UNIT B

RECEIVABL
ES
OUTLINE

UNIT B - RECEIVABLES
1. Accounts receivable
2. Estimation of doubtful accounts
3. Notes receivable
4. Loans receivable
5. Receivable financing – pledge,
assignment and factoring
6. Receivable financing –
discounting of notes receivable
APPLICA
No specific standard for Receivables.
BLE Applicable standards are as follows:
ACCOUNT
ING • PFRS 9 - Financial instruments
STANDAR • PFRS 15 – Revenue from Contract
with Customers
DS
DEFINITION OF TERMS

• RECEIVABLE is a financial asset that represents a contractual right

to receive cash or another financial asset from another entity.

• It represents the amount collectible from customers and others,

most frequently arising from sale of merchandise, claims for
money lent, or the performance of services.
DEFINITION OF TERMS

• Under PFRS 15, par. 108, a receivable is an entity’s right to

consideration that is UNCONDITIONAL.

• A right to consideration is unconditional if only the passage of

time is required before payment of the consideration that is due.
 Accounts
Receivable/Customers’
accounts/trade debt
TRADE

As to Notes receivable
Source
NON
TRADE

CLASSIFICATION
OF RECEIVABLES Trade receivables

CURRENT
As to SFP/BS
Nontrade receivables
Classification
NON
CURRENT
CLASSIFICATION AS TO
SOURCE
• Trade Receivables – claims arising from sale
of merchandise or services in the ordinary
course of business operation.

a. Accounts Receivable – open account;

not supported by a promissory note.

b. Notes Receivable – is a formal claim

against another that is evidenced by a
written promise called a promissory
note or a written order to pay at a
later time called “time draft.”
CLASSIFICATION AS TO SOURCE
• Negotiable promissory note is an unconditional written agreement to
pay a certain sum of money on a specific or determinable date to
order of the payee or to bearer.

Important Note!
ONLY negotiable PM is included as part of NR. Dishonored NR do not qualify as
NR in the SFP as well as overdue notes. They are classified as AR together with
accrued interest.
CLASSIFICATIO
N AS TO
SOURCE

• Non-trade receivables –
claims that arise from
sources other than from the
sale of goods or services in
the normal course of
business.
CLASSIFICATION AS TO SFP
1. Trade receivables – generally classified as current and are expected to be
realized in cash within the normal operating cycle or one year, whichever is
longer.

2. Nontrade receivables – classified as current only if they are reasonably

expected to be realized in cash within 12 months after the reporting date,
the length of the operating cycle notwithstanding.

if collectible beyond one year, nontrade receivables are classified as

noncurrent assets.
PRESENTATION
Current trade receivables and nontrade receivables are presented in one line item
called Trade and Other Receivables.

Details are disclosed in the notes to financial statements. Example:

Accounts receivable P5,000,000

Allowance for doubtful accounts ( 200,000) Important note:
Notes receivable 1,000,000
Customers’ credit balances may
Accrued interest on note receivable 150,000
arise due to overpayment or
Advances to officers and employees 100,000 returns.
Dividend receivable 250,000
Total trade and other receivables P6,300,000 These are presented as Current
Liabilities
INITIAL RECOGNITION OR MEASUREMENT

Receivables are recognized simultaneously with the

recognition of revenue under PFRS 15.

The entity shall recognize revenue to depict the transfer of

promised goods/services to customers in an amount that
reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services (PFRS 15.2).
INITIAL MEASUREMENT

•PFRS 9 FINANCIAL INSTRUMENTS

• Financial assets (ex: Receivables) are initially measured at Fair Value

+ Transaction Cost that are directly attributable to the acquisition

• Fair Value = transaction price – the fair value of the consideration

given

• Receivables shall be measured initially at face amount or original

invoice amount
SUBSEQUENT MEASUREMENT
• Receivables shall be subsequently measured at amortized cost (PFRS 9, Par.
5.2.1)

• Amortized cost = net realizable value

• Net realizable value is the amount of cash expected to be collected or the

estimated recoverable amount.

• The following are deducted from receivables to determine net realizable value:
 Allowance for freight charges
 Allowance for sales returns
 Allowance for sales discounts
Allowance for doubtful accounts
TERMS RELATED TO FREIGHT CHARGES
• FOB destination – ownership of Seller is responsible for the freight charge
goods is vested in the buyer upon up to point of destination
receipt.

• FOB shipping point – ownership of Buyer is responsible for the freight charge
goods is vested in the buyer upon from shipping point up to point of
shipment. destination

• Freight collect – freight charges on

the goods shipped is not yet paid

• Freight prepaid – freight charges

on the goods shipped is already
paid by the seller
Who is responsible for freight charges in the
sale of merchandise with the following
shipping terms?

1. FOB destination, freight prepaid Seller

2. FOB Shipping point, freight prepaid Buyer

3. FOB destination, freight collect Seller

4. FOB shipping point, freight collect Buyer

ACCOUNTING FOR FREIGHT CHARGES
Problem 1:
Affectionate Company sold merchandise on account for P500,000. The terms are
3/10, n/30. The related freight charge amounted to P10,000. the account was
collected within the discount period.

Required: Prepare journal entries to record the transactions under the following
freight terms:

1. FOB destination, freight collect

2. FOB destination, freight prepaid
3. FOB shipping point, freight collect
4. FOB shipping point, freight prepaid
ALLOWANCE FOR CASH DISCOUNTS

Cash discount Sales discount on the part of the seller

a reduction from invoice
by reason of prompt
payment Purchase discount on the part of the buyer

Examples:

2% discount is granted if paid within 10 days from invoice

• 5/10, n/30 date. No discount after 10 days.
• 2/15, 5/10, n30
METHODS OF RECORDING CREDIT
SALES

NET METHOD
GROSS METHOD Accounts receivable and
Accounts receivable and sales are recorded at net
sales are recorded at gross amount of the invoice
amount of the invoice (invoice price – cash discount
whether taken or not)
 PROBLEM 2 – the following transactions pertain to ABC Company:

TRANSACTIONS GROSS METHOD NET METHOD

• Sold merchandise to XYZ Accounts receivable 500,000 Accounts receivable 490,000
Corp., P500,000 on terms Sales 500,000 Sales 490,000
2/10, n/15.

• Collection is made within the Cash (500,000 x 98%) 490,000 Cash 490,000
discount period. Sales discount 10,000 Accounts receivable 490,000
Accounts receivable 500,000

• Collection is made beyond Cash 500,000 Cash 500,000

the discount period. Accounts receivable 500,000 Accounts receivable 490,000
Sales discount forfeited 10,000

Note: at the end of the accounting period, an adjustment is

prepared to take up allowance for sales discounts on open accounts.
The estimate shall be based on past experience
ACCOUNTING FOR BAD DEBTS
Methods of Accounting for Bad Debts:
Journal entry to record doubtful accounts:
1. Allowance Method – bad debts are Doubtful accounts xx
recognized if the accounts are doubtful of Allowance for doubtful accounts xx
collection if doubtful accounts are found to be worthless
• Required by GAAP since it conforms with the Allowance for doubtful accounts xx
Matching Principle. Accounts receivable xx

2. Direct writeoff method – recognition of bad Journal entry to record doubtful accounts:
debts only when the accounts prove to be No entry
worthless or uncollectible if doubtful accounts are found to be worthless
• Method allowed by the BIR. This violates the Doubtful accounts xx
Matching Principle and is not permitted under Accounts receivable xx
IFRS
PRO FORMA ENTRIES

ALLOWANCE METHOD DIRECT WRITEOFF METHOD

Journal entry to record doubtful accounts:
Doubtful accounts xx No entry
Allowance for doubtful accounts xx

if doubtful accounts are found to be worthless:

Allowance for doubtful accounts xx Doubtful accounts xx
Accounts receivable xx Accounts receivable xx

Recovery of written off accounts

Accounts receivable xx Accounts receivable xx
Allowance for doubtful accounts xx Doubtful accounts xx

Cash xx Cash xx
Accounts receivable xx Accounts receivable xx
ESTIMATING DOUBTFUL ACCOUNTS
Methods of estimating doubtful accounts:
1. Aging the Accounts Receivable – involves an analysis • More accurate and specific computation
where the accounts are classified into not due and of the allowance for d/a
past due • Has the advantage of presenting fairly
the accounts receivable
• Objection: violates the matching process

2. Percent of Accounts Receivable or SFP Approach – a • Simple to apply

certain rate is multiplied by the open accounts at the • Has the advantage of presenting accounts
end of the period in order to get the required receivable at est. realizable value
allowance balance • Objection: violates the matching process

3. Percent of Sales or Income Statement Approach – the • There is proper matching of cost against
amount of sales for the year is multiplied by a certain revenue
rate to get the doubtful accounts expense. • Favors the income statement
• Objection: may prove excessive or
inadequate
ACCOUNT
ING FOR
NOTES
RECEIVAB
LE
NOTES RECEIVABLE
• Notes Receivable – are claims supported by formal promises to pay usually in the
form of promissory notes.

• A Promissory Note is a written contract in which one person, known as the maker,
promises to pay another person, known as the payee, a definite sum of money.

• Standing alone, the term Note receivable represents only claims arising from the sale
of merchandise or service in the ordinary course of business.

• Dishonored notes receivable should be removed from notes receivable and

transferred to accounts receivable including its face amount, interest and other
charges.
INITIAL MEASUREMENT
IN GENERAL SHORT TERM NOTES LONG-TERM NOTES LONG-TERM NOTES
(Conceptual) (Interest Bearing) (Non Interest Bearing)
NR should be At FACE VALUE At FACE VALUE upon At PRESENT VALLUE
measured initially at issuance
PRESENT VALUE (PV*)

*Sum of all future Why not PV? Interest bearing note Actually, all notes
cashflows discounted It is immaterial to since the interest rate implicitly contains
using the effective compute the PV is explicitly stated in interest.
interest rate (prevailing the contract
market rate) Called noninterest
bearing since the interest
is not stated in the
contract but is already
included in the face
amount rather than
stated separately
SUBSEQUENT MEASUREMENT
SHORT TERM NOTES LONG TERM NR LONG TERM NR
(Interest bearing) (Noninterest bearing)
At face value At AMORTIZED COST using At AMORTIZED COST using
the effective interest the effective interest
method method
Amortized cost = initial value Amortized cost = Present value
• Minus principal payment plus amortization of the
• Plus or minus cumulative discount
amortization of any
difference between the Or
initial carrying amount and
the principal maturity Face amount minus the
amount unamortized unearned interest
• Minus reduction for income
impairment or
uncollectibility
Problem 1 (Interest bearing note, Valix)

Feasible Company sold to another entity a tract of land costing P5,000,000 for P7,000,000
on January 1, 2021.

The buyer paid P1,000,000 down and signed a two-year promissory note for the remainder
of the purchase price plus 12% interest compounded annually. The note matures on
January 1, 2023.

Required: Journal entries for 2021 to 2023.

 2021
Jan 1 Cash P1,000,000
Note receivable 6,000,000
Land P5,000,000
Gain on sale of land 2,000,000

Dec 31 Accrued interest receivable 720,000

Interest income 720,000
2022
Dec 31 Accrued interest receivable 806,400
Interest income 806,400
(6,000,000 + 720,000) x 12%
2023
Jan 1 Cash 7,526,400
Note receivable 6,000,000
Accrued interest receivable 1,526,400
Problem 2 (noninterest bearing note,
Valix)
Bygone Company manufactures and sells computers. On January 1, 2021, the entity sold a
computer costing P400,000 for P600,000.

The buyer signed a noninterest bearing note for P600,000 payable in three equal
installments every December 31.

The cash selling price of the computer is P540,000.

Required: Journal entries for 2021 to 2024.

 2021
Jan 1 Notes receivable 600,000
Sales P540,000
Unearned interest income 60,000

Dec 31 Cash 200,000

Note Receivable 200,000

Unearned interest income 30,000

Interest income 30,000
(a) (b) (c*)
Note Receivable Fraction Interest income
2021 600,000 6/12 30,000
2022 400,000 4/12 20,000
2023 200,000 2/12 10,000
1,200,000
 2022
Dec 31 Cash 200,000
Note Receivable 200,000

Unearned interest income 20,000

Interest income 20,000
2023
Dec 31 Cash 200,000
Note Receivable 200,000

Unearned interest income 10,000

Interest income 10,000
TIME VALUE OF MONEY
CONCEPT

Question:
If somebody were to give you
P1 million, who could either
give the money to you now or
a year after, would you rather
have it now or later?
TIME VALUE OF MONEY CONCEPT

The idea that money available at the present time is worth more than
the same amount in the future due to its potential earning capacilty

The time value of money says that a peso received TODAY is worth
MORE than a peso received TOMORROW.

This is true because a peso received today can be INVESTED to earn

interest.
PRESENT VALUE VS. FUTURE VALUE

Present Value Future Value

Current worth of a The value of an asset or

future sum of money or cash at a specified date
stream of cash flows in the future that is
given a specified rate of equivalent in value to a
return specified sum today
 PRESENT VALUE VS. FUTURE VALUE
Present Value Future Value

At the beginning of
the year, P20,000
was invested at a
deposit account
earning 8% P20,000 P21,600
interest annually.
How much will the
deposit be after a
year?
P20,000
Interest (P20,000 x 8%) 1,600
P21,600
 PRESENT VALUE VS. FUTURE VALUE
Present Value Future Value

At the end of the

year, a deposit
account earning Difference between PV and FV
8% interest
annually P3,200
P40,000 Interest 43,200
amounted to
43,200. How much
was deposited at
the beginning of
the year? P40,000
Interest (P40,000 x 8%) 3,200
P43,200
PRESENT VALUE VS. FUTURE VALUE
Therefore, the difference between the two values depend on two factors:

• The greater the rate, the larger

Interest Rate the interest, and as a result, the
future value

• The longer the money is left in

Time the account, the more interest it
earns
Problem 3 (noninterest bearing note,
installment)
Innovative Company manufactures and sells electrical generators. On January 1, 2021, the
entity sold an electrical generator costing P700,000 for P1,000,000.

The buyer paid P100,000 down and signed a noninterest bearing note for P900,000
payable in three equal installments every December 31.

The prevailing interest rate for a note of this type is 12%. The present value of an ordinary
annuity of 1 for three periods is 2.4018

Required: Journal entries for 2021 to 2024.

2021
Jan 1 Cash 100,000
Notes receivable 900,000
Sales 820,540
Unearned interest income 179,460

Computations:
Face value of note 900,000
Present value (300,000 x 2,4018) 720,540
Unearned interest income 179,460

Present value 720,540

cash received 100,000 Note: Uncearned
interest income is
Selling price 820,540
also referred to as
Cost 700,000 Discount on notes
Gross income from sale 120,540 receivable
 2021
Dec. 31 Cash 300,000
Notes receivable 300,000

Unearned interest income 86,465

Interest income 86,465

Computation of interest income using effective interest method:

Annual Interest Principal Present Value
Date Collection Income (c = a-b) (d = d in the
(a) (b = d in the preceding
preceding period – c)
period x
interest rate)
Jan 1, 2021 720,540
Dec 31, 2021 300,000 86,465* 213,535 507,005
Dec 31, 2022 300,000 60,841 239,159 267,846
Dec 31 2023 300,000 32,154 267,846 -
 2023
Dec. 31 Cash 300,000
Notes receivable 300,000

Unearned interest income 32,154

Interest income 32,154
Problem 4 (noninterest bearing note,
lumpsum)
On January 1, 2021, Enigma Company sold an equipment costing P500,000 which had a
carrying amount of P350,000, receiving a P125,000 down payment and, as additional
consideration, a P400,000 noninterest bearing note due on January 1, 2024.

There was no established exchange price for the equipment, and the note had no ready
market.

The prevailing rate of interest for a note of this type on January 21, 2021 was 12%. The
present value of 1 at 12% for three periods is 0.7118.

Required: Journal entries for 2021 to 2024.

 2021
Jan 1 Cash 125,000
Notes receivable 400,000
Accumulated depreciation 150,000
Equipment 500,000
Gain on sale of equipment 59,720
Unearned interest income 115,280

Computations:
Face value of note 400,000 Present value of note 284,720
Present value (400,000 x 0.7118) 284,720 cash received 125,000
Unearned interest income 115,280 Selling price 409,720
Carrying value of equipment 350,000
Gain on sale of equipment 59,720

Note: the present value of 1 at 12% for three periods was used since payment is made
only once upon maturity.
 Amortization of Unearned interest income using effective interest

Interest Income Unearned Present Value

Date (a = d in the Interest (d = d in the
preceding period (b = b in the preceding period
x effective preceding +a)
interest rate) period – a)
Jan 1, 2021 (beg) 115,280 284,720
Dec 31, 2021 34,166 81,114 318,886
Dec 31, 2022 38,266 42,848 357,152
Dec 31 2023 42,848 - 400,000

Notes:
1. Present value = PV in preceding period plus 3. Unearned interest = balance in preceding
interest income this period. period – interest income this period. For dec
31, 2021: 115,280 – 34,166)
2. Interest income = PV last period x effective
interest rate (for 12/31/21, P284,720 x 12%)
 2021
Dec 31 Unearned interest income 34,166
interest income 34,166

2022
Dec 31 Unearned interest income 38,266
Interest income 38,266

2023
Dec 31 Unearned interest income 42,848
Interest income 42,848

Cash 400,000
Notes receivable 400,000