UNIVERSITY OF CALOOCAN CITY

SOUTH CAMPUS

Conceptual Framework and Accounting Standards April, 2021

Module 04: Trade Accounts Receivable Instructor: John Bo S. Cayetano

LEARNING OBJECTIVES:
1. Ending balance of accounts receivable
2. Allowance for bad debt
3. Bad debt expense
4. Net realizable value (NRV) of accounts receivable

REVIEW NOTES:

Trade Accounts Receivable – refers to claims from sales of merchandise or service in the ordinary course of
business. Trade receivable are expected to be realized in cash within the normal operating cycle or one year
whichever is longer, are classified as current asset.

Initial and Subsequent Measurement – Since trade receivable is commonly collectible within one year, it is
commonly recorded at face amount at initial recognition.

Accounts receivable should subsequently be measured at year-end at net realizable value (NRV). The initial
amount recognized for accounts receivable shall be reduced by adjustments (allowances) which in the ordinary
course of business will reduce the amount recoverable from the customer. The NRV is computed as follows:

Ending balance of accounts receivable P XX

Less:
Allowance for doubtful accounts P XX
Allowance for sales return XX
Allowance for sales discount XX
Allowance for freight charge XX ( XX)
NRV of accounts receivable P XX

ENDING BALANCE OF ACCOUNTS RECEIVABLE:

Unadjusted AR to adjusted AR – the following are the possible adjustment to the accounts receivable at year-
end:

a. Customer’s NSF check – when the company received the check, it is recognized as cash and
deducted to accounts receivable. This should be reverted back to accounts receivable upon knowing
the check is NSF.

b. Customer’s credit balance – the normal balance of customer’s account is debit. Abnormal balance
(credit balance) may arise when there is an overpayment from the customer. This should be
recognized as liability from the customer and should not be deducted from other customer’s debit
balances.

c. Goods in transit – the sales of goods sold in transit should be included in the accounts receivable of
the company when there is a transfer to title from the company to the buyer.

Shipping Terms:
Shipping terms Transfer of title
• FOB shipping point
• FOB seller
With transfer of title
• FOB Cost Insurance Freight (CIF)
• FOB Free Along Side
• FOB destination
• FOB buyer Without transfer of title
• FOB ex-ship

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 Goods in Transit Adjustment Guide:

Already included in AR Not yet included in AR

With transfer of title No adjustment Add
W/out transfer of title Minus No adjustment

Beginning to Ending – From the beginning balance apply the transactions affecting the accounts receivable:

Beginning accounts receivable P XX

Credit sales XX
Recovery of accounts receivable XX
Collection of accounts receivable ( XX)
Collection of recovery ( XX)
Write offs ( XX)
Sales discount taken ( XX)
Sales return ( XX)
Ending balance of accounts receivable P XX

GROSS METHOD AND NET METHOD

Gross method – The accounts receivable and sales are recorded at gross amount of invoice. This is the common
and widely used method. If the sales discount was taken, sales discount is recognized. Sales discount account
is a contra account of sales.

Net method – The accounts receivable and sales are recorded at net amount of discount, meaning the invoice
price minus the sales discount. If the sales discount was not taken, sales discount forfeited is recognized. Sales
discount forfeited account is included as other income of the company.

ALLOWANCE FOR BAD DEBT AND BAD DEBT EXPENSE:

Accounting for Bad Debts – Bad debts expense are cost of the company from the non-collection of accounts
receivable. There are two methods that are being followed in accounting for bad debts:

1. Allowance method – Requires the recognition of bad debt expense if the accounts are doubtful. GAAP
requires the use of allowance method because it conforms with matching principle.

Journal Entry
Account is Dr. Bad Debt Expense XX
doubtful Cr. Allowance for Bad Debt XX
Account is
Dr. Allowance for Bad Debt XX
proved
Cr. Accounts Receivable XX
uncollectible
Dr. Accounts Receivable XX
Accounts Cr. Allowance for Bad Debt XX
written off is
recovered Dr. Cash XX
Cr. Accounts Receivable XX

Transaction Analysis of Accounts

NRV of AR – Decrease
Account is doubtful
Net Income – Decrease
NRV – No effect
Account is proved uncollectible
Net Income – No effect
NRV of AR – Decrease
Accounts written off is recovered
Net Income – No effect

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 2. Direct write off method – Requires the recognition of bad debt expense if the accounts are proved
uncollectible. Direct write off method is not permitted under PFRS.

Journal Entry
Account is
No Entry
doubtful
Account is
Dr. Bad Debt Expense XX
proved
Cr. Accounts Receivable XX
uncollectible
Dr. Accounts Receivable XX
Accounts Cr. BD Expense / Other Income XX
written off is
recovered Dr. Cash XX
Cr. Accounts Receivable XX

Transaction Analysis of Accounts

NRV of AR – No effect
Account is doubtful
Net Income – No effect
NRV – Decrease
Account is proved uncollectible
Net Income – Decrease
NRV of AR – No effect
Accounts written off is recovered
Net Income – Increase

METHODS OF ESTIMATING BAD DEBTS:

There are three methods of computing bad debt expense and allowance for bad debt, namely:

(1) Percentage of ending accounts receivable

(2) Percentage of sales
(3) Aging of accounts receivable

Which should be computed first?

1st 2nd
Percentage of AR Allowance for BD BD expense
Percentage of Sales BD expense Allowance for BD
Aging of AR Allowance for BD BD expense

1. Percentage of ending accounts receivable – A certain rate is multiplied by the open account at the
end of the period in order to get the required ending balance of allowance for bad debt.

Accounts receivable – end P XX

Percentage of uncollectibility x%
Allowance for bad debt – end P XX

The rate used is usually determined from the past experience of the entity

Allowance for BD – beg

= Percentage of uncollectibility
AR – beg

This procedure has the advantage of presenting accounts receivable at NRV. However, this procedure
violates the principle of matching because the expense is based on the asset rather than the revenue.
Bad debt expense can be computed by squeezing the amount as follows:

Allowance for bad debt – beg P XX

Recovery of write offs XX
Bad debt expense (squeeze) XX
Write offs ( XX)
Allowance for bad debt – end P XX

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 2. Percentage of sales – The amount of sales is multiplied by certain rate to get the doubtful accounts
expense. The rate may be applied to credit sales or total sales.

Sales P XX
Percentage of uncollectibility x%
Bad debt expense P XX

Theoretically, the percentage is computed by dividing the write off of the previous period net of
recovery by the sales of the previous period.

Write off – Recovery

= Percentage of uncollectibility
Sales

3. Aging of accounts receivable – Accounts are grouped by age. Each group is multiplied by their
respective percentage of uncollectibility to arrive at the required allowance per group.

Group 1 Group 2 Group 3 Total

AR – end P XX P XX P XX P XX
Rate of uncoll. x% x% x% x%
Allowance – end P XX P XX P XX P XX

This method is the more accurate and scientific computation of the allowance for doubtful accounts.
This method has the advantage of presenting fairly the accounts receivable in the statement of
financial position at net realizable value. The objective is that aging method is that it violates the
matching process.

Bad debt expense can be computed by squeezing the amount as follows:

Allowance for bad debt – beg P XX

Recovery of write offs XX
Bad debt expense (squeeze) XX
Write offs ( XX)
Allowance for bad debt – end P XX

NRV OF ACCOUNTS RECEIVABLE:

Accounts receivable should subsequently be measured at year-end at net realizable value (NRV). The initial
amount recognized for accounts receivable shall be reduced by adjustments (allowances) which in the ordinary
course of business will reduce the amount recoverable from the customer. The NRV is computed as follows:

Ending balance of accounts receivable P XX

Less:
Allowance for doubtful accounts P XX
Allowance for sales return XX
Allowance for sales discount XX
Allowance for freight charge XX ( XX)
NRV of accounts receivable P XX

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DISCUSSION:
1. The books of Hotsilog Service Inc. disclosed a cash balance of P48,757 on June 30. The bank statement
as of June 30 showed a balance of P54,780. Additional information that might be useful in reconciling the
two balances follows: Which of the following is a trade receivable?
a. Claims against shipping company for damaged goods or lost goods.
b. Advances to officers and employees.
c. Receivable arising from legal service rendered by a law firm.
d. Accrued interest on notes receivable.

2. Which of the following items is not a trade receivable?

a. Customer’s accounts on which post-dated checks are held.
b. Claims from employees representing selling price of goods sold under normal condition.
c. Claims from employees representing cash advances.
d. None of the above.

3. The credit balance in customer’s accounts should be

a. Netted against the debit balances in other customer’s accounts.
b. Presented separately as currently liability.
c. Reported as a loss contingency.
d. Reported as a valuation account to receivables.

4. Presented below are unaudited balances of selected accounts of Drain Company as of December 31, 2020:

Debit Credit
Cash 500,000
Accounts receivable 1,300,000
Allowance for uncollectible accounts 8,000

Goods amounting to P50,000 were invoiced for the account of a customer recorded in January 2, 2021 with
terms of net 60 days, FOB Shipping point. The goods were shipped to customer on December 30, 2020. The
bank returned on December 29, 2020, a customer’s check for P5,000 marked “No sufficient funds” but no
entry was made.

What is the correct balance of accounts receivable account at December 31, 2020?
a. 1,355,000 c. 1,300,000
b. 1,347,000 d. 1,350,000

Numbers 5-6
Starboy Company has the following data relating to accounts receivable for the year ended December 31,
2020:

Accounts receivable, January 1, 2020 480,000

Allowance for doubtful accounts, 1/1/20 19,200
Sales during the year, all on account, terms: 2/10, 1/15, n/30 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.

Starboy’s year-end balance of allowance for doubtful accounts was estimated to be 5% of the outstanding
accounts receivable as at December 31, 2020.

5. What was the balance of accounts receivable as at December 31, 2020?

a. 265,600 c. 288,000
b. 270,400 d. 307,200

6. How much was Starboy’s doubtful accounts expense for the year ended December 31, 2020?
a. 8,000 c. 7,360
b. 7,120 d. 2,320

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7. Estimation of uncollectible accounts receivable based on a percentage of sales
a. Emphasizes measurement of 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

8. Which of the following methods of determining annual bad debt expense best achieves the matching
concept?
a. Percentage of sales
b. Percentage of ending accounts receivable
c. Percentage of average accounts receivable
d. Direct write off

9. On December 31, 2019, the balance of accounts receivable of Jalena Company was P6,000,000 and the
January 1, 2019 balance of allowance for doubtful accounts was P800,000. The following data were
gathered:

Credit Sales Write off Recoveries

2016 9,000,000 400,000 30,000
2017 13,000,000 600,000 70,000
2018 15,000,000 700,000 120,000
2019 20,000,000 650,000 150,000

Doubtful accounts are provided for a 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 allowance for doubtful accounts on December 31, 2019?
a. 1,100,000 c. 1,300,000
b. 800,000 d. 1,250,000

10. JSC reported accounts receivable P8,000,000 on December 31, 2020 and allowance for doubtful accounts
P1,000,000 on January 1, 2020. During the year, accounts P400,000 were written off and recoveries written
off totaled P100,000.

Category Amount Uncollectible

Under 30 days 5,000,000 10%
31 – 180 days 1,500,000 20%
181 – 360 days 1,000,000 50%
More than one year 500,000 100%

What amount should be reported as doubtful accounts expense for the current year?
a. 1,800,000 c. 1,000,000
b. 1,100,000 d. 1,400,000

11. A method of estimating doubtful accounts that emphasizes asset valuation rather than income measurement
is the allowance method based on
a. Aging of accounts receivable
b. Direct write off
c. Gross sales
d. Credit sales less sales returns and allowance

12. On December 31, 2022, Sohee company estimated the allowance for doubtful accounts using the year-end
aging of accounts receivable. The following data for are available:

Allowance for doubtful accounts, 1/1/22 250,000

Provision for uncollectible accounts recorded during 2022 (2% on credit sales of P30,000,000) 600,000
Uncollectible accounts written off 150,000
Recovery of accounts previously written off 80,000
Estimated uncollectible accounts per aging, 12/31/22 900,000

What is the year-end adjustment to doubtful accounts expense?

a. 120,000 c. 900,000
b. 720,000 d. 600,000

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13. Accounts receivable are normally reported at the
A. Present value of future cash receipts
B. Current value plus accrued interest
C. Expected amount to be received
D. Current value less expected collection cost
Numbers 14-15
Packers Company sold goods to wholesalers on terms 2/15, net 30. The entity had no cash sales but 50% of
the customers took advantage of the discount. The entity used the gross method of recording sales and
accounts receivable. An analysis of the trade accounts receivable at year-end revealed the following:

Age Amount Collectible

0 – 15 days 10,000,000 100%
16 – 30 days 7,000,000 90%
31 – 60days 2,000,000 80%
Over 60 days 1,000,000 50%
20,000,000
14. What amount should be reported as allowance for sale discount at year-end?
a. 100,000 c. 300,000
b. 200,000 d. 0
15. What is the net realizable value of accounts receivable?
a. 20,000,000 c. 18,300,000
b. 18,400,000 d. 18,200,000
16. An entity uses the allowance method for recognizing doubtful accounts. The entry to record the write off of
specific uncollectible account.
a. Affects neither net income nor working capital
b. Affects neither net income nor account receivable
c. Decreases both net income and working capital
d. Decreases both net income and accounts receivable

17. Which of the following is not permitted for material amount of uncollectible accounts receivable?
a. Percentage of accounts receivable using allowance method
b. Percentage of sales using allowance method
c. Direct write-off method
d. All of the choices are acceptable
18. When the direct write off method is used, the entry to write off a specific customer account would
A. Increase both accounts receivable and net income
B. Decrease both accounts receivable and net income
C. Increase net income
D. Have no effect on net income
19. When examining the accounts of Medved Company, you ascertain that balances relating to both receivables
and payables are included in a single controlling account called receivables control that has a debit balance
of P4,850,000. An analysis of the composition of this account revealed the following:

Debit Credit
Account receivable customers P7,800,000
Accounts receivable – officers 500,000
Debit balances – creditors 300,000
Postdated checks from customers 400,000
Subscriptions receivable 800,000
Accounts payable for merchandise P4,500,000
Credit balances in customers’ accounts 200,000
Cash received in advance from customers for goods not yet shipped 100,000
Expected bad debts 150,000

After further analysis of the aged accounts receivable, you determined that the allowance for doubtful
accounts should be P200,000.

What is the correct total of current net receivables?

a. 8,950,000 c. 8,600,000
b. 8,800,000 d. 8,850,000
20. The following are normally included in the line item trade and other receivables’, except
a. Advances to officers and employees
b. Advances to subsidiaries and affiliates
c. Receivables from sale of securities or property other than inventory.
d. Dividends and interest receivable.

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