Financial Accounting and Reporting: Financial Assets – Part 1 FAR EASTERN UNIVERSITY

FAR EASTERN UNIVERSITY

Institute of Accounts, Business and Finance
Morayta, Sampaloc, Manila City
TOPICS (FINANCIAL ASSETS) – PART 1
A. CASH AND CASH EQUIVALENTS
B. LOANS AND RECEIVABLE
A. FA: CASH AND CASH EQUIVALENTS
1. Cash – money and other negotiable instrument that is payable in money and acceptable by the bank
for deposit and immediate credit. It includes cash on hand and other items that are unrestricted for
use in the current operations.
2. Cash Equivalents - Cash equivalents are short-term and highly liquid investments that are readily
convertible into cash and so near their maturity that they present insignificant risk of changes in
value because of changes in interest rates. Only highly liquid investments that are acquired three
months before maturity can qualify as cash equivalents.

REVIEW QUESTIONS: THEORETICAL

1. It refers to short-term and highly liquid investments that are readily convertible into cash and so near
their maturity that they present insignificant risk of changes in value because of changes in interest
rates
a. Cash and Cash Equivalents c. Short-term Investments
b. Treasury Bills d. Cash Equivalents
2. The following statements relate to cash. Which statement is true?
a. The term “cash equivalent” refers to demand credit instruments such as money order and bank
drafts.
b. The purpose of establishing a petty cash fund is to keep enough cash on hand to cover all normal
operating expenses for a period of time.
c. Classification of a restricted cash balance as current or noncurrent should parallel the classification of
the related obligation for which the cash was restricted.
d. Compensating balances required by a bank should always be excluded from “cash and cash
equivalent”.
3. On a company’s December 31, 2015 statement of financial position, which of the following items should
be included in the amount reported as cash?
I. A check payable to the company, dated December 2, 2015 recorded and deposited on company’s
account, in payment of a sale of goods which was delivered only to customer January 2016.
II. A check drawn on the company’s account, payable to a vendor, dated and recorded in the company’s
books on December 31, 2015 but not mailed until January 10, 2016.
a. I only b. II only c. Both I and II d. Neither I nor II
4. Cash in foreign currency is valued at
a. Face value
b. Current exchange rate reduced by allowance for expected decline in peso
c. Current exchange rate
d. Estimated realizable value
5. If the deposit is legally restricted as to withdrawal, the compensating balance related to a long-term loan
is shown as
a. Cash c. Long-term investment
b. Other assets d. Current liability
6. The effect of compensating balance is
a. To provide greater security to the borrower.
b. To decrease the yield on the loan to the lender.
c. To increase the yield on the loan to the borrower.
d. To increase the yield on the loan to the lender.
7. Malaking received cash to be held in trust for Maliit under an escrow agreement. Such cash should be
presented in Malaking’s financial statements as
a. Part of cash
b. A liability
c. An asset and a liability
d. An off-balance sheet item but disclosed in the notes
8. Which of the following is not a basic characteristic of a system of cash control?
a. Use of a voucher system
b. Combined responsibility for handling and recording cash
c. Daily deposit of all cash received
d. Internal audits at irregular intervals
9. Who is responsible, at all times, for the amount of the petty cash fund?
a. The pretty custodian. c. The general office manager.
b. The general cashier. d. The petty cash custodian.

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Financial Accounting and Reporting: Financial Assets – Part 1 FAR EASTERN UNIVERSITY

10. The petty cash account is debited

a. Only when the fund is established.
b. When the fund is established and every time it is replenished.
c. When the fund is established and when the size of the fund is increased.
d. When the fund is established and when the size of the fund is decreased.
11. Usually, if the petty cash fund is not reimbursed just prior to year-end and an appropriate adjusting
entry is not made
a. A complete audit is necessary.
b. The petty cash account should be returned to the cashier.
c. Expenses will be overstated and cash will be understated.
d. Expenses will be understated and cash will be overstated.
12. What is the adjusting entry for a customer NSF check?
a. Debit cash and credit accounts receivable
b. Debit service charge and credit cash
c. Debit accounts receivable and credit cash
d. No adjustment in necessary
13. A proof of cash
a. Is a physical count of currencies on hand on reporting period.
b. Is a formal statement showing the total cash receipts during the year.
c. Is a four-column bank reconciliation showing reconciliation of cash balances per book and per bank
at the beginning and end of the current month and reconciliation of cash receipts and cash
disbursements of the bank and depositor during the current month.
d. Is a summary of cash receipts and cash payments.
14. A proof of cash would be useful for
a. Discovering cash receipts that have not been recorded in the journal.
b. Discovering time lag in making deposits.
c. Discovering cash receipts that have been recorded but have not been deposited.
d. Discovering an inadequate separation of incompatible duties of employees.
15. Doggie Co. prepares four-column bank reconciliation. Check no. 8859 was written for P5,670 on the
books, but the check was written and cleared the bank for the correct amount, P6,570. The correct
treatment on the reconciliation would be:
a. On the bank side, deduct P900 from payments and add P900 to ending balance.
b. On the book side, deduct P900 from payments and add P900 to ending balance.
c. On the book side, add P900 from payments and deduct P900 from ending balance.
d. On the bank side, add P900 from receipts and add P900 to ending balance.

REVIEW QUESTIONS: PROBLEMS

1. Jake Company provided the following information with respect to its cash and cash equivalents on
December 31, 2017:
Checking account at Metrobank (₱ 200,000 )
Checking account at BDO 3,500,000
Treasury bonds 1,000,000
Payroll account 500,000
Tax fund 400,000
Foreign bank account - restricted 2,000,000
Postage stamps 50,000
Employee’s postdated check 300,000
IOU from president’s son 750,000
Credit memo from a vendor for a purchase return 80,000
Traveller’s check 300,000
NSF check 150,000
Petty cash (₱20,000 in currency and expense receipts for ₱30,000) 50,000
Money order 180,000
What amount should be reported as unrestricted cash on December 31, 2017?
a. ₱6,900,000 b. ₱5,900,000 c. ₱4,900,000 d. ₱4,600,000

2. Zyrus Company reported the following information as of the end of the current year.
 Investment in equity securities of ₱1,000,000. These securities are share investments in entities
that are traded in the Philippine Stock Exchange. As a result, the shares are very actively traded in
the market.
 Investment securities of ₱2,000,000. These securities are government treasury bonds. The treasury
bonds have a 10-year term and purchased on December 31 at which time they had two months to
go until they mature.
 Cash of ₱3,400,000 in the form of coin, currency, saving account and checking account.
 Investment securities of ₱1,500,000. These securities are commercial papers. The term of the
papers is nine months and they were purchased on December 31 at which time they had three
months to go until they mature.
How much should be reported as cash and cash equivalents at the end of the current year?
a. ₱7,900,000 b. ₱6,900,000 c. ₱6,400,000 d. ₱5,400,000

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Financial Accounting and Reporting: Financial Assets – Part 1 FAR EASTERN UNIVERSITY

3. The December 31, 2017 trial balance of Bebe Company includes the following accounts:
Cash on hand ₱ 400,000
Petty cash fund 40,000
Philippine Bank current account 10,000,000
Manila Bank current account 8,000,000
City Bank current account ( 200,000 )
Asia Bank saving account 500,000
Asia Bank time deposit, 90 days 4,000,000
 Cash on hand includes the following items:
 Customer’s check for ₱70,000 returned by bank December 26, 2017 due to insufficient fund but
subsequently redeposited and cleared by the bank on January 10, 2018
 Customer’s check for ₱30,000 dated January 10, 2018 received December 23, 2017.
 The petty cash fund consisted of the following items as of December 31, 2017:
Currency and coins ₱ 10,000
IOU’s from an officer 4,000
Unreplenished petty cash vouchers 24,000
 Included among the checks drawn by Bebe against the Philippine Bank current account and recorded
on December 31, 2017 are the following:
 Check written and dated December 23, 2017 and delivered to payee on January 3, 2018,
₱50,000
 Check written December 26, 2017, dated January 30, 2018, delivered to payee on December 28,
2017, ₱90,000
 The credit balance in City Bank current account represents checks drawn in excess of the deposit
balance which are still outstanding at December 31, 2017.
 The savings account in Asia Bank has been set aside by the Board of Directors for acquisition of new
equipment. This amount is expected to be disbursed in the next 3 month from the end of the
reporting period.
The cash and cash equivalents on December 31, 2017 should be
a. ₱22,250,000 b. ₱22,310,000 c. ₱22,410,000 d. ₱22,450,000

4. The controller for Munda Company is attempting to determine the amount of cash to be reported on the
December 31, 2017 statement of financial position. The following items are included in the Cash in Bank
items of Munda Company:
BDO special checking account used for payroll payments ₱ 500,000
MBTC checking account (per ledger), checks of ₱80,000 are
outstanding as of December 31, 2017 300,000
DBP, checking account (per bank statement) of ₱50,000 are
outstanding as of December 31, 2017 600,000
EWB, includes a ₱100,000 compensating balance restricted as to withdrawal 1,000,000
BPI special account used as a bond sinking fund 400,000
PNB, includes a ₱200,000 compensating balance 1,000,000
LBP checking accounts
CA-000-111111 ₱ 600,000
CA-000-111112 ( 250,000 ) 350,000
EBC, (bank under liquidation), realizable value was P0.75 of every P1 deposit 200,000
RCBC, current account ( 50,000 )
1-year Treasury note, maturity date 01/31/2018 600,000
1-year Treasury note, maturity date on 01/31/2018 (acquired 11/28/2017) 800,000
90-day, Central Bank Treasury bills 450,000
ABC, US-dollar denominated deposit (opened in October 17); exchange rate
on October 17 was ₱40; average (October 17 – December 31) was ₱50;
December 31 was ₱45 $ 20,000

The amount to be reported as Cash and Cash Equivalents in Munda Company’s December 31, 2017
statement of financial position is
a. ₱5,850,000 b. ₱5,750,000 c. ₱5,470,000 d. ₱5,450,000

5. The December 31, 2017 trial balance of Francine Company includes the following accounts:
Cash on hand ₱ 500,000
Petty cash fund 20,000
Security Bank current account 1,000,000
PNB Current account No. 1 400,000
PNB Current account No. 2 ( 50,000 )
BSP treasury bill - 60 days 3,000,000
BPI time deposit - 30 days 2,000,000
Additional information:
 The cash on hand includes a customer postdated check of ₱100,000 and postal money order of
₱40,000.
 The petty cash fund includes unreplenished petty cash vouchers for ₱2,000 and an employee check
for ₱3,000 dated January 31, 2018.
 A check for ₱200,000 was drawn against Security Bank account, dated January 15, 2018, delivered
to the payee and recorded December 31, 2017.
 The BPI time deposit is set aside for acquisition of land to be used as a factory site.
The statement of financial position on December 31, 2017 should show cash and cash equivalents at
a. ₱6,965,000 b. ₱4,965,000 c. ₱4,765,000 d. ₱1,965,000

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Financial Accounting and Reporting: Financial Assets – Part 1 FAR EASTERN UNIVERSITY

6. On January 1, 2017, the board of directors of FEU Co. passed a resolution for the establishment of a
₱20,000 petty cash fund. The following were the transactions during the period.
Jan. 1, 2017 Established ₱20,000 petty cash fund.
Jan. 1 through 31, 2017 Disbursements are made for the following:
Drinks of employees in the slaughter ₱ 2,800
Wages of Lester, employee 1,000
Cost of LPG and other utilities 2,000
Gasoline for company tricycle 6,000
Manicure of Ms. Rachelle (secretary of the
boss)–authorized 6,000
Total ₱ 17,800
Jan. 31 Total coins and currencies in the petty cash box is ₱1,000.
Replenishment is made.
Required: Provide the necessary journal entries. Assume that the petty cash custodian is to be charged
of any cash shortage or overage.
7. The petty cash fund of Charice Company on December 31, 2017, the end of the entity’s reporting period,
is composed of the following:
Currencies ₱ 20,000
Coins 2,000
Petty cash vouchers:
Gasoline payments for delivery equipment 3,000
Medical supplies for employees 1,000
Repairs of office equipment 1,500
Loans to employees 3,500
Check drawn by the entity payable to the order of Pempengco, petty
cash custodian, representing her salary 15,000
Employee’s check returned by the bank for insufficiency of funds 3,000
Sheet of paper with names of employees together with contribution for a
birthday gift of a co-employee. Attached is a currency of 5,000
The petty cash general ledger account has an imprest balance of ₱50,000. What is the amount of the
petty cash fund that should be shown in the statement of financial position on December 31, 2017?
a. ₱42,000 b. ₱37,000 c. ₱27,000 d. ₱22,000
8. AAA Company had the following account balances on December 31, 2017
Cash in bank-current account ₱ 5,000,000
Cash in bank-payroll account 1,000,000
Cash on hand 500,000
Cash in bank-restricted account for building construction
expected to be finished in 2018 3,000,000
Time deposit purchased on December 15, 2017 and
due on March 15, 2018 2,000,000
The cash on hand includes a ₱200,000 check payable to AAA, dated January 15, 2018. What amount
should be reported as cash and cash equivalents on December 31, 2017?
a. ₱8,700,000 b. ₱8,300,000 c. ₱6,500,000 d. ₱6,300,000
9. The checkbook balance of AAA Company on December 31, 2017 was ₱4,000,000. Data about certain
cash items follow:
 A customer check amounting to ₱200,000 dated January 2, 2018 was included in the December 31,
2017 checkbook balance.
 Another customer check for ₱500,000 deposited on December 22, 2017 was included in its
checkbook balance but returned by the bank for insufficiency of fund. This check was redeposited on
December 26, 2017 and cleared two days later.
 A ₱400,000 check payable to supplier dated and recorded on December 30, 2017 was mailed on
January 16, 2018.
 A petty cash fund of ₱50,000 with the following summary on December 31, 2017:
Coins and currencies ₱ 5,000
Petty cash vouchers 43,000
Return value of 20 cases of soft drinks 2,000
₱ 50,000

A check of ₱43,000 was drawn on December 31, 2017 payable to Petty Cash.
What is the "cash" balance on December 31, 2017?
a. ₱4,248,000 b. ₱4,205,000 c. ₱4,200,000 d. ₱3,748,000

10. The information that follows is available from the general ledger and the bank statement of George
Company
 Cash in bank, October 31, ₱939,000
 Deposit in transit, October 31, ₱35,000; Outstanding checks, October 31, ₱68,000
 Credit memo, October ₱60,000; Debit memo, October ₱20,000
 Included in the October bank receipts was a deposit of George Company for ₱25,000, erroneously
recorded by the bank to Georgia Company’s account
 Included in the October bank disbursements was a check issued by Georgy Company for ₱10,000,
erroneously recorded by the bank in George Company’s account

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Financial Accounting and Reporting: Financial Assets – Part 1 FAR EASTERN UNIVERSITY

 Included in the book receipts was a deposit for ₱45,000 which was recorded as ₱54,000. No
correction was made yet by George Company
 Included in the book disbursements was a check issued by George Company for ₱42,000 was
recorded as ₱24,000
The correct cash balance as of October 31, 2017 is
a. ₱950,000 b. ₱952,000 c. ₱945,000 d. ₱927,000

11. AAA Corp. had the following transactions in its first year of operations:
Sales (90% collected in first year) ₱ 2,000,000
Bad debt written-off 60,000
Disbursements for cost and expenses 1,300,000
Disbursements for income taxes 90,000
Purchases of fixed assets 450,000
Depreciation on fixed assets 90,000
Proceeds from issuance of ordinary share 600,000
Proceeds from short-term borrowings 100,000
Payments on short-term borrowings 80,000
The cash balance at December 31 is
a. ₱520,000 b. ₱580,000 c. ₱780,000 d. ₱1,030,000

12. The composition of Ana Company’s cash and cash equivalents as of December 31, 2017 is as follows:
Demand deposit account – BPI ₱ 1,000,000
Certificate of time deposit – 30 days 250,000
Customer check on hand – DAUD 40,000
Customer check on hand – dated January 2, 2018 25,000
Manager’s checks on hand 220,000
Special account in PNB used for dividend payment 400,000
Petty cash fund 42,000
Additional information
 Check of ₱80,000 in payment of accounts payable was recorded on December 31, 2017 but was
mailed to suppliers only in January 2, 2018
 Petty cash fund balance, being maintained under the fluctuating system. Unreplenished receipts
amounted to ₱18,000.
The correct cash balance for Ana Company’s statement of financial position is
a. ₱1,910,000 b. ₱1,912,000 c. ₱1,992,000 d. ₱1,974,000
13. A count of the Petty cash fund of AAA Company on December 31, 2017 showed the following:
Coins and currency ₱ 5,000
Paid vouchers:
Gasoline and oil ₱ 600
Office supplies 300
Transportation 700
Postage stamps 400
Due from employees 2,400 4,400
Employee’s postdated check 600
Check drawn to the order of petty cash custodian 2,500
The amount of the petty cash fund for the statement of financial position is
a. ₱5,000 b. ₱7,500 c. ₱8,100 d. ₱12,500
14. Reconciliation of AAA Company’s bank account at May 31 is:
Balance per bank statement ₱ 2,100,000
Deposits outstanding 300,000
Checks outstanding (30,000)
Correct cash balance 2,370,000
Balance per book 2,372,000
Bank service charge (2,000)
Correct cash balance 2,370,000
June data are as follows:
Bank Book
Checks recorded ₱2,300,000 ₱2,360,000
Deposits recorded 1,620,000 1,800,000
Collection by bank (₱400,000 note plus interest) 420,000
NSF check returned with the June 30 statement 10,000
Balances 1,830,000 1,810,000
The check outstanding on June 30 amounted to
a. ₱90,000 b. ₱60,000 c. ₱30,000 d. Nil

15. AAA Company keeps all its cash in a checking account. An examination of the company’s accounting
records and bank statement for the month ended June 30, 2017 revealed the following information:
 The cash balance per book on June 30 is ₱8,500,000.
 A deposit of ₱1,000,000 that was placed in the bank’s night depository on June 30 does not appear
on the bank statement.
 The bank statement shows on June 30, the bank collected note for AAA and credited the proceeds

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Financial Accounting and Reporting: Financial Assets – Part 1 FAR EASTERN UNIVERSITY

of ₱950,000 to the Company’s account.

 Checks outstanding on June 30 amount to ₱300,000.
 AAA discovered that a check written in June for ₱200,000 in payment of an account payable, had
been recorded in the Company’s records as ₱20,000.
 Included with the June bank statement was NSF check for ₱250,000 that AAA had received from a
customer on June 26.
 The bank statement shows a ₱20,000 service charge for June.
The cash in bank to be shown in the statement of financial position on June 30, 2017 is
a. ₱9,360,000 b. ₱9,180,000 c. ₱9,000,000 d. ₱8,300,000

16. Information pertaining to AAA Company appears below:

Balance per bank statement July 31 ₱ 1,240,000
Balance per ledger, July 31 750,000
Deposit of July 30 not recorded by bank 280,000
Debit memo-service charges 10,000
Credit memo-collection of note by bank for AAA 300,000
Outstanding checks ?
An analysis of the canceled checks returned with the bank statement reveals the following:
 Check for purchase of supplies was drawn for ₱60,000 but was recorded as ₱90,000.
 The manager wrote a check for traveling expenses of ₱100,000 while out of town. The
check was not recorded.
What is the outstanding checks on July 31?
a. ₱970,000 b. ₱610,000 c. ₱550,000 d. ₱270,000
17. AAA Company’s bank statement for the month of December included the following information:
Ending balance ₱ 2,800,000
Bank service charge for December 12,000
Interest paid by bank to AAA for December 10,000
In comparing the bank statement to its own cash records, AAA Company found the following:
Deposits made but not yet recorded by bank ₱ 350,000
Checks written and mailed but not yet recorded by bank 650,000
In addition, AAA Company discovered that it had drawn and erroneously recorded a check for ₱46,000
that should have been recorded for ₱64,000. What is the cash balance per ledger on December 31?
a. ₱2,800,000 b. ₱2,540,000 c. ₱2,520,000 d. ₱2,500,000
18. AAA Company had the following bank reconciliation on June 30, 2017:
Balance per bank statement, June 30 ₱ 3,000,000
Deposit in transit 400,000
Outstanding check (900,000)
Balance per book, June 30 ₱ 2,500,000

The bank statement for the month of July showed the following:
Deposits (including ₱200,000 note collected for AAA) ₱ 9,000,000
Disbursements (including ₱140,000 NSF check and P10,000 service 7,000,000
charge)
All reconciling items on June 30 cleared through the bank in July. The outstanding checks totaled
₱600,000 and the deposit in transit amounted to ₱1,000,000 on July 31.
What is the amount of cash receipts per book in July?
a. ₱9,800,000 b. ₱9,600,000 c. ₱9,400,000 d. ₱8,600,000

“With enough determination, no goal is out of reach.”

“Those who commit and give their dreams the power of focused action are the ones who will
achieve their dreams. No matter how fiercely desired the goal may be, it takes commitment and
action to make it a reality.”

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Financial Accounting and Reporting: Financial Assets – Part 1 FAR EASTERN UNIVERSITY

B. FA: LOANS AND RECEIVABLES

Receivable is a financial asset that represent a contractual right to receive cash or another financial asset
from another entity. It represents the amount collectible from the customers and others, most frequently
arising from sale of merchandise, claims for money lent, or the performance of services. For accounting
purposes however, the term is employed to mean claims expected to be settled by the receipts of cash.

REVIEW NOTES: IMPAIRMENT MODEL

DEFINITION OF TERMS:
 Credit loss is the difference between all contractual cash flows that are due to an entity in accordance
with the contract and all the cash flows that the entity expects to receive (i.e. all cash shortfalls),
discounted at the original effective interest rate (or credit-adjusted effective interest rate for
purchased or originated credit-impaired financial assets).
 12-month expected credit loss - is the portion of lifetime expected credit losses that represent
the expected credit losses that result from default events on a financial instrument that are possible
within the 12 months after the reporting date.
 Lifetime expected credit loss –is the expected credit losses that result from all possible default
events over the expected life of a financial instrument.
 Expected credit losses is the weighted average of credit losses with the respective risks of a default
occurring as the weights.
 Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other
party by failing to discharge an obligation.
 Cash shortfall is the difference between contractual cash flow and cash flow that the entity expects to
receive.
 Credit-adjusted effective interest rate
Credit-adjusted effective interest rate is the rate that exactly discounts the estimated future cash
payments or receipts through the expected life of the financial asset to the amortized cost of a financial
asset that is a purchased or originated credit-impaired financial asset.
 Purchased or originated credit-impaired financial asset
Purchased or originated financial asset(s) that are credit-impaired on initial recognition.
 Credit-impaired financial asset
A financial asset is credit-impaired when one or more events that have a detrimental impact on the
estimated future cash flows of that financial asset have occurred. Evidence that a financial asset is
credit-impaired include observable data about the following events:
a. significant financial difficulty of the issuer or the borrower;
b. a breach of contract, such as a default or past due event;
c. the lender(s) of the borrower, for economic or contractual reasons relating to the borrower's financial
difficulty, having granted to the borrower a concession(s) that the lender(s) would not otherwise
consider;
d. it is becoming probable that the borrower will enter bankruptcy or other financial reorganization;
e. the disappearance of an active market for that financial asset because of financial difficulties; or
f. the purchase or origination of a financial asset at a deep discount that reflects the incurred credit
losses.
It may not be possible to identify a single discrete event—instead, the combined effect of several events
may have caused financial assets to become credit-impaired.
 Loss allowance is the allowance for expected credit losses on financial assets measured in accordance
with paragraph 4.1.2, lease receivables and contract assets, the accumulated impairment amount for
financial assets measured in accordance with paragraph 4.1.2A and the provision for expected credit
losses on loan commitments and financial guarantee contracts.
 Past due is a financial asset is past due when a counterparty has failed to make a payment when that
payment was contractually due.

The expected credit loss model (ECL)

The ECL model requires three approaches depending on the type of asset or credit exposure. These are
summarized below:

Type of asset/exposure Approach

1. Trade receivables, contract Simplified approach
assets and lease receivables
2. Originated or purchased credit- Changes in lifetime expected credit
impaired financial assets losses approach
3. Other assets/exposures General approach (i.e., ‘three-
stage’ or ‘three-bucket’ approach)

A. GENERAL APPROACH
The general approach is based on three stages which are intended to reflect the credit deterioration and
improvement of a financial instrument. An overview of this ‘three-stage’ or ‘three-bucket approach is
shown below:
Stage 1 Stage 2 Stage 3
 Credit risk has not increased  Credit risk has increased  Credit risk has increased
significantly since initial significantly since initial significantly since initial
recognition. recognition. recognition plus there is
 ‘Low credit risk’ expediency objective evidence of
impairment.
 Recognize 12-month  Recognize lifetime expected  Recognize lifetime expected

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Financial Accounting and Reporting: Financial Assets – Part 1 FAR EASTERN UNIVERSITY

expected credit losses credit losses credit losses

 Interest revenue is computed  Interest revenue is computed Interest revenue is computed
on the gross carrying amount on the gross carrying amount on the net carrying amount of
of the asset of the asset the asset (i.e., gross carrying
amount less loss allowance)
Change in credit risk since initial recognition
IMPROVEMENT DETERIORATION

B. CHANGES IN LIFETIME EXPECTED CREDIT LOSSES APPROACH

At the reporting date, an entity shall only recognise the cumulative changes in lifetime expected credit
losses since initial recognition as a loss allowance for purchased or originated credit-impaired financial
assets.
At each reporting date, an entity shall recognise in profit or loss the amount of the change in lifetime
expected credit losses as an impairment gain or loss. An entity shall recognise favourable changes in
lifetime expected credit losses as an impairment gain, even if the lifetime expected credit losses are less
than the amount of expected credit losses that were included in the estimated cash flows on initial
recognition.

C. SIMPLIFIED APPROACH
An entity shall always measure the loss allowance at an amount equal to lifetime expected credit losses
for:
a. trade receivables or contract assets that result from transactions that are within the scope of PFRS
15, and that:
i. do not contain a significant financing component in accordance with PFRS 15 (or when the entity
applies the practical expedient in accordance with paragraph 63 of PFRS 15); or
ii. contain a significant financing component in accordance with PFRS 15, if the entity chooses as its
accounting policy to measure the loss allowance at an amount equal to lifetime expected credit
losses. That accounting policy shall be applied to all such trade receivables or contract assets but
may be applied separately to trade receivables and contract assets.
b. lease receivables that result from transactions that are within the scope of PFRS 16, if the entity
chooses as its accounting policy to measure the loss allowance at an amount equal to lifetime
expected credit losses. That accounting policy shall be applied to all lease receivables but may be
applied separately to finance and operating lease receivables.
An entity may select its accounting policy for trade receivables, lease receivables and contract assets
independently of each other.

REVIEW QUESTIONS: THEORETICAL

1. *It refers to a financial asset that represent a contractual right to receive cash or another financial asset
from another entity that normally arise from sale of merchandise, claims for money lent, or the
performance of services?
a. Contract b. Collectible c. Receivable d. Realizable
2. *Which of the following is not a characteristic of loans and receivables?
a. It is a derivative financial asset.
b. It has fixed or determinable payments.
c. They may or may not have fixed maturity or term.
d. They are not quoted in an active market (not traded in securities market).
3. *Which of the following statement best refers to initial recognition of receivables?
a. Receivables are recognized when it meets the definition of asset even though the amount to be
received cannot be measured reliably.
b. Receivables are never recognized until the legal ownership to the goods is transferred to the buyer.
c. Receivables are recognized when title to the goods passes to the buyer or when transfer of resources
take place.
d. Receivable are not recognized unless it is to be collected within one year from the end of the
reporting date.
4. Initially, loans and receivables are measured at
a. Fair value
b. Maturity value
c. Fair value plus transaction costs that are directly attributable to acquisition
d. Maturity value plus transaction costs that are directly attributable to acquisition
5. Short-term non-interest bearing notes receivable are usually recorded at their
a. Present value c. Principal value
b. Net realizable value d. Maturity value
6. Long-term notes receivable which nominally bear no interest or an interest which is unreasonably low
should be stated at
a. Face value c. Discounted value
b. Maturity value d. Current value
7. The interest on a non-interest bearing note is equal to
a. The excess of the face value over the present value.
b. The excess of the present value over the face value.
c. The excess of the market value over the present value of the note.
d. Zero.

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8. A discount given to a customer for purchasing a large volume of merchandise is typically referred to as a
a. Quantity discount. c. Cash discount.
b. Trade discount. d. Size discount.
9. If a company employs the gross method of recording accounts receivable from customers, then sales
discounts taken should be
a. Reported as a deduction from sales in the income statement.
b. Reported as an item of "other expense" in the income statement.
c. Reported as a deduction from accounts receivable in determining the net realizable value of accounts
receivable.
d. Reported as sales discounts forfeited in the cost of goods sold section of the income statement.
10. Subsequent to initial recognition, loans and receivables are measured at
a. Cost
b. Fair value
c. Amortized cost using the straight line method
d. Amortized cost using the effective interest method
11. Receivable balances should be valued at their face amount minus
a. Allowance for bad debts.
b. Allowance for sales discounts.
c. Allowance for sales returns.
d. Allowance for bad debts and other anticipated adjustments, which will reduce the receivables to
estimated realizable value.
12. Assuming that the ideal measure of short-term receivables in the statement of financial position is the
discounted value of the cash to be received in the future, failure to follow this practice usually does not
make the statement of financial position misleading because
a. Most short-term receivables are not interest-bearing.
b. The allowance for uncollectible accounts includes a discount element.
c. The amount of the discount is not material.
d. Most receivables can be sold to a bank or factor.
13. Accounting for the interest in a non-interest bearing note receivable is an example of what aspect of
accounting theory?
a. Matching c. Verifiability
b. Substance over form d. Accounting entity
14. Uncollectible account expense
a. Should not occur if the credit department properly investigates prospective customers who wish to
purchase merchandise on credit.
b. Is the amount of cash a business must pay each time a credit customer fails to pay his or her
account.
c. Is the amount a business must pay to a collection agency to recover amounts on overdue accounts
receivable.
d. Represents the loss in the value of accounts receivable which eventually turn out to be uncollectible.
15. The allowance for doubtful receivables should be deducted from the related asset, the asset being shown
on the statement of financial position at
a. Gross, less allowance
b. Net, with the allowance indicated parenthetically
c. Gross, and the allowance as a current liability
d. Both “a” and “b”
16. The allowance method of recognizing bad debts expense can be applied in more than one way. What two
conditions must be met before the allowance method can be used?
a. Bad debts must be expected and material.
b. Bad debts must be relevant and reliable.
c. Bad debts must be probable and estimable.
d. Bad debts must be consistent over time and the method used to estimate them must be consistently
applied.
17. Which of the following methods of determining annual bad debt expense best achieves the matching
concept?
a. Percentage of sales c. Percentage of ending accounts receivable
b. Direct write-off d. Percentage of average accounts receivable
18. A method of estimating doubtful accounts that emphasizes asset valuation rather than income
measurement is the allowance method based on
a. Aging of receivables c. Direct writeoff
b. Gross sales d. Credit sales less sales returns and allowances
19. In the preparation of an accounts receivable aging schedule at the end of the fiscal year, the accountant
of a company, makes a series of computations, e.g. 6% of the total balance of accounts which are 30
days past due, added to 12% of the total balance of accounts which are 31 to 60 days past due, etc.
Which of the following does the sum of the resulting amounts from the series of computations cited
above best represents?
a. It represents the expenses for bad debts for the year.
b. It represents the amount to be added to the allowance for doubtful accounts in the financial
statements at the end of the year.

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c. It represents the desired credit balance of the allowance for doubtful accounts to be reported in the
financial statements at the end of the year.
d. It represents the desired credit balance of the allowance for doubtful accounts to be reported in the
financial statements at the beginning of the year.
20. Which of the following is a generally accepted method of determining the amount of the adjustment to
bad debt expense?
a. A percentage of sales adjusted for the balance in the allowance
b. A percentage of sales not adjusted for the balance in the allowance
c. A percentage of accounts receivable not adjusted for the balance in the allowance
d. An amount derived from aging accounts receivable and not adjusted for the balance in the allowance
21. The advantage of relating a company's bad debt expense to its outstanding accounts receivable is that
this approach
a. Gives a reasonably correct statement of receivables in the statement of financial position.
b. Best relates bad debt expense to the period of sale.
c. Is the only generally accepted method for valuing accounts receivable.
d. Makes estimates of uncollectible accounts unnecessary.
22. A company uses the allowance method for recognizing doubtful 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. Decreases both net income and working capital
d. Decreases both net income and accounts receivable
23. When a specific customer’s account receivable is written off as uncollectible, what will be the effect on
net income under each of the following methods of recognizing bad debt expense?
Allowance Direct write-off
a. None Decrease
b. Decrease None
c. Decrease Decrease
d. None None
24. The practice of realizing cash from trade receivables prior to maturity date is widespread. A term which
is not associated with this practice is
a. Hypothecation b. Factoring c. Defalcation d. Discounting
25. It is a financing arrangement whereby one party formally transfer its rights to accounts receivable to
another party in consideration for a loan.
a. Pledge b. Factoring c. Assignment d. Discounting
26. It is a financing arrangement that is usually done on a “without recourse, notification basis”.
a. Pledge b. Factoring c. Assignment d. Discounting
27. The equity of assignor in assigned accounts is equal to
a. Assigned accounts receivable
b. Assigned accounts receivable minus the bank loan balance
c. Bank loan balance
d. Bank loan balance minus the assigned accounts receivable
28. The account Equity in Assigned Account Receivable should be classified as
a. An asset c. A liability
b. Note disclosure d. A contra liability
29. Gary Company factored its accounts receivable without recourse with a bank. Gary received cash as a
result of this transaction which is best described as
a. Bank loan collateralized by Gary’s accounts receivable.
b. Bank loan to be repaid by the proceeds from Gary’s accounts receivable.
c. Sale of Gary’s accounts receivable to the bank with the risk of uncollectible accounts retained by
Gary.
d. Sale of Gary’s accounts receivable to the bank with the risk of uncollectible accounts transferred to
the bank.
30. When accounts receivable are factored without recourse, what account does the transferor credit?
a. Accounts receivable assigned c. Liability
b. Sales d. Accounts receivable
31. It is a predetermined amount withheld by a factor as a protection against customer returns, allowances
and other special adjustments.
a. Equity in assigned accounts c. Commission
b. Service charge d. Factor’s holdback
32. The factor’s holdback arising from factoring of accounts receivable is shown as
a. Current assets separately
b. Current assets as part of trade accounts receivable
c. Noncurrent assets separately
d. Deduction from accounts receivable
33. Principal amount of a promissory note plus interest multiplied by the discount rate and discount period is
equal to
a. Interest income c. Discount
b. Net proceeds d. Discounted value

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34. After being held for 30 days, a 120-day 12% interest bearing note receivable was discounted at a bank
at 15%. The proceeds received from the bank equal
a. Maturity value less discount at 12%
b. Maturity value less discount at 15%
c. Face value less discount at 12%
d. Face value less discount at 15%
35. Notes receivable discounted with recourse should be
a. Included in total receivables with disclosure of contingent liability
b. Included in total receivables without disclosure of contingent liability
c. Excluded from total receivables with disclosure of contingent liability
d. Excluded from total receivables without disclosure of contingent liability
36. The note receivable discounted account is
a. A contingent liability shown separately as part of total liabilities.
b. A current liability.
c. Deducted from total notes receivable and the contingent liability shown in a note to financial
statement.
d. All of the above.
37. When an enterprise discounts its “own” note with a bank, the face value is credited to
a. Notes receivable discounted c. Note payable – trade
b. Note payable – bank d. Notes receivable
38. A note receivable that is sold (e.g. discounted) to obtain early cash must be
a. Retained in the accounts in the same manner as before discounting.
b. Reported as extraordinary loss if it is dishonored.
c. Disclosed as a contingent liability if it is discounted without recourse.
d. Reported as a sale or loan.
39. Which is true concerning statement of financial position presentation of receivables?
a. Trade receivables and non-trade receivables should be shown separately
b. Nontrade receivables should be presented as noncurrent assets
c. Trade accounts receivable and trade notes receivable should be presented separately
d. Trade receivables and nontrade receivables which are currently collectible should be presented as
one line items called “trade and other receivables”.
40. Receivables from officers, directors and employees for goods sold or services rendered in the ordinary
course of business
a. Are considered current if proper control is exercised in granting credit and the accounts are currently
collectible
b. Are not included in trade accounts receivable
c. Are included in current assets even if the receivables are actually loans and advances and the
collection is unlikely within a year
d. Are always classified as noncurrent
41. Receivables from subsidiaries and affiliates, if significant should be classified as
a. Current assets
b. Noncurrent assets
c. Either as noncurrent or current depending on the expectation of realizing them within one year or
over one year
d. Intangible assets
42. The following statements pertain to presentation and valuation of receivables. Which is not in accordance
with generally accepted practice?
a. Credit balances in customers’ account receivable should be offset against other receivables to arrive
at the net amount.
b. Receivable balances should be valued at face amount minus allowance for doubtful accounts and for
any anticipated adjustments, which in the normal course of events will reduce the amount of
receivable to estimated realizable value.
c. Long-term notes receivables which nominally bear no interest or an interest, which is unreasonably
low should be stated at present value.
d. Receivables denominated in foreign currency should be translated to local currency using the
exchange rate on reporting period.
43. Receivables denominated in a foreign currency should be
a. Translated to local currency using the exchange rate at the time the receivables arise
b. Shown at face value of the foreign currency
c. Translated to local currency using the exchange rate at the reporting period
d. Translated to local currency using the exchange rate when the financial statement is issued
44. Which of the following would indicate that a note receivable or other loan is impaired?
a. When it is written off.
b. When it is probable that principal payments will be delayed.
c. When the maker of the note experiences financial difficulties.
d. When the market value of the note falls below its book value due to interest rate changes.
45. Which of the following describes the carrying value of an impaired note immediately following the
recognition of the impairment?
a. Nominal sum of remaining cash flows to be received.
b. Present value of remaining cash flows to be received, discounted at current market rate of interest.

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Financial Accounting and Reporting: Financial Assets – Part 1 FAR EASTERN UNIVERSITY

c. Present value of remaining cash flows to be received, discounted at original interest rate implicit in
the note.
d. The book value before the impairment is recognized less accrued interest.
REVIEW QUESTIONS: COMPUTATIONAL
1. Atok Company had the following information relating to its accounts receivable for the year 2016:
Accounts receivable – January 1 ₱12,000,000
Credit sales 20,000,000
Collection from customers, excluding the recovery of accounts written off 17,000,000
Accounts written off as worthless 300,000
Sales returns 1,000,000
Recovery of accounts written off 100,000
Estimated future sales returns on December 31 400,000
Estimated uncollectible accounts on December 31, per aging 1,000,000
Atok should report the December 31, 2016 accounts receivable, before allowance for sales returns and
uncollectible accounts, at
a. ₱13,700,000 b. ₱13,800,000 c. ₱12,300,000 d. ₱13,130,000
2. Naragsak Company entered into the following during the year:
1/2/2016 Sold 10,000 units of merchandise to Rex Company at a selling price of ₱100 with terms of
2/10, 1/20, n/30.
1/4/2016 Sold 15,000 units of merchandise to Zeus Company at a selling price of ₱100 with terms of
2/10, 1/20, n/30.
1/6/2016 Rex returned 2,000 units of goods to the company.
1/10/2016 Rex paid his account availing of the cash discount.
2/2/2016 Zeus Company paid his account.
Required: Prepare all the necessary entries assuming the company used:
Gross Method Net Method
Date Account title Debit Credit Account title Debit Credit
Accounts Receivable 1,000,000 Accounts Receivable 980,000
1/2/16
Sales 1,000,000 Sales 980,000
Accounts Receivable 1,500,000 Accounts Receivable 1,470,000
1/4/16
Sales 1,500,000 Sales 1,470,000
Sales Return 200,000 Sales Return 196,000
1/6/16
Accounts Receivable 200,000 Accounts Receivable 196,000
Cash 784,000 Cash 784,000
1/10/16 Sales Discount 16,000
Accounts Receivable 800,000 Accounts Receivable 784,000
Cash 1,500,000 Cash 1,500,000
2/2/16 Sales Discount Forfeited 30,000
Accounts Receivable 1,500,000 Accounts Receivable 1,470,000

Allowance for Sales Return (PAS 18)

Use the following data to answer the next four questions:
On December 31, 2015, Barathrum Co. sold goods costing ₱100,000 and with sales price of ₱150,000 to
Rod, Inc. on account. To induce sale, Barathrum Co. provides its buyers the right to return goods within 30
days upon purchase if the buyers are not satisfied with the goods. The company uses perpetual inventory
method.
Case No. 1: Barathrum Co. can reliably estimate that 30% of the goods sold will be returned within the
agreed period of time. Also assume that on January 5, 2016, 45% of the goods were actually returned and
the balance of receivable was collected.
3. How much is the amount of net sales to be reported on December 31, 2015?
a. ₱150,000 b. ₱105,000 c. ₱82,500 d. Nil
4. On January 5, 2016, journal entry to record the collection include a
a. Debit to Allowance for Sales Returns, ₱67,500.
b. Credit to Accounts Receivable, ₱105,000
c. Debit to Sales Returns, ₱22,500
d. Debit to Cash, ₱100,000
Case No. 2: Barathrum Co. cannot reliably estimate future returns. On February 1, 2016, the customer
did not return any of the goods. The receivable was collected on March 10, 2016.
5. How much is the amount of net sales to be reported on December 31, 2015?
a. ₱150,000 b. ₱105,000 c. ₱82,500 d. Nil
6. On February 1, 2016, journal entry to record the transaction include a
a. Credit to Accounts Receivable, ₱105,000
b. Credit to Sales Returns, ₱150,000
c. Debit to Cash, ₱150,000
d. Debit to Cost of Sales, ₱100,000

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Financial Accounting and Reporting: Financial Assets – Part 1 FAR EASTERN UNIVERSITY

Allowance Method vs. Direct Write-off Method

Use the following data to answer the next four questions:
All of Gibraltar Company’s sales are on a credit basis. The allowance for doubtful accounts on 1/1/2017 was
₱125,000. During the year, it was estimated that ₱80,000 will not be collected and ₱60,000 was ascertained
not collectible. Also, a recovery of accounts written off amounting to ₱10,000 was received from a customer.
7. Using the allowance method, what is the net amount to be presented as part of the profit or loss
section?
a. ₱145,000 b. ₱125,000 c. ₱80,000 d. ₱60,000
8. Using the allowance method, what is the balance of the allowance for doubtful accounts in the
statement of financial position as of December 31, 2017?
a. ₱155,000 b. ₱145,000 c. ₱125,000 d. ₱80,000
9. Using the direct write-off method, what is the net amount to be presented as part of the profit or loss
section?
a. ₱125,000 b. ₱70,000 c. ₱60,000 d. ₱50,000
10. Using the direct write-off method, what is the balance of the allowance for doubtful accounts in the
statement of financial position as of December 31, 2017?
a. ₱125,000 b. ₱80,000 c. ₱70,000 d. Nil

Allowance Method: I/S Approach

11. All of Bokod Company’s sales are on a credit basis. The following information is available for 2016:
Allowance for doubtful accounts, 1/1/2016 ₱ 1,000,000
Sales 22,000,000
Sales returns 2,000,000
Accounts written off as uncollectible 600,000
Recovery of accounts written off 200,000
Bokod provides for doubtful accounts expense at the rate of 10% of net sales. At December 31, 2016,
the allowance for doubtful accounts balance should be
a. ₱3,200,000 b. ₱2,800,000 c. ₱2,600,000 d. ₱2,000,000
12. On January 1, 2016, the balance of accounts receivable of Kapangan Company was ₱5,000,000 and the
allowance for doubtful accounts on same date was ₱800,000. The following data were gathered:
Credit sales Write-offs Recoveries
2013 ₱10,000,000 ₱ 250,000 ₱ 20,000
2014 14,000,000 400,000 30,000
2015 16,000,000 650,000 50,000
2016 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 2016 doubtful accounts expense?
a. ₱595,000 b. ₱750,000 c. ₱812,500 d. ₱875,000
Allowance Method: B/S Approach – Composite
13. The following accounts were abstracted from Kabayan Company’s unadjusted trial balance at December
31, 2016:
Debit Credit
Accounts receivable ₱20,000,000
Allowance for doubtful accounts 300,000
Net credit sales ₱70,000,000
Kabayan estimates that 5% of the gross accounts receivable will become uncollectible. The doubtful
accounts expense for the year ended December 31, 2016 should be
a. ₱1,000,000 b. ₱1,300,000 c. ₱3,500,000 d. ₱ 700,000
Allowance Method: B/S Method – Aging of Accounts Receivable
14. Bakun Company operates in an industry that has a high rate of bad debts. On December 31, 2016,
before any year-end adjustments, the accounts receivable balance was ₱20,000,000 and its allowance
for doubtful accounts balance was ₱1,500,000. The year-end balance reported for the allowance for
doubtful accounts is based on the following schedule:
Time Outstanding Accounts Receivable Percent Uncollectible
Under 30 days ₱10,000,000 5%
31 - 180 days 5,000,000 10%
181 - 360 days 3,000,000 30%
More than one year 2,000,000 100%
The accounts which have been outstanding for more than one year and 100% uncollectible would be
written off immediately. What should be the doubtful accounts expense for the year ended December
31, 2016?
a. ₱1,900,000 b. ₱3,900,000 c. ₱2,400,000 d. ₱2,000,000

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Impairment of Receivable (PFRS 9)

15. XYZ Co. issues 3-year, interest-bearing loan of ₱2,000,000 on August 1, 2017. XYZ Co. makes the
following estimates of risks and default losses:
Risk of default in:
Date Next 12 months Months 13 to 36 Loss from default
August 1, 2017 2.00% 5.00% 800,000
December 31, 2017 3.00% 12.00% 700,000
December 31, 2018 1.00% 3.00% 500,000
Required: Compute for the amount of loss allowance on the following dates and prepare the journal
entries:
a. August 1, 2017 c. December 31, 2018
b. December 31, 2017
16. On January 1, 2017, Bank Company granted a five-year term loan of ₱1,000,000 to Utangero Company.
If there were no possibility of credit losses, the coupon rate that Bank Company would charge the
borrower is 5% per annum. However, because of the borrower’s credit rating, Bank Company estimates
that there is a possibility the borrower might default on the payments and the expected credit losses are
estimated at ₱10,000 per year over the five-year term. Accordingly, Bank Company charges the
borrower 6% coupon rate to reflect the yield on the instrument to include a return to cover those credit
losses expected when the loan is first recognized.
Required:
a. Compute for the lifetime expected credit loss.
b. Compute for the 12-month expected credit loss.
c. Prepare the journal entry on initial recognition of the loan
d. Prepare the entry assuming there is no significant deterioration of credit risk for the year ended
2017.
e. Prepare the entry assuming there is significant deterioration of credit risk for the year ended 2017.

17. On January 1, 2017, Dayan granted a ₱10 million loan to Delimma Company. The loan is repayable by
the borrower on equal annual instalments of ₱2.40 million over a five-year term. The effective interest
rate that Dayan charges the borrower is 6.4% per annum comprising 4% risk-free rate and 2.4% for
credit risk.
Dayan estimates that there is a 75% chance that there loan will not default; a 15% chance that the loan
defaults and the expected cash flow in each year is ₱1.80 million; and a 10% chance that the loan
defaults and the expected cash flow in each year is ₱1.20 million.
Required:
a. Compute for the amount of cash shortfall for the five year period.
b. Compute for the probability weighted cash shortfall
c. Compute for the lifetime expected credit loss
d. Compute for the 12-month expected credit loss
e. Prepare the journal entry in 2017.
Notes Receivable: Interest Bearing – Reasonable Interest Rate
Use the following data for the next two questions:
On January 1, 2016, Josh Co. sold a machine to Groban Co. In lieu of cash payment, Groban gave Josh a 4-
year, ₱100,000, 10% note. The note required interest to be paid annually on December 31. The machine has
a cost of ₱500,000 and accumulated depreciation as of January 1, 2016 of ₱350,000. The 10% interest rate
is a realistic rate of interest for a note of this type.
18. What is the gain or loss on the sale of machine?
a. ₱250,000 loss b. ₱250,000 gain c. ₱50,000 loss d. ₱50,000 gain
19. What is the amount of interest income to be reported in 2016?
a. ₱50,000 b. ₱35,000 c. ₱10,000 d. Nil

Notes Receivable: Interest Bearing – Unreasonable Interest Rate

Use the following data for the next five questions:
On January 1, 2016, Jima Co. sold office equipment with a cost of ₱1,000,000 and accumulated depreciation
of ₱150,000 in exchange for a 3-year, 10% ₱2,000,000 note receivable. Principal is due on December 31,
2018 but interest is due annually every December 31. The prevailing interest rate for this type of note is
12%.
20. How much is the gain on sale of office equipment in 2016?
a. ₱1,903,960 b. ₱903,960 c. ₱1,053,960 d. ₱1,051,730
21. How much is the interest income for 2016?
a. ₱200,000 b. ₱235,704 c. ₱228,475 d. ₱114,104
22. How much is the carrying amount of the note on December 31, 2016?
a. ₱1,932,435 b. ₱2,000,000 c. ₱1,964,327 d. ₱1,915,834
23. How much is the current portion of the note on December 31, 2016?
a. Nil b. ₱14,950 c. ₱31,892 d. ₱1,964,327
24. How much is the noncurrent portion of the note on December 31, 2016?
a. Nil b. ₱1,932,435 c. ₱31,892 d. ₱1,964,327

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Financial Accounting and Reporting: Financial Assets – Part 1 FAR EASTERN UNIVERSITY

Notes Receivable: Non-interest Bearing - Installment

Use the following data for the next three questions:
On January 1, 2015, Bee-Sayas Co. sold transportation equipment with a historical cost of ₱20,000,000 and
accumulated depreciation of ₱7,000,000 in exchange for cash of ₱500,000 and a noninterest-bearing note
receivable of ₱8,000,000 due in 4 equal annual installments starting on December 31, 2015 and every
December 31 thereafter. The prevailing rate of interest for this type of note is 12%.
25. How much is the interest income in 2015?
a. ₱728,946 b. ₱678,334 c. ₱728,964 d. ₱704,236
26. How much is the current portion of the receivable on December 31, 2015?
a. ₱1,271,036 b. ₱1,423,560 c. ₱3,380,102 d. ₱1,594,388
27. How much is the carrying amount of the receivable on December 31, 2016?
a. ₱4,803,663 b. ₱3,380,102 c. ₱6,074,699 d. ₱6,000,000

Noninterest-bearing note – non-uniform cash flows

28. On January 1, 2016, Bee-Saya Co. sold machinery costing ₱3,000,000 with accumulated depreciation of
₱1,100,000 in exchange for a 3-year, ₱900,000 noninterest-bearing note receivable due as follows:
Date Amount of installment
December 31, 2016 ₱ 400,000
December 31, 2017 300,000
December 31, 2018 200,000
Total ₱ 900,000
The prevailing rate of interest for this type of note is 10%. How much is the carrying amount of the
receivable on December 31, 2016?
a. ₱467,354 b. ₱438,016 c. ₱376,345 d. ₱428,346

Receivable with cash price equivalent

Use the following data for the next two questions:
On January 1, 2016, Bee-Cool Co. sold inventory costing ₱1,800,000 with a list price of ₱2,200,000 and a
cash price of ₱2,000,000 in exchange for a ₱2,400,000 noninterest-bearing note due on December 31, 2018.
29. How much is the initial measurement of the receivable?
a. ₱1,800,000 b. ₱2,200,000 c. ₱2,000,000 d. ₱2,400,000
30. How much is the carrying amount of the receivable on December 31, 2016?
a. ₱2,266,667 b. ₱2,133,333 c. ₱2,125,390 d. ₱2,000,000

Assignment of Receivable
Use the following data for the next three questions:
On December 1, 2016, Bruno Company assigned specific accounts receivable totaling ₱2,000,000 as
collateral on a ₱1,500,000, 12% note from a certain bank. Bruno Company will continue to collect the
assigned accounts receivable. In addition to the interest on the note, the bank also charged 5% finance fee
deducted in advance on the ₱1,500,000 value of the note. The December collections of assigned accounts
receivable amounted to ₱1,000,000 less cash discounts of ₱50,000. On December 31, 2016, Bruno Company
remitted the collections to the bank in payment for the interest accrued on December 31, 2016 and the note
payable.
31. What amount of cash was received from the assignment of accounts receivable on December 1, 2016?
a. ₱2,000,000 b. ₱2,500,000 c. ₱1,900,000 d. ₱1,425,000
32. What is the carrying amount of the note payable on December 31, 2016?
a. ₱500,000 b. ₱550,000 c. ₱565,000 d. ₱730,000
33. What amount should be disclosed as the equity of Bruno Company in assigned accounts on December
31, 2016?
a. ₱500,000 b. ₱450,000 c. ₱435,000 d. ₱270,000
Factoring of Receivables
Use the following data for the next two questions:
Binalonan Company factored ₱5,000,000 of accounts receivable to ABC Company on July 1, 2016. Control
was surrendered by Binalonan. ABC assessed a fee of 5% and retains a holdback equal to 20% of the
accounts receivable. In addition ABC charged 12% computed on a weighted average time to maturity of the
receivables of 30 days.
34. Binalonan Company will receive and record cash of
a. ₱3,700,685 b. ₱3,750,000 c. ₱3,700,000 d. ₱4,700,685
35. Assuming all receivables are collected, Binalonan Company’s cost of factoring the receivables would be
a. ₱250,000 b. ₱49,315 c. ₱299,315 d. Nil
Factoring of Receivables
Use the following data for the next two questions:
Urdaneta Company factored ₱100,000 of its accounts receivable to finance company for ₱85,000. An
allowance for bad debts equal to ₱3,000 was previously established for these amounts. The finance
company withheld 5% of the purchase price as protection against sales returns and allowance.
36. What is the loss on derecognition of the accounts receivable assuming the transaction is without
recourse?
a. ₱15,000 b. ₱19,750 c. ₱12,000 d. ₱17,000

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Financial Accounting and Reporting: Financial Assets – Part 1 FAR EASTERN UNIVERSITY

37. What is the loss on derecognition of the accounts receivable assuming the transaction is with recourse
and the recourse obligation has an estimated fair value of ₱5,000?
a. ₱15,000 b. ₱19,750 c. ₱12,000 d. ₱17,000
Discounting Notes Receivable
Use the following data for the next three questions:
On January 1, 2016, Juan Company sold land with carrying amount of ₱1,500,000 in exchange for a 9-
month, 10% note with face value of ₱2,000,000. The 10% rate properly reflects the time value of money for
this type of note.
On April 1, 2016, Juan Company discounted the note with recourse. The bank discount rate is 12%. The
discounting transaction is accounted for as a secured borrowing.
On October 1, 2016, the maker dishonored the note receivable. Juan Company paid the bank the maturity
value of the note plus a protest fee of ₱10,000.
On December 31, 2016, Juan Company collected the dishonored note in full plus 12% annual interest on the
total amount due.
38. What is the amount of proceeds received by Juan Company from the discounting of note receivable?
a. ₱2,150,000 b. ₱2,021,000 c. ₱2,050,000 d. ₱1,921,000
39. What is the interest expense to be recognized by Juan Company on April 1, 2016?
a. ₱50,000 b. ₱29,000 c. ₱21,000 d. ₱25,000
40. What is the amount collected by Juan Company from the customer on December 31, 2016?
a. ₱2,224,500 b. ₱2,224,800 c. ₱2,160,000 d. ₱2,214,500
Discounting Own Note
Use the following data for the next three questions:
On July 1, 2016, Consolation Co. discounted its “own” ₱500,000, 1-year note at a bank, at a discount rate of
12%, when the prime rate is 10%.
41. How much is net proceeds to be recorded by Consolation Co. on July 1, 2016?
a. ₱500,000 b. ₱460,000 c. ₱440,000 d. ₱450,000
42. What is the effective interest rate of the discounting?
a. 12% b. 12.6% c. 13% d. 13.6%
43. How much interest expense should be reported for the year-ended December 31, 2016?
a. ₱60,000 b. ₱40,000 c. ₱30,000 d. ₱25,000
Loans Receivable: Origination Cost and Fee, Subsequent Measurement
Use the following data for the next three questions:
DOSE Bank granted a loan to a borrower in the amount of ₱5,000,000 on January 1, 2016. The interest rate
on the loan is 10% payable annually starting December 31, 2016. The loan matures in five years on
December 31, 2020. DOSE Bank incurs ₱39,400 of direct loan origination cost and ₱10,000 of indirect loan
origination cost. In addition, DOSE Bank charges the borrower an 8-point nonrefundable loan origination fee.
44. What is the carrying amount of the loan as of January 1, 2016?
a. ₱5,049,400 b. ₱5,039,400 c. ₱5,000,000 d. ₱4,639,400
45. What is the effective interest rate of the notes receivable?
a. 10.56% b. 13% c. 12.56% d. 12%
46. What is the amount of interest income to be reported in 2016?
a. ₱600,000 b. ₱556,728 c. ₱503,940 d. ₱500,000
47. What is the carrying amount of the loan receivable on December 31, 2016?
a. ₱5,196,128 b. ₱5,144,128 c. ₱5,000,000 d. ₱4,696,128

Impairment of Receivable
Use the following data for the next three questions:
On January 1, 2013, Marcy Co. received a ₱16,000,000 note receivable from Lynn Inc. The principal is due
on December 31, 2017 while interest at 10% is due annually at the end of each year for five (5) years.
Lynn Inc. made the required payments during 2013 and 2014. However, during 2015, Lynn Inc. began to
experience financial difficulties, requiring Marcy Co. to reassess the collectibility of the note. Interest was
accrued in 2015. On December 31, 2015, Marcy Co. determined that the note has been impaired and
projects future cash flows as follows:
Expected date of Amount
collection of cash flow
December 31, 2016 1,600,000
December 31, 2017 3,200,000
December 31, 2018 4,800,000
Questions:
Based on the above data, answer the following:
48. How much is the loan impairment in 2015?
a. ₱9,894,720 b. ₱7,705,280 c. ₱8,294,720 d. ₱2,189,440
49. How much is the interest income for 2016?
a. Nil b. ₱687,581 c. ₱770,528 d. ₱1,600,000
50. How much is the carrying amount of the note on December 31, 2016?
a. ₱4,800,000 b. ₱4,363,389 c. ₱6,875,808 d. ₱8,000,000

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Financial Accounting and Reporting: Financial Assets – Part 1 FAR EASTERN UNIVERSITY

Impairment Reversal
Use the following data for the next three questions:
On January 1, 2014, Jurassic Company granted a five year loan to a borrower amounting to ₱5,000,000. The
loan bears interest of 10% and to be collectible every December 31.
On December 31, 2015, Jurassic considers the loan impaired and that only ₱4,000,000 principal amount will
be collected. The prevailing rate of interest for a loan of this type is 12%. No cash flows received in 2015
and the company did not accrue the interest because of the impairment.
No cash flows were received in 2016 and on December 31, 2016, the financial condition of the borrower has
improved and that it can pay its entire unpaid obligation including principal and interest at maturity. (Round
off present value factors to four decimal places and final answers to nearest hundred):
51. How much is the impairment loss to be recognized on December 31, 2015?
a. ₱2,152,800 b. ₱2,652,800 c. ₱1,994,800 d. ₱2,494,800
52. How much interest income is to be recognized on December 31, 2016?
a. ₱360,624 b. ₱300,520 d. ₱300,500 d. Nil
53. How much is the gain on reversal of impairment loss in 2016?
a. ₱1,694,280 b. ₱824,780 b. ₱1,652,280 d. ₱1,694,300
“One important key to success is self-confidence.
An important key to self-confidence is preparation.”

 -- END OF HANDOUT-- 

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