Chapter 3 Receivables

RECEIVABLES
- Any legitimate claim from others for money, goods or services
- Claims that are expected to be settled by the receipt of cash
a) Amounts collectible from customers
b) Accrued revenue
c) Other items such as loans and advances to offices etc.
d) Legitimate claims against suppliers and insurance companies
e) Claims against arising from nonrecurring transactions

CLASSSIFICATION
As to source:
Trade Receivables - from sale of goods/services in the normal course of business
Non-trade Receivables from sources other than from sale of goods/services in the normal course of
business
Examples:
a) Loans to officers and employees
b) Advances to affiliate
c) Accrued interest and dividends
d) Deposits to guarantee performance/payment or to cover possible damages/losses
e) Subscriptions for the entitys securities
f) Deposit with creditors, claims for losses and damages
g) Claims for tax refunds/rebates
h) Claims against common carriers for damaged/lost goods
i) Claims against creditors for returned, damaged or lost goods
As to classification:
Current Receivables expected to be collected within a year or during the current operating cycle*
Non-current Receivables non-trade receivables that are not reasonably expected to be realized in
cash within 12 mos from eop

*Normal Operating Cycle
- time between the acquisition of assets for processing and their realization in cash or cash equivalents- -
- period required for cash to be converted onto inventories through purchase and production,
inventories into receivables trough sale and receivables back into cash/cash equivalents through
collection

RECOGNITION
Trade discounts
- Volume/quantity discounts
- Means of converting a catalog list price to the prices actually charged to the buyer
- Always deducted from the list price prior to recording the AR arising from a credit transaction

Cash discounts
- Sales discounts from the sellers point of view
- Reductions from the sales price as an inducement for prompt payment of an account
- Reduce gross sales revenue
a) Gross method - records discount when taken by customers
Record revenue at gross amount of sales
When customer takes the discount record cash discount
- Lacks conceptual validity
- Simplest and most widely used method because the cash discount is usually immaterial and
record keeping is less complicated
b) Net method
Record revenue at gross amount of sales less cash discount
When customer forfeits discount, record discounts taken
Report discounts forfeited as other revenue
- Theoretically preferred over the gross method
- Initially recognizes AR at its amortized cost
- Requires an adjusting entry at yearend for SD forfeited
c) Allowance Method
Record revenue at gross amount and available CD record as allowance for SD (credit)
When customer takes discount allowance for SD is debited
If accounts collected beyond discount period Allowance for SD is debited and SD
forfeited account is credited
INITIAL MEASUREMENT
Short term receivables
Fair Value = Face value / Original invoice amount

Interest bearing Long term receivables
Fair Value = Face value

Non-interest bearing Long term receivables
Fair Value = Present Value of all Future Cash Flows Discounted using the Prevailing
Market Value of Interest for Similar transaction

SUBSEQUENT RECOGNITION
NRV = Gross AR Estimated ADA
- Amount of cash expected to be collected/estimated recoverable amount
a) Allowance for Freight Charge
1. FOB destination
- Buyers ownership upon receipt
- Seller responsible of freight charge
2. FOB shipping
- Buyers ownership upon shipment
- Buyer responsible of freight
3. Freight collect
- Paid by buyer
4. Freight prepaid
- Paid by seller
b) Allowance for Sales Return
Sales return XX
Allowance for sales return XX
c) Allowance for Sales Discount
Same as Cash Discount
d) Allowance for Doubtful Accounts
Account becomes uncollectible Bad debt loss
1. Allowance Method
Recognize bad debt loss if the accounts are doubtful of collection
DA XX
ADA XX
Worthless/ Uncollectibe
ADA XX
AR XX
- Based on matching principle
- Estimated bad debts are matched against revenue
- Must be followed if amount are material
2. Direct Write-off method
Recognize bad debt loss only when proved to be worthless/uncollectible
Bad debts XX
AR XX
No entry if only doubtful of collection
- Used by small business
- BIR recognize for income tax purposes
- Violates the matching principle because bad debt loss often recognized in later accounting
period

Methods of Estimating DA
FOB destination, freight collect
Freight out XX
Allowance for freight charge XX
1. Aging the AR/ SFP approach- analysis of the accounts where they are classified into
not due/past due
2. Percent of AR/ SFP approach certain rate is multiplied by the open accounts at the
end of the period
3. Percent of Sales amount of sales for the year is multiplied by a certain rate to get DA
expense