Chapter 6

Accounts Receivable
Receivable are financial assets that represent a
contractual right to receive cash or another financial
asset from another entity.
Accounts Receivable- is open accounts or those not
supported by promissory notes.
Notes Receivable- is those supported by formal promises
to pay in the form of notes.
Trade receivables- refer to claims arising from sale of
merchandise or services in the ordinary course of
business. Trade receivables which are expected to be
realized in cash within the normal operating cycle or one
year are classified as current asset. It includes accounts
receivable and notes receivable.
Nontrade Receivable- claims arising from sources other
than the sale of merchandise or services in the ordinary
course of business. If collectible beyond one year,
nontrade receivables are classified as noncurrent assets.
Example of Nontrade Receivables
1. Advances to or receivable from shareholders,
directors, officers or employees.
2. Advances to affiliates are usually treated as long-
term investments.
3. Advances to supplier for the acquisition of
merchandise
4. Subscription receivable
5. Creditors accounts may have debit balances as a
result of overpayment or return and allowances.
If the debit balances are not material, an offset
may be made against the creditors accounts with
the credit balances and only the net accounts
payable may be presented.
6. Special deposits on contract bids normally are
classified as other noncurrent assets. However,
the deposits that are collectible currently should
be classified as current asset.
7. Accrued income such as dividends receivable,
accrued rent income, accrued royalties income
and accrued interest on bond investment.
8. Claims receivable such as claims against common
carriers for losses or damages, claim for rebates
and tax refunds, claims from insurance
companies.
Initial measurement of receivables
PFRS 9, paragraph 5.1.1, provides that a financial asset
shall be recognized initially at fair value plus transaction
costs that are directly attributable to the acquisition.
For short-term receivable, the fair value is equal to the
face value or original invoice amount.
For long-term receivable that are interest-bearing, the
fair value is equal to the face value. And for long-term
receivable that are noninterest-bearing the fair value is
equal to the present value.
Terms related to freight charge
FOB destination- the ownership of goods purchased is
vested in the buyer upon receipt thereof. The seller shall
be responsible for the freight charge up to the point of
destination.
FOB Shipping point the ownership of the goods
purchased is vested in the buyer upon shipment thereof.
The buyer pays for the transportation charge.
Freight collect means that freight charge on the
goods shipped is not yet paid. The freight charge is
actually paid by the buyer.
Freight prepaid means that freight charge on the
goods shipped is already paid by the seller.
Methods of recording credit sales
1. Gross method the accounts receivable and
sales are recorded at gross amount of the
invoice.
2. Net method the accounts receivable and sales
are recorded at net amount of the invoice.
Accounting for bad debts
Two methods are followed in accounting for this bad
debt loss, namely:
1. Allowance method - requires recognition of a
bad debt loss if the accounts are doubtful of
collection.
2. Direct write off method requires recognition of
a bad debt loss only when the accounts proved to
be worthless or uncollectible.
3. Computing allowances for doubtful account
End Beg.
Worthless Bad expenses
Recovery

Bad expenses can be compute based on percentage of
sale.
End can be compute based on percentage of account
receivable or aging.
To get net realizable value of accounts receivable:
Account receivable (end)
Less: Allow. For freight charge
Allow. For sales return
Allow. For sales discount
Allow. For doubtful accounts
Net realizable value
Theory of Accounts
1. Trade receivables are classified as current assets if
they are reasonably expected to be collected.
a. Within one year
b. Within the normal operating cycle
c. Within one year or within the operating cycle,
whichever is shorter.
d. Within one year or within the operating cycle,
whichever is longer.
2. In the case of long-term installments receivable (real
estate installment sales) where a major portion of the
receivables will be collected beyond the normal
operating cycle.
a. The entire receivable are shown as current
without disclosure of the amount not currently
due.
b. The entire receivables are shown as noncurrent.
c. Only the portion currently due is shown as
current and the balance as noncurrent.
d. The entire receivables are shown as current with
disclosure of the amount not currently due.
3. When an entity uses the allowance method for
recognizing uncollectible accounts, the entry to
record the write off of a specific uncollectible
account.
a. Affects neither net income nor working capital
b. Affects neither net income nor accounts
receivable
c. Decrease both net income and accounts
receivable
d. Decrease both net income and working capital
4. When the allowance method of recognizing bad debt
expense is used, the allowance for doubtful accounts
would decrease when.
a. Specific account receivable is collected
b. Account previously written off is collected
c. Account previously written off becomes
collectible
d. Specific uncollectible account is written off
5. The estimate of uncollectible accounts receivable
based on a percentage of sales.
a. Emphasizes measurement of the net realizable
value of accounts receivable
b. Emphasizes measurement of bad debt expense.
c. Emphasizes measurement of total assets.
d. Is only acceptable for tax purposes.

Problems

1. All of Camia Companys sales are on a credit basis.
The following information is available for the current
year:

Allowance for doubtful accounts Jan. 1 180,000
Sales 9,500,000
Sales returns and allowances 800,000
Sales discounts 200,000
Accounts written off as uncollectible 200,000

Camia provides for doubtful accounts expense at the
rate of 3% of net sales. What is the allowance for
doubtful accounts at year-end?
a. 435,000
b. 265,000
c. 235,000
d. 241,000

2. Milktown Company began operations on January 1,
2013. Milktown has found that its estimated bad
debt expense has been consistently higher than
actual bad debts. Management proposes lowering
the percentage from 3% of credit sales to 2%. Credit
sales for 2013 totaled P5,000,000 and accounts
written off as uncollectible during 2013 totaled
P550,000. What is the bad debt expense for 2013?
a. 150,000
b. 100,000
c. 550,000
d. 240,000

3. The following data were taken from the records of
Roxy Company for the year ended December 31,
2013:

Sales on account 3,600,000
Notes received to settle accounts 400,000
Provision for doubtful accounts 90,000
Accounts receivable determined
to be worthless 25,000
Purchases on account 3,900,000
Payment to creditors 3,200,000
Discounts allowed by creditors 260,000
Merchandise returned by customer 15,000
Collections received to settle accounts 2,450,000
Notes given to creditors in
settlement of accounts 250,000
Merchandise returned to suppliers 70,000
Payments on notes payable 100,000
Discounts taken by customers 40,000
Collections received in
settlement of notes 180,000

What is the net realizable value of accounts
receivable on December 31, 2013?
a. 605,000
b. 890,000
c. 825,000
d. 670,000

4. On December 31, 2013, the accounts receivable
control account of Honduras Company had a balance
of P8,200,000. An analysis of the accounts receivable
showed the following:

Accounts known to be worthless 100,000
Advance payments to creditors
on purchase orders 400,000
Advances to affiliated companies 1,000,000
Customers accounts reporting credit
balances arising from sales returns (600,000)
Interest receivable on bonds 400,000
Trade accounts receivable unassigned 2,000,000
Subscription receivable due in 30days 2,200,000
Trade accounts receivable assigned
(Finance Companys equity
in assigned accounts is P500,000) 1,500,000
Trade installments receivable due
1-18 months, Including unearned
finance charge of P50,000 850,000
Trade accounts receivable from
officers, due currently 150,000
Trade accounts on which postdated
checks are held (no entries were
made on receipt of checks) 200,000
Total 8,200,000

What is the correct balance of trade accounts
receivable on December 31, 2013?
a. 4,650,000
b. 4,700,000
c. 4,150,000
d. 4,050,000

5. ABC Company uses the estimate of sales method of
accounting for uncollectible accounts. ABC estimates
that 3% of all credit sales will be uncollectible. On
January 1, 2013, the Allowance for Doubtful Accounts
had a credit balance of P2,400. During 2013, ABC
wrote-off accounts receivable totaling P1,800 and
made credit sales of P100,000. After the adjusting
entry, the December 31, 2013, balance in the
Uncollectible Accounts Expense would be
a. 1,200
b. 3,000
c. 3,600
d. 7,200































(a) Journalize the entries to record the following:
(1) Record the adjusting entry at December 31, the
end of the fiscal year, to provide for doubtful
accounts. The accounts receivable account has a
balance of P800,000, and the contra asset
account before adjustment has a debit balance
of P600. Analysis of the receivables indicates
doubtful accounts of P20,000.
(2) In March of the following fiscal year, the P550
owed by Flake Co. on account is written off as
uncollectible.
(3) Eight months later, P200 of the Flake Co. account
is reinstated and payment of that amount is
received.
(4) In October, P400 is received on the P600 owed
by Doe Co. and the remainder is written off as
uncollectible.
(b) Based on the data in (a) (1) above, what is the net
realizable value of the accounts receivable as
reported on the balance sheet as of December 31?
(c) Assuming that the business had been following the
direct write-off procedure in accounting for
uncollectible receivables, journalize the entries to
record the following:
(1) Recorded the write-off of account of Flake Co.
[(a) (2) above].
(2) Reinstated account of Flake Co. for P200 and
recorded payment of that amount received [(a)
(3) above].
(3) Recorded the receipt of P400 from Doe Co. in (a)
(4) above and wrote off the remainder owed as
uncollectible.