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Receivable Financing
- Generating cash from receivables

Common financing arrangements for receivable are the following:

1. Accounts Receivable
a. Pledging -
 Continue to recognize and report the receivable with appropriate disclosure
b. Assignment –
 Transfer the account receivables to “account receivable – assigned”
 Returns, write-offs and collections with-in discount period are accounted with
the usual way with a corresponding credit to the account “accounts receivable –
assigned”
 The difference between Accounts Receivable – Assigned and Carrying Amount
of Notes Payable is the “Equity on AR - assigned”

Assignment

Transaction Non-notification(silent) Notification

Assignment/Loan AR – assigned xx AR- assigned xx

AR xx AR xx

Cash xx Cash xx
Service Charge xx Service Charge xx
NP – bank xx NP – bank xx
Deduction of AR Sales Return xx Sales Return xx
Sales Discount xx Sales Discount xx
Allowance for BD xx Allowance for BD xx
AR-assigned xx AR-assigned xx
Collection Cash xx NP-bank xx
AR-assigned xx AR-assigned xx
Remittance collection/payment NP- bank xx Interest expense xx
of interest Interest Expense xx Cash xx
Cash xx
Transfer of balance AR xx AR xx
AR-assigned xx AR-assigned xx

c. Factoring - w/o recourse, notification basis

 2. Notes Receivable
a. Discounting
i. Without recourse – credit to Notes Receivable

Cash xx
Loss on Notes Receivable discounting xx
Note Receivable xx
Interest Income xx
ii. With recourse
1. Secured borrowing – credit to Liability for NR-discounted; reported as
current lliability

Cash xx
Interest Expense xx
Liability for NR - Discounted xx
Interest Income xx
2. Conditional Sale – credit to NR – discounted; reported as a deduction
form Notes Receivable with disclosure of contingent liability.

Cash xx
Loss on Notes Receivable discounting xx
Note Receivable discounted xx
Interest Income xx

Loans Receivable
Initial Measurement – Fair Value + Transaction Cost
Subsequent Measurement – Amortized Cost using Effective Interest Method
DOC > OF – used DOC
DOC < OF - used Unearned Interest Income
Effective Interest method
Interest received = Principal x nominal rate
Interest Income = Carrying amount x effective rate
Practice

Davao Bank granted a loan to a borrower on January 1, 2018. The interest on bank loan is 8% payable
annually starting December 31, 2018. The loan matures in three years on December 31, 2020. Data
related to the loan are:

Principal amount 3,000,000

Origination fees charged against the borrower 100,000
Direct Origination Cost incurred 260,300
After considering the origination fees charge to the borrower and the direct origination cost
incurred, the effective rate on the loan is 6%.
Prepare amortization table and journal entries.

Impairment of Loans Receivable

- An entity shall assess at each balance sheet date whether there is any objective evidence that a
financial asset or group of financial asset is impaired.
 - The amount of impairment loss can be measured as the difference between the carrying amount
and the present value of estimated cash flows discounted at the original effective rate.

Inventory – goods purchased and held for resale (PAS 2)

Classification:

1. Merchandise business – Merchandise Inventory

2. Manufacturing business – (Raw Material Inventory, Work in process Inventory, Finished
Goods Inventory, Manufacturing or Factory Supplies Inventory)
3. Service Provider Business – Work in process inventory

Measurement

1. Initial Measurement – at HISTORICAL COST; includes:

a. Purchase cost – includes purchase price, import duties and other non-refundable taxes,
transportation, handling and other cost directly attributable to the acquisition.
*trade discounts, rebates are deducted from cost of sales.
b. Cost of Conversion
c. Other cost incurred in bringing the inventories to its present location and condition.

2. Balance sheet Measurement - LOWER OF COST or NET REALIZABLE VALUE on individual basis.

NRV = Estimated selling price – Estimated Cost of Completion – Estimated Cost to sell

ITEMS to be considered:

1. Merchandise in transit – if FOB Shipping point, include as inventory on the buyer but if the term
is FOB Destination, include as inventory of the seller.
2. Goods on Consignment- include as inventory of the consignor
a. Goods held on consignment – exclude
b. Goods out on consignment – include
3. Sale on approval – should remain as inventory on the seller until the payment is received
4. Installment Sale – include as inventory of buyer
5. Special order – excluded in the inventory of the seller.

Retail Inventory Method

Cost Ratio Computation:

1. Average Method – include all

2. LCM/Conventional/Conservative – include mark-up and mark-up cancellation
3. FIFO Method – exclude beginning inventory

Summary

Accounts Cost Retail

1. Purchase discount/allowance
2. Purchase returns
3. Freight-in
4. Department transfer-in/debit
5. Department transfer-out/credit
-
- -
+
+ +
- -

6. Employee discount +sales

7. Sales Returns -sales
8. Normal shortage, shrinkage, +sales
 spoilage and breakage
9. Abnormal shortage, shrinkage, -GAS -GAS
spoilage and breakage
10. Sales discount/allowance ignore

BIOLOGICAL ASSETS!
Biological Asset (PAS 41)
- Can a fair value be reliably determined for the biological asset?
YES – Fair value less costs of disposal
NO – Cost less Accum. Dep’n and any accumulated impairment loss

Agricultural Produce
- Fair Value less costs of disposal at the point of harvest

* Cost of disposal - the incremental costs directly attributable to the disposal of an asset,
excluding, transport cost, finance costs and income taxes

Bearer Plants – accounted for as Property, Plant and Equipment (PAS 16)

- held for production and supply of agricultural produce

- Expected to produce for more than 1 period
- Remote likelihood of being sold as agricultural produce

Bearer Animals – reported as biological assets

Animals-related recreational Activities – not agricultural activity; PPE

Practice:

Query Company has herd of 10 2-year old animals on January 1, 2018. One animal aged 2.5
years was purchased on July 1, 2018 for P108, and one animal was born on July 1, 2018.
No animal were sold or disposed of during the year. The active market provided the
following fair value less cost to sell:

2 - year old animal on January 1 100

2.5 - year old animal on July 1 108
New born animal on July 1 70
2 – year old animal December 31 105
2.5 - year old animal on December 31 111
Newborn animal on December 31 72
3 – year old animal on December 31 120
0.5 – year old animal on December 31 80
FINANCIAL INTRUMENTS
– is any contract that gives rise to a financial asset of one entity and a financial
liability or an equity instrument of another entity.
 CASH
 RECEIVABLES
 PREPAID EXPENSES
 TREASURY BONDS
 EQUITY INSTRUMENTS
 INVENTORIES
 PPE
 ACCOUNTS PAYABLE
 NOTES PAYABLE
 DEFFERED REVENUE
 ESTIMATED WARRANTY LIABILITY
 INCOME TAX PAYABLE
 REDEEMABLE PREFERENCE SHARE

A Financial Asset is any asset that is:
a. Cash
b. An equity instrument of another entity
c. A contractual right
d. To receive cash or another financial asset
from another entity; or
e. To exchange financial assets or financial
liabilities with another entity under
conditions that are potentially favorable
to the entity
A Financial Liability is any liability that is:
a. A contractual obligation
i. To deliver cash or another
financial asset to another entity
ii. To exchange financial assets or
financial liabilities with another
entity under conditions that are
potentially unfavorable to the
entity.

CLASSIFICATION:
1. Financial Asset @ FV through P/L
2. Financial Asset @ FV through OCI
3. Financial Asset at Amortized Cost

VALUATION
1. Initial Measurement
FAIR VALUE + TRANSACTION COST
*except Financial Asset @ FVPL or Trading Securities; transaction cost are
expense outright.

2. Subsequent Measurement
Investment in quoted equity securities
 Held for trading Fair Value – P/L

 Not held for trading (nontrading Fair Value – OCI

equity securities)

EXAMPLE: (TS/FA@FVTPL)
Maxima Company provided the following with respect to its marketable equity
securities held as “trading”
1. The entity carried the following securities on December 31, 2015:
 COST MARKET
A ordinary – 4,000 shares 330,000 300,000
B ordinary -1,000 shares 200,000 160,000
C preferred – 2,000 shares 300,000 310,000
On June 30, 2016, the securities are quoted as follows:
A Ordinary 80
C Preferred 180

Prepare Jouranl Entries:

Practice: FA@FVOCI
2. The following accounts appeared on the statement of financial position of Cara Company on
January 1, 2016:
Financial Asset – FVOCI 4,000,000
Market Adjustment for unrealized loss (500,000)
Market Value 3,500,000

Other Comprehensive Income

Unrealized loss (500,000)
An analysis of investment portfolio revealed the following on December 31, 2016.
Cost Market
XYZ ordinary share 1,000,000 1,200,000
ABC ordinary share 2,500,000 2,000,000
RST preference share 500,000 200,000
4,000,000 3,400,000

1. Give the entry to recognize the decrease in value on December 31, 2016.
2. Give the entry assuming the ABC ordinary share is sold for P2,100,000 on July 1, 2017.
3. Give the entry on December 31, 2017, assuming the securities have the market value of:
XYZ ordinary share 1,000,000
RST preference 150,000

INVESTMENTS!
Classification:

Investment in Subsidiary  Means that there is a controlling interest when the

Investment in Associate
Other equity securities/unquoted
equity instruments
investor company owns enough of the voting share of an
investee company to determine its operating and
financial policy
 Ownership over 50% of the investee’s outstanding voting
share usually would assure control
 Means that the investor had the ability to affect, to an
important degree, the operating and financial policies of
the investee
 In the absence of evidence to the contrary, 20% or more
of the investee’s voting share held is presumed to
exercise significant influence
 The power to participate in financial and operating policy
decision of investee but not control over those policies.
 Those without controlling interests or significant
influences less than 20% are considered small
investments
  Are usually without readily determinable fair market
value

Three dates to consider:

1. Date of declaration – payment of dividends is approved by BOD; dividends are recognized

on this date.
2. Date of Record – the stock and transfer book of corporation is closed for registration.

Only those shareholders registered as of this date are entitled to

received dividends.

3. Date of payment – this is the date on which the dividends declared are paid.

Classes of Dividends:

a. Cash Dividends Treated as dividend income except if the *equity method is

used.
Cash xx
Dividend income xx
*under equity method, dividend is not an incomedecreases
the investment account

b. Property Dividends Treated as dividend income at fair market value of the

property received.

c. Liquidating Dividends Represents return of capital thus are not income

Cash xx
IES xx
d. Share dividends No amount of income to be recognized. Do not affect the total
cost of investment but reduces the cost of investment per
share.
a. Same class – memo only

b. Different class (OS - PS)

Allocate the original shares and stock dividend
base on Market Value

e. Share dividends in lieu of
cash dividends
Inv. In PS xx
Inv. In OS xx
The dividends in effect are property dividends.
1. Fair value of shares received
2. Cash dividends that would have been received

f. Cash are received in lieu of “as if”: assumed received and subsequently sold
share dividends 1. Allocate the total cost to the stock dividends received
2. Cash – cost(share)=gain/loss on investment
Stock/Share Split

1. Split up Increase in number of shares and decrease the

cost per share
2. Split down Decrease the number of share and increase the
cost per share

Stock Rights/Share Rights

- Preemptive right/right of pre-emption

- 1 share is equal to 1 right that will be received.

Methods of recording:

1. Accounted for separately – reclassify 1. fair value stock right 2. use parity if no fair value is given

2. Accounted for NOT separately

Accounted for Separately Not Accounted for Separately

1. Receipt of stocks Memo entry
Stock Right xx
IES xx
2. Exercise of Stock Right
IES xx IES xx
Cash xx Cash xx
Stock Right xx
3. Sale of SR
Cash xx Cash xx
Stock Right xx IES xx
Gain on Sale of SR xx
4. Expiration of Stock Right Memo only
Loss on Stock Right xx
Stock Right xx

Theoritical or Parity Value of Stock Right

a. When the share is selling right-on = value of 1 right

MV of share right-on
minus subscription price
# of right to purchase 1 share plus 1

b. When the share is selling ex-right = value of 1 right

MV of share ex-right
minus subscription price
# of right to purchase 1 share
INVESTMENT IN ASSOCIATE

ASSOCIATE - An entity, including an unincorporated entity such as a partnership, over which the investor has
significant influence and that, is neither a subsidiary nor an interest in a joint venture.

Initial Measurement – at COST

SUBSEQUENT MEASURMENT – EQUITY METHOD

Subsequent - increased by the net income of the investee and decreased by the net loss and dividend
payments of the investee.
 Investor’s share of the profit or loss of the investee is recognized in the investor’s profit or loss.
 Distribution or dividends received from an investee reduce the carrying amount of the investment.

dr. cr.

Acquisition Cash Dividends

Net Income (share) Net Loss

Excess of Fair Value

Over Cost Excess of Cost over
Carrying Amount

Entries for Subsequent Measurement

Investment in Associate Non-marketable

1. Acquisition 1. Acquisition
Investment in Associate xx IES xx
Cash xx Cash xx
2. Cash dividend
Cash xx Cash xx
Investment in Associate xx Dividend Income xx

3. Net Income of Investee No Entry

Investment in Associate xx
Investment Income xx

4. Net loss of Investee No Entry

Loss on Investment xx
Investment in Associate xx

5. Amortization/Depreciable Asset

 Excess of cost over carrying amount

Investment Income xx
Investment in Associate xx

 Excess of FV over cost

Investment in Associate xx
Investment Income xx