BANGAYAN, MELODY D. Dr. Lyssander Rodan C.

Dela Cruz
ACCTG 024- ACTCY31S1 December 9, 2020

DISCUSSION #2
Receivable Inventory

Let us have a discussion on the following:

1. When is a notes receivable reclassified as an accounts receivable?

 When notes receivable is dishonored by the maker, or if the notes receivable is

considered overdue notes.

2. What is the different of a trade discount / volume discount / quantity discount from
cash discount? Give the accounting treatment of them.

 Trade discount is offered on the list price or the catalogue price that the buyer
sees at the time of purchase. The list price gets reduced by a certain percentage
depending on the quantity purchased. Trade discounts are adjusted with the sales
prices and therefore, are not shown separately in any books of accounts of the
company.

 Volume Discount is an economic incentive to encourage individuals or

businesses to purchase goods in multiple units or in large quantities. A volume
discount is different from a quantity discount, although both are fairly similar.

 Quantity discounts don’t necessarily include purchases of a large number of

units of a good. For example, at the retail level, a “Buy One Get One Free” deal
offered to consumers is a quantity discount.

 Cash Discount is offered to the buyer on the invoice or billed price of the goods
and services. Cash discounts, are made later than the time of sales done,
therefore, is shown as an expense in the Profit and Loss statement of the
company.
3. How do we measure at initial recognition an interest-bearing note and a non-interest-
bearing note?

 Interest bearing notes have a stated interest rate. Other terms for stated interest
rate include nominal rate, coupon rate, and face rate. Interest Bearing Note can
be Realistic and Unrealistic Interest

 Realistic Interest: Initially measured at fair value, which is equal to face

amount.

 Unrealistic Interest: Initially measured at present value using the

imputed or market rate of interest of the same note.

 Noninterest-bearing notes do not have a stated interest rate because they

include the interest element as part of the face amount.

 Non-interest-Bearing Note: Initially measured at present value.

4. What is the difference between percentages of sale as against percentage of

receivable in the determination of bad debt expense?

 The Percentage-of-sales approach (income statement approach) which

estimates bad debts expense, focuses on the income statement and the
relationship of uncollectible accounts to sales. While the percentage of
receivables approach (balance sheet approach) focuses on the balance sheet
and the relationship of the allowance for uncollectible accounts to accounts
receivable. It does not directly estimate the bad debts expense but estimates the
closing balance of the allowance for bad debts instead.

5. Differentiate the treatment of sales on return under PAS 18 and PFRS 15

 PAS 18 If the entity retains significant risk of ownership, the transaction is not a
sale and revenue is not recognized. However, revenue can be recognized at the
time of sale provided the seller can reliably estimate future returns and recognize
an allowance for sales returns based on previous experience and other relevant
factors.

 PFRS 15 recognizing revenue only to the extent that it is highly probable that a
significant reversal in the amount of cumulative revenue is recognized will not
occur when the uncertainty associated with the right of return is subsequently
resolved.
6. What is the difference between a stated and an effective interest rate?

 Stated interest is the specified rate on your savings account or loan. Effective
interest is the true rate you earn or pay. The effective interest rate reflects the effect
of compounding frequency which increases the rate you earn or pay, whereas the
stated annual rate does not.

7. Differentiate perpetual from periodic inventory system

 A perpetual inventory system automatically updates and records the inventory

account every time a sale, or purchase of inventory, occurs. You can consider this
“recording as you go.” The recognition of each sale or purchase happens
immediately upon sale or purchase.

 A periodic inventory system updates and records the inventory account at

certain, scheduled times at the end of an operating cycle. The update and
recognition could occur at the end of the month, quarter, and year. There is a gap
between the sale or purchase of inventory and when the inventory activity is
recognized.

8. How do we treat change in inventory method?

 A change in inventory method is regarded as a change in accounting policy.

Hence, any changes should be applied retrospectively. However, due to the
nature of the effect of the error of inventories transaction which produced a
counter-balanced effect, the effect maybe computed as:
Ending Inventory (Prior Year, using old cost method) Php xxxx
Ending Inventory (prior year using new method) xxxx
Overstated / Understated ending inventory Php xxxx
If the ending inventory of previous year was overstated, the net income and the
retained earnings last year was likewise overstated. Thus, the adjusting entry
would be:
Retained Earnings Php xxxxx
Merchandise Inventory Php xxxxxx
On the date of change, the effect would be an overstatement of the beginning
inventory and net income of this year is understated but the ending balance of the
retained earnings would be correct.
 If the ending inventory of previous year was understated, the net income and the
retained earnings last year was likewise understated. Thus, the adjusting entry
would be:
Merchandise Inventory Php xxxxxx
Retained Earnings Php xxxxx
On the date of change, the effect would be an understatement of the beginning
inventory and net income of this year is overstated but the ending balance of the
retained earnings would be correct

9. What is a purchase commitment? When do we recognize gain and loss on purchase

commitment?

 Purchase commitments are commitments by a business to purchase goods

or services at some future date at a fixed price.

 When there is a reasonable certainty that inventories purchased under

purchase commitment become impaired, a loss on purchase commitment
should be recognized in the period such impairment has been determined and
any recovery may be recognized as gain but such gain to be recognized is
limited only to the loss previously recognized.

10. In inventory estimation, what is the difference between gross profit based on sale
from gross profit based on cost.

 The gross profit method is based on the average gross profit rate which can
be used in the estimate of the entity cost of goods sold as well as the ending
inventory for financial reporting purposes.

 The retail inventory method is based on the assumption that such is used in
the retail industry for measuring inventories of large numbers of rapidly changing
items with similar margins for which it is impracticable to use other costing
methods. Since the inventory are recorded at retail price, the cost of inventory
is determined by reducing the sales value of the inventory by the appropriate
percentage of gross margin. The percentage to be use takes into consideration
inventory that had been marked down belong to its original selling price. Here,
the commonly used ratio is not the gross profit ratio but instead the cost ratio.