Receivables - Noninterest-bearing: inside the face amount

- Claims that an entity expects to be settled

- Expectation to receive something Loans Receivable
- Sale of goods/services, other income, loans and - Owed from a debtor to a creditor
advance to officer/employee - Banks and other financial institutions
Classification of Receivables Fair Value +Transaction
Initial Measurement
Trade Receivables Cost
- Arises from normal operating procedure of the Subsequent
Amortized Cost
company Measurement
Nontrade Receivables Receivable Financing
- Not coming from normal business operations - Pagkakitaan ang receivable kahit hindi pa nare-
Current asset receive
- Trade Receivable - Way entities obtain cash to finance their
- Nontrade Receivable if less than one year or the operations
normal operating cycle of the company - Pledge: A/R serves as collateral for a loan
Noncurrent Asset arrangement.
- Nontrade Receivable - Assignment: Transfer of rights in an A/R in
- Longer than 1 year or the normal operating consideration for a loan.
cycle - Factoring: sale of A/R
*Recorded at the same time when the entity recognizes - N/R Discounting: Obtaining cash before
the revenue involved in the transaction, recorded at the maturity date of the loan through discounting
transaction price. the note to a financing company
*Seller will give invoice to the buyer *Receivable aging- analysis of account balances kung
*No direct cash payment was made by the buyer to the gaano na katagal hindi nababayaran sa company
seller Example 1
Measurement at Original Transaction Cessy Company has an accounts receivable balance
Initial Recognition Price amounting to P467,000 at the start of 2020. During the
Subsequent Net realizable Value year, credit sales amounts to P3,000,000 while sales
Measurement (A/R-Uncollectible) returns amount to P80,000. Accounts written off
*Always report only the amount that is realizable amounted to P68,000.
Cash Discounts The entity estimated that future sales returns will
- Given by the seller to the buyer to encourage amount to P90,000 by December 31. Also, estimated
early payment uncollectible accounts per aging of receivables
- Gross method/ Net method amounted to P64,000.
Uncollectible accounts Collections were made on accounts receivable and has
- A/R that cannot be collected due to various credited all trade receivable subsidiary ledgers by a total
reasons of P2,530,000.
- Direct write-off method: immediate recognition How much is the net realizable value of accounts
of a particular uncollectible account receivable to be presented in the December 31, 2020
*Uncollectible Accounts exp xx Statement of Financial Position?
Accounts Receivable xx Accounts Receivable
- Allowance method: allows estimates of 467,000 80,000
uncollectible accounts 3,000,000 68,000
*Uncollectible accounts exp xx 2,530,000
Allowance for Uncollectible acc. xx 90,000
Notes Receivable 64,000
- Supported by notes of promise to pay 635,000
- Interest-bearing: stated rate of interest
1
 Example 4
Jiyeon Company decided to sell a used machinery. The
carrying amount of the machinery is P2,000,000. The
entity accepted a noninterest-bearing note amounting
Example 2 to P5,000,000. This note receivable required ten
Melody Company uses the allowance method of payments annually amounting to P500,000. The
accounting for uncollectible accounts. For receivable transaction happened at the end of 2019 and the first
aging, it was estimated that 3%, 10%, and 15% will not P500,000 payment was made on December 31, 2020.
be collected anymore for receivables aging 0-30 days, For all similar notes, the prevailing market interest rate
31-60 days, and over 60 days, respectively. These all is 12%
amounts to P4,000,000, P2,000,000, and P1,500,000. 1. How much is the carrying amount of the note
Net credit sales for the year amounted to P30,000,000 receivable as at December 31, 2019?
and that the balance before adjustment of the PV of OA: 500,000 x 5.65 = 2,825,000
allowance for uncollectible accounts amount to P50,000 2. How much is the unearned interest income related to
credit. the note at the point of sale?
What amount should be recognized in the adjusting Face Value of the note 5,000,000
entries as uncollectible accounts expense for the Present value of annual payment 2,825,000
current year? Unearned interest income 2,175,000
0-30 days 3% 4,000,000 120,000 3. How much is the gain on sale of machinery to be
31-60 days 10% 2,000,000 200,000 reported at 2019 year-end?
Over 60 days 15% 1,500,000 225,000 Present value of annual payments 2,825,000
Required balance of the allowance account 545,000 Compare with the CA of machinery 2,000,000
Less: credit balance in the allowance acc -50,000 Gain on sale of machinery 825,000
Uncollectible accounts expense 495,000 4. How much is the interest income for 2020?
*debit balance before adjustment: add
Present value of the note 2,825,000
*credit balance before adjustment: minus
Multiply by: interest rate 12%
Example 3
Interest income, Dec. 31,202 339,000
Pilot Company provided the following information:
5. How much is the carrying amount of the note
Dec. 31,2019 Dec. 21,2020
receivable as at December 31, 2020?
A/R 1,546,000 1,685,000
NRV 1,490,000 1,638,000 Notes Receivable, Dec. 31,2019 5,000,000
During the year, the firm recovered past written-off Less: first payment 500,000
Notes receivable, Dec. 31, 2020 4,500,000
accounts amounting to P96,000 and written-off
P143,000 accounts. How much is the uncollectible
Unearned
Notes interest
Receivable, incDec.
Dec. 31,2019 2,175,000
31,2020 4,500,000
accounts expense for the year ended December 31,
Less:
Less: interest earned
Unearned interestfor
inc2020 339,000
1,836,000
2020?
Unearned interest
CA of NR, Dec. 31 incDec. 31, 1,836,000
2,664,000
Dec. 31,2019 Dec. 21,2020 2020
A/R 1,546,000 1,685,000 Example 5
NRV 1,490,000 1,638,000
Abby Company factored P5,000,000 of its accounts
Allow. For 56,000 47,000
receivable to a finance company to generate cash.
Unc/Acc
Control to this receivable was surrendered by Abby.
From this transaction, a fee of 5% was assessed and
All. For uncollectible acc, Beg 56,000
retained a holdback equal to 5% of accounts receivable
Add: Recoveries of past written-off 96,000
in excess of P500,000. The factor has also charged 15%
Uncollectible accounts expense x 38,000
interest computed on a weighted average time to
Less: Written-off accounts during the 143,000
yr maturity of the receivable of 60 days.
Allowance for unc. Acc, End 47,000
2
1. How much cash was initially received from the Credit sales, 2/10,1,20, n/60 5,000,000
factoring? Accounts proved to be worthless 50,000
Promissory notes received as payment
Accounts Receivable under factoring 300,000
5,000,000
2. How much is the cost of factoring the receivable? of accounts
Factoring fee (5M x 5%) -250,000
Factoring fee 250,000 Sales allowance allowed on CS 60,000
Factor’s holdback (5M-500K x 5%) -225,000
Interest 123,288 Refundsinterest
made to cash/paid customers -123,288
100,000
Charged (5M x 15% x 60/365)
Cost of Factoring 373,288 Sales returns from CS
Cash Received from factoring 4, 80,000
401,712
Receivable Cash received from payment w/in 10d 2,450,000
- Right to receive cash Cash received beyond 10d but w/in 1,485,000
Trade Receivable 20d
- Directly related to primary operations Cash received beyond 20d 495,000
- Primary revenue generating activity Recoveries from accounts written-off 19,000
- Receivables from ordinary course of business (not yet included from cash receipts)
- Accounts receivables: mutual understanding of Accounts receivable, beg 650,000
buyer and seller Determine the ending balance of accounts receivable.
- Notes receivables: formal document Accounts receivable
(promissory note) 650,000 50,000
- Loans receivables: financial institutions 5,000,000 300,000
Nontrade Receivable 19,000 60,000
- Others 80,000
2,450,000
- Advances to employees
(=2450 /98%) 50,000
- Subscriptions receivable
1,485,000
- Advances to affiliates
(=1485/99%)15,000
- Claims against insurer 495,000
- Advances to suppliers 19,000
Trade and Other Receivables 665,000
- All trade receivables
- Current non-trade receivables Net Realizable Value
Current <= 12 months A/R Gross xx
Noncurrent > 12 months Less: Allow. For Bad Debts (xx)
Accounts Receivable Allow. For Sales Discounts (xx)
- Informal Allow. For Sales Returns (xx)
- Supported by invoice Allow. For Freight (xx)
Initial Measurement Face amount (Gross Net Realizable Value, A/R xx
Met) Direct Write-off
Subsequent Measurement Net Realizable Value - Bad debts expense when there is actual write-
- Net realizable value: expected to received off
Accounts Receivable - Passive
Beginning Balance Collection from CS - No write-off, No worthless, Bad debts not
Credit Sales Sales Disc recognized
Recoveries Sales Allow - No allowance maintained
Sales Return Allowance Method
Write-off - Recognizes bad debts expense even though
Recoveries
there is no actual write-off
NR Received
Allowance for Bad Debts (Contra Asset)
Ending Balance
Write-off Beginning Balance
Example 1:
Recoveries
Granada Company reported the following transactions
Bad debts expense
for the year ended:
3
 Ending Balance Scenario 2: Based on % A/R
Estimation Methods Allowance for bad debts
% of Sales % of A/R Aging 75,000 100,000
Basis Credit A/R, end A/R, end 15,000
Sales 85,000 BDE
All. For BD Based on T- Basis x % ∑(Basis x %) (2.5M x 5%) 125,000 Adj.
account ABD, end
Bad D. exp Basis x % Squeeze on Squeeze on A/R Gross 2,500,000
T-account T-account Allowance for Bad Debts -125,000
Focus Matching NRV of AR NRV of AR A/R CA 2,375,000
Scenario 3: Aging Method
Balance % Uncollectible Amount
1,750,000 2% 35,000
Example 2: 500,000 10% 50,000
On January 1, 2023, Tulips Company reported a balance 250,000 20% 50,000
in its allowance for bad debts amounting to P100,000. Adj. Allowance for Bad debts 135,000
For the current year, accounts written-off and recoveries
amounted to P75,000 and P15,000, respectively. In Allowance for bad debts
addition, the company reported net credit sales of 75,000 100,000
P5,000,000, while ending receivables amounted to 15,000
P2,500,000, which can be aged as follows: 95,000 BDE (squeeze)
135,000Adj. ABD, end
Age Balance
Less than one month 1,750,000
More than one month but less than 500,000
A/R Gross 2,500,000
1yr
Allowance for Bad Debts -135,000
More than a year 250,000
A/R CA 2,365,000
2,500,000
Notes Receivable
Under each of the following scenarios, compute for the
- Formal
bad debts expense and the allowance for bad debts
- Promissory note
after the adjustment:
- Maker: who makes the note; will recognize the
1. Bad debts expense is estimated at 3.5% of CS
note payable
2. Allow. For bad debts is 5% of A/R balance.
- Payee: will receive the NR
3. Allowance for bad debts is based on estimated
- based on interest or noninterest bearing
percentage per age bracket as follows:
Interest Bearing Noninterest Bearing
Age Probability
Stated rate/ Nominal Rate No stated rate
of Collection
Additional Interest to be paid Still recognizes
Less than one month 98%
interest income
More than one month but less than 90%
Stated rate=Market rate
1yr
Stated rate ≠Market rate
More than a year 80%
I.M= Face Amount I.M=PV of cashflows
Scenario 1: Based on % of Credit sales
using market rate on
Allowance for bad debts
initial recognition
75,000 100,000
Interest Income: Interest Income:
15,000
Face amount x SR Based on
(=5M x 3.5%) 175,000 BDE
Amortization Table
215,000 ABD, end
Subsequent Measurement: Subsequent
A/R Gross 2,500,000 Face Amount Measurement:
Allowance for Bad Debts -215,000 Based on
A/R CA 2,285,000
4
 Amortization Table Initial Meas. 2,000,000 2.577097 5,154,294
Example 3: Amortization table
On January 1, 2023, Sheep Company received a 6% Date P Int. Inc. Amortization PV or CA
interest-bearing promissory note with face amount of 1/1/23 5,154,294
P6,000,000 and maturity date of December 31, 2025 12/31/23 2M 412,336 -1,587,664 3,566,530
from selling its land with carrying amount of 12/31/24 2M 285,322 -1,714,678 1,851,852
P4,500,000. Interest is payable every December 31 of 12/31/25 2M 148,148 1,851,852 -
each year, starting 2023. Loans Receivable
Under each of the following independent scenarios,
- Trade receivables of financial institutions
determine the annual interest income from 2023 to
- Check the credibility of the background of the
2025:
possible debtor
Scenario 1: Principal is payable on maturity date (term
- Origination cost: cost incurred by the bank from
notes receivable)
background checking
Interest Income
- Origination fees: siningil na fees to borrower,
2023 6,000,000 360,000
2024 6,000,000 360,000 received by the bank from borrower; service fee
2025 6,000,000 360,000 Initial Measurement
Face Amount xx
Add: Direct Origination Cost xx
Scenario 2: Principal is payable in equal annual Less: Origination Fees (xx)
installment every Dec. 31, starting 2023 (serial) Initial Measurement xx
Interest Income
2023 6,000,000 360,000 *Indirect origination costs- Expensed outright
2024 4,000,000 240,000 D.O.C > O.F : I.M > F.A : S.R. > E.I.R
2025 2,000,000 120,000 D.O.C < O.F. : I.M < F.A : S.R. < E.I.R
Example 4 D.O.C Direct Origination Cost
At the beginning of 2023, Mistletoe Company sold its O.F. Origination Fee
land with carrying amount of P5,000,000 for a total I.M Initial Measurement
amount of P7,000,000. Cash of P1,000,000 was received F.A Face Amount
as a down payment while a three-year noninterest- S.R Stated Rate
bearing note was received for the remaining portion of E.I.R Effective Interest Rate
the selling price. Market rates averaged 8% on that date. Example 5:
Under each of the following independent scenarios, At the beginning of 2023, Banco Bank granted a 7%
determine the interest income for 2023 and carrying interest-bearing, P3,000,000 face amount loan to a
amount of the note receivable as of Dec. 31, 2023: borrower. The loan has a maturity of Dec. 31, 2026. The
Scenario 1: Principal is payable on maturity date interest is payable every Dec. 31 of each year. In
PV of Single payment connection with the loan, the bank incurred total
Initial Meas. 6,000,000 0.793832 4,762,992 origination costs of P150, 637, including P50,000
Amortization table indirect origination costs. In addition, the bank also
Date Int. Inc. Amortization PV or CA charged the borrower origination fee of P200,000. After
1/1/23 4,762,992 considering the relevant amounts, the loan has an
12/31/23 381,039 381,039 5,144,031 effective interest rate of 8%.
12/31/24 411,523 411,522 5,555,553 Determine the interest income for the years 2023 and
12/31/24 444,447 444,4447 6,000,000 2024 and carrying amount of the loan receivable as of
*No payment column because it is equal to 0 Dec. 31, 2023 and 2024.
Scenario 2: Principal is payable in equal annual Face Amount 3,000,000
installments every Dec.31, starting 2023 Add: Direct Origination Cost 100,637
PV of Ordinary Annuity Less: Origination Fees -200,000
5
 Initial Measurement 2,900,637
Amortization table
Date P Int. Inc. Amortization PV or CA
1/1/23 2,900,637
12/31/23 210k 232,051 22,051 2,922,688
12/31/24 210k 233,815 23,815 2,946,503
12/31/25 210k 235,720 25,720 2,972,223
12/31/26 210k 237,777 27,777 3,000,000

Receivable Financing
- cash is king
- Receivable as Security or Collateral: Pledging
and Assignment
- Selling of Receivables: Factoring and
Discounting
- Pledging: General A/R balance that becomes
the collateral; no specific
- Assignment: Specific receivables
- Factoring: bibilhin receivables and sila na
magcocollect
- Discounting: maturity value will be discounted;
advance interest
Assignment - no gain or loss to be recognize
Face amount of A/R xx
Less: Haircut – compliment of the face amt. (xx)
Service Charge (xx)
Other charges (xx)
Proceeds xx

Factoring
Face amount of AR xx
Less: Factors Holdback(hindi binigay in (xx)
cash)
Finance Charge (xx)
Commission (xx)
Proceeds xx
Discounting
Total Interest until Maturity
Maturity Value = Principal + Interest
Discount Amount = MV x Discount Rate x Time
Net proceeds = MV- Discount Amount