Receivables – Additional Concepts

PROBLEM 1: TRUE OR FALSE

1 TRUE 6 TRUE
2 TRUE 7 FALSE
3 TRUE 8 TRUE
4 FALSE 9 TRUE
5 FALSE 10 TRUE
PROBLEM 2: MULTIPLE CHOICE – THEORY
1 B 6 A 11 A
2 B 7 C 12 A
3 B 8 C 13 B
4 D 9 B 14 C
5 C 10 D 15 A
PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL
1 D 6 C 11 C
2 C 7 A 12 A
3 B 8 D
4 A 9 C
5 D 10 C
PROBLEM 5: FOR CLASSROOM DISCUSSION
1. Solution:
Initial measurement:
Face amount 5,000,000
Direct loan origination costs 261,986
Origination fees (5M x 2%) (100,000)
Carrying amount - 1/1/x1 5,161,986
Subsequent measurement:
Future cash flows x PV factor @ x% = Present value of note
First trial (using 9%):
➢ Principal of (5,000,000 x PV of 1 @ 9%, n=4) + Interest of
(500,000 x PV of ordinary annuity @ 9%, n=4) = 5,161,986
➢ (5,000,000 x 0.70842521105) + (500,000 x 3.23971987722) =
5,161,986
➢ (3,542,126 + 1,619,860) = 5,161,986 is equal to 5,161,986
➢ The effective interest rate is 9%.
 Date Collections Interest income Amortization Present value
1/1/x1 5,161,986
12/31/x1 500,000 464,579 35,421 5,126,565
12/31/x2 500,000 461,391 38,609 5,087,956
12/31/x3 500,000 457,916 42,084 5,045,872
12/31/x4 500,000 454,128 45,872 5,000,000

2. Solution:
Initial measurement: 2M x PV of 1 @ 10%, n=4 = 1,366,027
Jan. 1, Loan receivable 2,000,000
20x1
Unrealized loss (“Day 1” difference) 633,973
Cash 2,000,000
Unearned interest 633,973
3. Solutions:
July 1, 20x1
July 1, Loan receivable 2,000,000
20x1 Cash 2,000,000
July 1, Impairment loss* 20,000
20x1 Loss allowance 20,000

December 31, 20x1

Dec. 31, Impairment loss 71,000
20x1 Loss allowance (91K – 20K) 71,000

Lifetime expected credit losses = (3.0% + 10%) x 700,000 = 91,000

Dec. 31, Interest receivable 100,000
20x1 Interest income (2M x 10% x 6/12)** 100,000

December 31, 20x2

Dec. 31, Loss allowance (91K – 5K) 86,000
20x2 Impairment gain 86,000

Dec. 31, Interest receivable 100,000

20x2 Interest income (2M x 10% x 6/12) 100,000

4. Solution:
PV of future cash flows (1M x PV ord. ann. @10%, n=3) 2,486,852
Carrying amount (3M principal + .4M int. receivable) (3,400,000)
Impairment loss (913,148)
 Direct Allowance
Dec. 31, 20x1 Dec. 31, 20x1

Impairment loss 913,148 Impairment loss 913,148

Interest receivable 400,000 Interest receivable 400,000
Loan receivable 513,148 Loss allowance 513,148

Date Collections Interest income Amortization Present value

Dec. 31, 20x1 2,486,852
Dec. 31, 20x2 1,000,000 248,685 751,315 1,735,537
Dec. 31, 20x3 1,000,000 173,554 826,446 909,091
Dec. 31, 20x4 1,000,000 90,909 909,091 -

5. Solution:
Nov. Cash 28,000
14,
Liability on repurchase agreement 28,000
20x1

6. Answer: ₱200,000
7. Solution:
Cash 723,000
Discount on loan payable 27,000
Loans Payable 750,000
8. Solutions:
➢ Journal entries
Notification basis Non-notification basis
1. To record the assignment
Accts. receivable – assigned 900K Accts. receivable – assigned 900K
Accounts receivable 900K Accounts receivable 900K
2. To record the receipt of loan
Cash 723K Cash 723K
Discount on L/P (900M x 3%) 27K Discount on L/P (900M x 3%) 27K
Loan payable 750K Loan payable 750K
3. To record the collections
Cash 350K
No entry yet Sales returns 560
Accts. rec’ble – assigned 350,560
4. To record the write-off
Allowance for bad debts 530 Allowance for bad debts 530
Accts. receivable – assigned 530 Accts. receivable – assigned 530
5. To record the remittance of collections to Sunday, plus interest
 Loan payable 350K
Not applicable (see #’s 6 & 7 below) Interest expense (a) 7.5K
Cash 357.5K
6. Sunday Financing Corp. notifies Morning Co. of the collections
Loan payable 350K
Sales returns 560
Accts. rec’ble – assigned 350,560
7. Morning Co. pays the interest
Interest expense (a) 7.5K
Cash 7.5K

➢ Equity in assigned receivables

A/R – assigned Loan payable
beg. 900,000 750,000 beg.
350,560 collection payment 350,000
530 write-off
548,910 end. end. 400,000

9. Solutions:
Requirement (a):
Mug Co.’s books:
Cash (squeeze) 368,000
Due from Factor (2% × ₱400,000) 8,000
Loss on Sale of Receivables (6% × ₱400,000) 24,000
Accounts Receivable 400,000

Coffee Co.’s books:

Accounts Receivable 400,000
Due to Mug 8,000
Financing Revenue 24,000
Cash 368,000

Requirement (b):
Mug Co.’s books:
Cash 368,000
Due from Factor 8,000
Service charge (6% × ₱400,000) 24,000
Loss on recourse obligation 7,000
Accounts Receivable 400,000
Recourse Liability 7,000
10. Solution:
Maturity value = Principal + Interest for the full term of the note
Maturity value = 1,000,000 + (1,000,000 x 12% x 6/12)
Maturity value = 1,060,000

Discount period = unexpired term (or full term – expired term)

Discount period = 6 months – 4 months from July 1 to Nov. 1
Discount period = 2 months

Discount = Maturity value x Discount rate x Discount period

Discount = 1,060,000 x 16% x 2/12
Discount = 28,267

Net proceeds = Maturity value - Discount

Net proceeds = 1,060,000 – 28,267
Net proceeds = 1,031,733

Interest income = accrued interest as of date of discounting

Interest income = 1,000,000 x 12% x 4/12
Interest income = 40,000

Requirement (a): Without recourse basis

Nov. Cash (equal to net proceeds) 1,031,733
1, Loss on discounting (squeeze) 8,267
20x1
Note receivable 1,000,000
Interest income 40,000

Requirement (b): With recourse basis – Conditional sale

Nov. Cash (equal to net proceeds) 1,031,733
1, Loss on discounting (squeeze) 8,267
20x1
Note receivable discounted 1,000,000
Interest income 40,000

Requirement (c): With recourse basis – Secured borrowing

Nov. Cash (equal to net proceeds) 1,031,733
1, Loss on discounting (squeeze) 8,267
20x1
Liability on note discounted 1,000,000
Interest income 40,000
 Inventories

PROBLEM 1: TRUE OR FALSE

1 TRUE 6 FALSE
2 FALSE 7 FALSE
3 FALSE 8 FALSE
4 FALSE 9 TRUE
5 TRUE 10 TRUE
PROBLEM 2: MULTIPLE CHOICE – THEORY
1 D 6 A 11 D 16 A
2 D 7 C 12 D 17 A
3 B 8 A 13 A 18 C
4 A 9 D 14 A 19 C
5 C 10 D 15 C 20 D
PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL
1 B 6 C 11 C 16 C
2 C 7 A 12 A 17 D
3 D 8 C 13 C 18 B
4 D 9 D 14 A 19 B
5 C 10 A 15 C 20 A
PROBLEM 5: CLASSROOM ACTIVITIES
ACTIVITY 1:
Solutions:
(a) The sale terms are FOB SHIPPING POINT and Freight
COLLECT. (see ‘COD’ Cash On Delivery on Bill of Lading)
(b) Journal entry:
(i) Perpetual inventory system:
JOURNAL
DATE ACCOUNTS Ref. Debit Credit
9/27/X1(a 8,689.29(
) Inventory b)
Input VAT 910.71
Accounts payable 8,500.00
Cash 1,100.00
to record the purchase of inventory
(a) The date of the Bill of Lading, i.e., the date Wictory Liner
receives the goods from XYZ, Inc.
(b) Purchase price net of VAT ₱7,589.29 + Freight (₱900.00 bill of
lading + ₱200.00 porter fee) = ₱8,689.29 cost of purchase

(ii) Periodic inventory system:

JOURNAL
DATE ACCOUNTS Ref. Debit Credit
7,589.29
9/27/X1 Purchases (c)
1,100.00
Freight-in (d)
Input VAT 910.71
Accounts payable 8,500.00
Cash 1,100.00
to record the purchase of inventory

(c) Purchase price net of VAT

(d) ₱900.00 bill of lading + ₱200.00 porter fee = ₱1,100

ACTIVITY 2:
Solutions:
Specific Identification:
Ending inventory ₱11.75
Cost of goods sold ₱7.00 – the cost of item “broken”

FIFO:
Ending inventory ₱13.00
Cost of goods sold ₱5.75 – the cost of item “happy”

Weighted Average Cost:

Ending inventory (₱5.75 + ₱6.00 + ₱7.00) - ₱6.25 = ₱12.50
Cost of goods sold (₱5.75 + ₱6.00 + ₱7.00) ÷ 3 = ₱6.25
 Inventory Estimation
PROBLEM 1: TRUE OR FALSE
1 FALSE
2 FALSE
3 TRUE
4 FALSE
5 TRUE
PROBLEM 2: MULTIPLE CHOICE – THEORY
1 D
2 C
3 C
4 A
5 C
PROBLEM 3: MULTIPLE CHOICE – COMPUTATIONAL
1 D 6 B
2 D 7 D
3 D 8 C
4 A 9 A
5 A 10 A
PROBLEM 5: FOR CLASSROOM DISCUSSION
1. Solutions:
GPR based on sales GPR based on cost
Net sales 600,000
Less: COGS 400,000 (200K ÷ 600K) (200K ÷ 400K)
Gross profit 200,000 33.33% 50%
2. Solution: (40% ÷ 60%) = 66.67%
3. Solution: (50% mark-up based on cost ÷ (100% cost + 50%
mark-up) = 33 1/3%
4. Solution: (100% ÷ 142.86%) = 70%
5. Solution:
Accounts payable
30,000 beg.
Payments 480,000 510,000 Net purchases (squeeze)
end. 60,000
 Inventory
beg. 80,000
Net purchases 510,000 427,500 COGS (585K - 15K) x 75%
Freight-in 5,000
167,500 end.
(28,000) goods in-transit
(32,000) consigned goods
(2,500) salvage value
105,000 Inventory loss

6. Solution:
Inventory
beg. 80,000
Gross purchases 517,000 3,000 Purchase returns
Freight-in 5,000 4,000 Purchase discounts
COGS
427,500
(585K - 15K) x 100%/133 1/3%
167,500 end.
(33,500) Undamaged (20% x 167.5K)
Salvage value
(25,125)
(50% x 167.5K x 30%)
108,875 Inventory loss

7. Solutions:
Cost Retail
Inventory, beg. 300,000 375,000
Net purchases (a) 1,056,000 1,495,000
Departmental Transfers-In 2,000 3,000
Net mark-ups (20,000 – 2,000) 18,000
Net mark-downs (6,000 – 1,000) (5,000)
Abnormal spoilage (8,000) (11,000)
TGAS 1,350,000 1,875,000
Net sales (b) (1,375,000)
EI @ retail 500,000

(a) @ cost: 1,180,000 + 30,000 - 150,000 - 4,000 = 1,056,000;

@ retail: 1,500,000 – 5,000 = 1,495,000

(b)
 Normal spoilage 400
Sales 1,428,000
Sales returns (56,000)
Employee discounts 2,600
Net sales 1,375,000

Cost ratios:
Cost ratio Total goods avail. for sale at cost
=
(Average cost) Total goods avail. for sale at sales price
Average cost ratio = (1,350,000 ÷ 1,875,000) = 72.00%

TGAS at cost less beg. inventory at cost

Cost ratio
= TGAS at retail less beg. inventory at
(FIFO)
retail

FIFO cost ratio = [(1,350,000 – 300,000) ÷ (1,875,000 – 375,000)] =

70.00%

Average FIFO
Cost ratios 72.00% 70.00%
Multiply by: EI @ retail 500,000 500,000
Ending inventory @ cost 360,000 350,000

Average FIFO
TGAS @ cost 1,350,000 1,350,000
Ending inventory @ cost (360,000) (350,000)
Cost of goods sold 990,000 1,000,000