%. The note is
due on this date, December 31, 2019. The restructuring arrangement calls for P2,016,000 annual
payment with first payment due on December 31, 2020. No further interest will be collected during
the extended four-year term. This note has an allowance for uncollectible notes and accounts of
P180,000.

Principal and accrued interest P 8,064,000

Allowance for Uncollectible Notes and Accounts -180,000
Present value of future cash inflows
(2,016,000 x 3.0373) -6,123,197
Additional Impairment Loss P 1,760,803
 2019
Dec. 31 Impairment Loss - Notes Receivable 1,760,803
Allowance for Uncollectible Notes and Accounts 180,000
Restructured Notes Receivable 8,064,000
Notes Receivable 7,200,000
Interest Receivable 864,000
Discount on Restructured Notes Receivable 1,940,803

Amortization Table
A B C D
Applied to Applied to Balance of
Date Periodic Interest Principal Principal
Payment (Previous D x 12%) (A - B) (D - C)
Dec. 31, 2019 6,123,197
Dec. 31, 2020 2,016,000 734,784 1,281,216 4,841,981
Dec. 31, 2021 2,016,000 581,038 1,434,962 3,407,019
Dec. 31, 2022 2,016,000 408,842 1,607,158 1,799,861
Dec. 31, 2023 2,016,000 216,139 1,799,861 0

2020
Dec. 31 Cash 2,016,000
Discount on Restructured Notes Receivable 734,784
Restructured Notes Receivable 2,016,000
Interest Revenue 734,784

CASE B
On December 31, 2019, ABC had a note receivable from Company B with face value of
P1,800,000 and interest receivable of P216,000 based on 12% interest. No impairment loss was
previously recognized on this note as ABC did not anticipate any credit loss during the last twelve
months on this receivable. The note is already due on this date. Company B suffered financial
difficulty because of losses. ABC agreed to extend the maturity date of the principal by two years.
The interest of P216,000 is to be collected on this date but the interest during the extended period
is reduced from 12% to 10%.

Carrying value P 1,800,000

Present value of future cash inflows
P1,800,000 x 0.7972 P 1,434,960
P180,000 x 1.6901 304,218 1,739,178
Impairment Loss P 60,822

2019
Dec. 31 Cash 216,000
Interest Receivable 216,000

Dec. 31 Impairment Loss - Notes Receivable 60,822

Restructured Notes Receivable 1,800,000
Notes Receivable 1,800,000
Discount on Restructured Notes Receivable 60,822
 Amortization Table
Nominal Effective Discount Amortized Cost,
Date Interest Interest Amortization end
Dec. 31, 2019 1,739,178
Dec. 31, 2020 180,000 208,701 28,701 1,767,879
Dec. 31, 2021 180,000 212,121 32,121 1,800,000

2020
Dec. 31 Cash 180,000
Discount on Restructured Notes Receivable 28,701
Interest Revenue 208,701

2021
Dec. 31 Cash 1,980,000
Discount on Restructured Notes Receivable 32,121
Restructured Notes Receivable 1,800,000
Interest Revenue 212,121

IMPAIRMENT of ACCOUNTS RECEIVABLE (BAD DEBTS)

On December 31, 2019, ABC showed the following ledger balances:

Accounts Receivable P 7,000,000

Allowance for Uncollectible Accounts 350,000

The aging of accounts receivable showed the following:

Age Classification Balance Probability of Non-collection

Less than 30 days P 5,000,000 3%
31 - 90 days 1,000,000 12%
91 - 120 days 750,000 22%
More than 120 days 250,000 32%

After review of collectability, ABC determined that P50,000 of accounts in the age category
"more than 120 days" are believed to be uncollectible and should be written off. The 32% provision
for non-collectability shall be applied on the remaining accounts in the same age category.

Required allowance and impairment loss:

5,000,000 x 3% P 150,000
1,000,000 x 12% 120,000
750,000 x 22% 165,000
200,000 x 32% 64,000
Total required allowance P 499,000
Less: Existing allowance (350,000 - 50,000) 300,000
Additional impairment loss recognized P 199,000

2019
Dec. 31 Allowance for Uncollectible Accounts 50,000
Accounts Receivable 50,000

Uncollectible Accounts Expense 199,000

Allowance for Uncollectible Accounts 199,000

Accounts Receivable P 6,950,000

Less: Allowance for Uncollectible Accounts 499,000
Carrying Amount P 6,451,000