LECTURE NOTES ON TRADE AND OTHER RECEIVABLES

Nature of loans and receivables (L&R)

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are
not quoted in an active market, other than:
(a) those that the entity intends to sell immediately or in the near term, which shall be classified as
held for trading, and those that the entity upon initial recognition designates as at fair value through
profit or loss;
(b) those that the entity upon initial recognition designates as available for sale; or
(c) those for which the holder may not recover substantially all of its initial investment, other than
because of credit deterioration, which shall be classified as available for sale.

Note: This definition was deleted in PFRS 9.

Financial assets at amortized cost (FA@AC)

A financial asset shall be measured at amortized cost if both of the following conditions are met:
(a) The asset is held within a business model whose objective is to hold assets in order to collect
contractual cash flows.
(b) The contractual terms of the financial asset give rise on specified dates to cash flows that are
solely payments of principal and interest on the principal amount outstanding.

Interest is consideration for the time value of money and for the credit risk associated with the principal
amount outstanding during a particular period of time.

Receivables normally qualify as financial assets at amortized cost.

Recognition of loans and receivables

An entity shall recognize a financial asset on its statement of financial position when, and only when,
the entity becomes a party to the contractual provisions of the instrument.

Measurement of loans and receivables

Initial recognition
Receivables are initially recognized at its fair value plus transaction costs that are directly attributable
to the acquisition of the financial asset.

Fair value: the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.

The fair value of a financial instrument at initial recognition is normally the transaction price (ie the fair
value of the consideration given or received. However, if part of the consideration given or received is
for something other than the financial instrument, an entity shall measure the fair value of the financial
instrument. For example, the fair value of a long-term loan or receivable that carries no interest can be
measured as the present value of all future cash receipts discounted using the prevailing market rate(s)
of interest for a similar instrument (similar as to currency, term, type of interest rate and other factors)
with a similar credit rating. Any additional amount lent is an expense or a reduction of income unless
it qualifies for recognition as some other type of asset.

Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal
of a financial asset or financial liability. An incremental cost is one that would not have been incurred if
the entity had not acquired, issued or disposed of the financial instrument.

Subsequent to initial recognition

Amortized cost using effective interest method.

The amortized cost of a financial asset is the amount at which the financial asset is measured at initial
recognition minus principal repayments, plus or minus the cumulative amortization using the effective
interest method of any difference between that initial amount and the maturity amount, and minus any
reduction (directly or through the use of an allowance account) for impairment or uncollectibility.

The effective interest method is a method of calculating the amortized cost of a financial asset and of
allocating the interest income over the relevant period.

The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts
through the expected life of the financial instrument or, when appropriate, a shorter period to the net
carrying amount of the financial asset or financial liability. When calculating the effective interest rate,
an entity shall estimate cash flows considering all contractual terms of the financial instrument (for
example, prepayment, call and similar options) but shall not consider future credit losses. The
calculation includes all fees and points paid or received between parties to the contract that are an
integral part of the effective interest rate (see PAS 18), transaction costs, and all other premiums or
discounts.

Types of loans and receivables

Trade receivables
• Result from the normal operating activities, i.e., credit sales of goods or services to customers.
• May be evidenced by a formal written promise to pay and classified as notes receivable.
• In most cases, they are unsecured, “open” accounts reflecting a short-term extension of credit to a
customer for a period of 30-90 days, with the potential for interest charges if the account is not paid
within such period.

Nontrade receivables
• All other types of receivables.
• Arise from a variety of transactions:
(1) Advances to officers and employees
(2) Advances to subsidiaries and affiliates
(3) Sale of securities or property other than inventory.
(4) Dividends and interest receivable.
(5) Others

Presentation of loans and receivables

Trade
Section: Current assets (CA)
Line item: Trade and other receivables (T&OR)

Non-trade:
• Realizable within 12 months
Section: Current assets (CA)
Line item: Trade and other receivables (T&OR)

• Not realizable within 12 months

Section: Noncurrent assets (NCA)
Line item: If material, Separate item
If not material,
Related to NCI – Noncurrent investment
Others – Other NCA

Accounts Receivable
• Theoretically, all receivables should be valued at an amount representing the present value of the
expected future cash receipts.
• However, given the relatively short-term nature of accounts receivable, they are instead reported
at “net realizable value” (or expected cash value) and no implicit interest element is therefore
recognized.
• Accounts receivable, recorded net of trade discounts, should be further reduced and reported net of
allowances for certain estimations - uncollectible items, cash discounts, and returns and allowances.
• Objective—to record the receivables at the amount of claims from customers actually expected to
be collected in cash.

Accounting for sales revenue

• The amount of sales or revenues is normally the largest item on a company’s income statement and
accounts receivable is typically one of the largest current assets on the statement of financial
position.
• Discounts - decreases in the gross, or list, price of goods sold to customers.
1. Trade discount—an amount deducted from the list price to obtain the “net” sales price actually
charged the customer.
a. A means of varying price, usually relating to purchase volumes.
b. The net price is the amount at which the receivable and revenue should be recorded.
2. Cash (or sales) discount—a price reduction granted to encourage early payment.
a. Known as a purchase discount to the purchaser and a sales discount to the seller.
b. Usually granted for payment within periods of no more than 30 days, and are reflected by
sales clauses such as, “2/10, n/30”, which indicates a 2% discount is available for paying
within 10 days or else the entire amount is due within 30 days.
c. Receivables are generally recorded at their gross amounts, a simple and widely used
method.
d. The net method of accounting for sales discounts records the sales and receivable net of the
discount, and any additional amounts subsequently collected in association with payment
beyond the “discount” period are reflected as financing revenue or other income.

• Sales returns and allowances.

1. When goods are returned or an allowance is necessary for damage or imperfections otherwise
(wrong color, size, etc.).
2. Net sales and accounts receivable are reduced, and inventory may need adjustment in relation
to returns.
3. The charge could be made directly to sales, but using a separate contra account generally
provides more useful information to management.
Accounting for Freight

Who should pay? Who actually paid?

Buyer FOB shipping point Freight collect

Seller FOB destination Freight prepaid

Deduct FOB destination Freight collect

from AR

Add to AR FOB shipping point Freight prepaid

Traditional Methods of Accounting for Bad Debts

Direct write-off method

• Debit bad debt expense or doubtful accounts expense and credit accounts receivable as
uncollectibles are discovered.
• Direct write-off method, however, does not provide for the matching of expenses with current
revenues and does not report receivables at their net realizable value.

Allowance method
• An end-of-period adjustment is made containing a debit to the same account (bad debt expense)
as the direct write-off method, but the amount represents an estimate of future uncollectibles and
is credited to an allowance account (allowance for bad debts or allowance for doubtful accounts).
• Allowance for bad debts is a contra asset account with a credit balance and is offset against accounts
receivable to help achieve net realizable value reporting in the statement of financial position.

Estimating uncollectibles based on percentage of sales

• An assumed percentage is applied to current total or credit sales.
• The assumed percentage is derived from the relationship over previous periods between the
amount of total, or credit, sales and the actual amount of uncollectible accounts losses.
• The existing allowance balance is ignored.

Estimating uncollectibles based on accounts receivable balance

• Emphasizes the relationship between the accounts receivable and allowance for uncollectible
accounts balances.
• To determine the desired value for the allowance account, an assumed percentage is applied to
the balance of accounts receivable or multiple percentages are applied to the accounts receivable
balance as broken into various categories, where such categories are determined by an “aging
of receivables” process: the process of analyzing individual accounts to classify and sum them
according to their length of time past due.
• The periodic adjusting entry is the same in form as that utilized under the percentage of sales
method, though one must be careful to first compare the results of the initial calculations with
any existing balance already in the allowance account: the difference will be the final amount
actually recorded in the journal entry and will ensure that the previously determined “target”
balance for the allowance account is reported in the statement of financial position.
• The aging method is the most satisfactory approach for achieving net realizable value reporting
in the statement of financial position.

Writing off an uncollectible account under the allowance method

• Under the allowance method, bad debt expense is not recorded at the time an account is
discovered to be uncollectible – such recognition has already occurred via the end-of-period
adjustment previously made.
• Credit is to accounts receivable and debit is to the allowance account.
• Because both the asset and the allowance account decrease by the same amount as a result of
a write-off, there is no impact on the reported value of accounts receivable in the statement of
financial position (i.e., no change in net realizable value).
• Occasionally, accounts previously written off may turn out to be collectible; this merely requires
reversing the original write-off entry and recording a normal collection on account.

Corrections to the allowance account

Occasional analytical reviews of the allowance account balance may identify a balance that is excessive
or inadequate, prompting a correcting entry to the bad debts expense and allowance accounts as well
as possible revisions to the estimation rate or method employed.
 PROBLEMS
1. The Skywarp Company has the following items included in its receivables and payables account:
Items Debit Credit
Due from customers P156,000
Payables to creditors for
merchandise P62,000
Note receivable, long-term 80,000
Allowance for bad debts 4,000
Due from employees 2,200
Cash dividend payable 24,000
Special receivable, dishonored
note* 22,000
Accrued wages 2,400
Rent received in advance 1,600
Insurance premiums paid in
advance 1,200
Mortgage payable 40,000
* Collection probable in two years.
Compute the amount to be reported as trade and other receivables.

2. New Corp., which has started operations in the current year, has the following data relating to
accounts receivable for the year ended December 31, 2015:
Cash sales P1,000,000
Credit sales 5,000,000
Collections on credit sales 3,000,000
Sales returns and allowances on
credit sales 100,000
Accounts written off 20,000
Allowance for doubtful accounts, 12/31
(5% of accounts receivable) ?
Allowance for sales discounts, 12/31 10,000
Allowance for sales returns, 12/31 15,000
Allowance for freight, 12/31 3,000
What is the net realizable value of the accounts receivable on December 31?

3. On June 9, Seller Corp. sold merchandise with a list price of P5,000 to Buyer on account. Seller
allowed trade discounts of 30% and 20%. Credit terms were 2/15, n/40 and the sale was made
FOB shipping point. Seller prepaid P200 of delivery costs for Buyer as an accommodation. On June
25, Seller received from Buyer a remittance in full payment amounting to

4. The Pacifier Company uses the net price method of accounting for cash discounts. In one of its
transactions on December 15, Pacifier sold merchandise with a list price of P500,000 to a client who
was given a trade discount of 20% and 15%. Credit terms were 2/10, n/30. The goods were
shipped FOB destination, freight collect. On December 20, the client returned damaged goods
originally billed at P60,000. Total freight charges paid by the buyer amounted to P7,500.
What is the net realizable value of this receivable on December 31?

5. Dancing Shoes sold P21,000 of merchandise during the month of December, which was charged to
a national credit card. On December 15, Dancing bills the independent national credit card company
for these sales and is assessed a 5% service charge. On December 21, a customer returned
merchandise originally sold for P2,000 and Dancing notifies the credit card company of the return.
On December 29, the credit card company remitted amount owed to Dancing.
How much was received by Dancing from the credit card company?

6. Bangui Company provides for doubtful accounts expense at the rate of 3 percent of credit sales.
The following data are available for last year:
Allow. for Doubtful Accounts, Jan. 1 P 54,000
Accounts written off as uncollectible 60,000
Collection of accounts written off 15,000
Credit sales, year-ended December 31 3,000,000
The allowance for doubtful accounts balance at December 31, after adjusting entries, should be

7. On January 1, 2015, the balance of accounts receivable of Burgos Company was P5,000,000 and
the allowance for doubtful accounts on same date was P800,000. The following data were gathered:
Credit sales Writeoffs Recoveries
2012 P10,000,000 P250,000 P20,000
2013 14,000,000 400,000 30,000
2014 16,000,000 650,000 50,000
2015 25,000,000 1,100,000 145,000
 Doubtful accounts are provided for as percentage of credit sales. The accountant calculates the
percentage annually by using the experience of the three years prior to the current year. How much
should be reported as 2015 doubtful accounts expense?

8. John Corp. has the following data relating to accounts receivable for the year ended December 31,
2015:
Accounts receivable, January 1, 2015 P480,000
Allowance for doubtful accounts,
January 1, 2015 19,200
Sales during the year, all on account,
terms 2/10, 1/15, n/60 2,400,000
Cash received from customers during
the year 2,560,000
Accounts written off during the year 17,600
An analysis of cash received from customers during the year revealed that P1,411,200 was received
from customers availing the 10-day discount period, P792,000 from customers availing the 15-day
discount period, P4,800 represented recovery of accounts written-off, and the balance was received
from customers paying beyond the discount period.
The allowance for doubtful accounts is adjusted so that it represents certain percentage of the
outstanding accounts receivable at year end. The required percentage at December 31, 2015 is
125% of the rate used on December 31, 2014.
The doubtful accounts expense for the year ended December 31, 2015 is

9. The accounts receivable subsidiary ledger of Besao Corporation shows the following information:
12/31 Invoice
Account
Customer balance Date Amount
Maybe, Inc. P140,720 12/06 P56,000
11/29 84,720
Perhaps Co. 83,680 09/2 48,000
08/20 35,680
Pwede Corp. 122,400 12/08 80,000
10/25 42,400
Perchance Co. 180,560 11/17 92,560
10/09 88,000
Possibly Co. 126,400 12/12 76,800
12/02 49,600
Luck, Inc. 69,600 09/12 69,600
Total P723,360 P723,360
The estimated bad debt rates below are based on the Corporation’s receivable collection experience.
Age of accounts Rate
0 – 30 days 1%
31 – 60 days 1.5%
61 – 90 days 3%
91 – 120 days 10%
Over 120 days 50%
The Allowance for Doubtful Accounts had a credit balance of P14,000 on December 31, 2015, before
adjustment.
The adjusting journal entry to adjust the allowance for doubtful accounts as of December 31, 2015
will include a debit to doubtful accounts expense of

10. Badoc Corporation's books disclosed the following information for the current year:
Net credit sales P1,500,000
Net cash sales 240,000
Accounts Receivable at beginning of year 200,000
Accounts Receivable at end of year 400,000
Badoc's accounts receivable turnover is