Intermediate Accounting
CASH & CASH EQUIVALENTS
● Cash
– includes money and any other negotiable
instrument that is payable in money and acceptable
by bank for deposit and immediate credit
– money – the standard medium of exchange in
business transactions
– includes: (these are acceptable by the bank for
deposit or immediate encashment)
○ Checks – an authorization to draw funds from
a bank account
■ Postdated checks – a check on which
the issuer has stated a date later than the
current date. (cannot be considered cash
yet)
○ Bank drafts – a payment on behalf of the
payer, which is guaranteed by the issuing bank
○ Money orders – a financial instrument that is
used to pay the person or organization named
on the instrument a specific amount of money
Unrestricted Cash
There is no specific standard dealing with cash
PAS 1, par 66
→ entity shall classify an asset as current when the asset is
cash or a cash equivalent unless it is restricted to settle a
liability for more than 12 months after the end of the reporting
period
→ cash = must be unrestricted in use (must be readily
available in the payment of current obligations and not subject
to any restrictions, contractual or otherwise)
Cash items included in cash
a. Cash on hand – undeposited cash collections and
other cash items awaiting deposit
○ Customer’s checks
○ Cashier’s checks – offers a guarantee that it’ll
be paid
– comes directly from the
bank’s funds
– provide an additional layer
of security to the payer, as the receiver
won’t be providing their bank account
number
– can pay with a cashier’s
check even if they don’t have a checking
account or a bank account
○ Manager checks – offer a guarantee to your
recipient that the check is already fully
funded
– provides convenience and safety when
you’re dealing with large sums of money
○ Traveler’s checks – are paper documents that
can be used like standard paper checks and cas
○ Bank drafts
○ Money orders
b. Cash in bank – includes demand deposit or
checking account and saving deposit which are
unrestricted as to withdrawal
c. Cash fund – set aside for current purposes
○ Petty cash fund
○ Payroll fund
○ Dividend fund
Cash equivalents
● Cash equivalents – short-term and highly liquid
investments that are readily convertible into cash and so
near their maturity date = present insignificant risk of
changes in value because of interest rate (PAS 7, par 6)
– only highly liquid investments
acquired 3 months before maturity can qualify as cash
equivalents
(treasury bills – investments to government/ utang ni
government = sure that they will pay)
(maturities of up to 1 year) bills = bonds (have maturities
of more than 1 year)
(time-deposit – allows depositors to grow their money
with higher interest rates compared to a regular savings
account. When the term is over, depositors can withdraw
their money or it can be renewed and held for another
term)
(commercial paper – a form of unsecured, short-term
debt commonly issued by companies to finance their
payrolls, payables, inventories, and other short-term
liabilities)
○ Three-month BSP treasury bill
○ Three-year BSP treasury bill purchased
three months before date of maturity
○ Three-month time deposit
○ Three-month money market instrument or
commercial paper
○ Preference shares with specified redemption
date and acquired three-months before
redemption date
Note: acquired 3 months before maturity date (due date),
NOT 3 months left till maturity date (what's important: date
of purchase = 3 months or less before maturity)
■ Equity securities (cannot qualify cash
equivalents because it doesn’t maturity
date)
Investment of excess cash
→ entity must maintain sufficient cash for use in current
operations
→ any cash accumulated in excess of that needed for current
operations should be invested even temporarily in some type
of revenue earning investment
→ excess cash may be invested in time deposits,
money market instruments and treasury bills for the purpose of
earning interest income
Classifications of investment of excess cash
a. Term: 3 months or less = cash equivalents
b. Term: more than 3 months, within a year =
short-term financial assets or temporary investments
(presented differently as current assets)
c. Term: more than 1 year = noncurrent or long-term
investments
investments that become due within one year from the end of
the reporting period are reclassified as current or temporary
investments
Measurement of cash
→ cash: face value
→ foreign currency: measured at the current exchange rate
Financial statement presentation
→ cash and cash equivalents (shown as first line item under
current assets)
→ details comprising the cash and cash equivalents (notes to
financial statements)
Foreign currency
→ translated to Philippine currency
→ included in cash if it is not subject to any foerign exchange
restrictions
→ deposits in foreign bank subject to foreign exchange
restriction = classified separately among noncurrent assets and
restriction should be clearly indicated
Cash fund for a certain purpose
→ current asset: if cash set aside for use in current operations
or for payment of current obligation
→ long-term investment: cash fund is set aside for noncurrent
purpose or payment of noncurrent obligation
○ Sinking fund – a strategic way to save money
by setting aside a little bit each month
○ Preference share redemption fund –
repayment by the company of the obligation
on account of shares issued
○ Contingent fund – created as an imprest
account to meet some urgent or unforeseen
expenditure of the government
○ Insurance fund – insure the deposits and
protect the depositors of insured banks. To
resolve failed banks
○ Fund for acquisition – funding a company
uses specifically for the purpose of acquiring
another company
Classification of cash fund
→ classified as current or noncurrent depending on the
classification of related liability
Bank Overdraft
→ overdraft – occurs when cash in bank account has a credit
balance from issuing checks in excess of deposits
– classified as a current liability and is not to be
offset against other bank accounts with debit balances
– generally not permitted in the Philippines
■ Exception: when an entity maintains two
or more accounts in one bank, the
overdraft can be offset against the other
bank account with a debit balance
■ Bank overdrafts can be offset against
other bank accounts:
○ if the amount is not material
○ when payable on demand and often
fluctuates from positive to negative
as an integral part of cash
management
Compensating Balance
→ takes the form of minimum checking or demand deposit
account balance that must be maintained in connection with a
borrowing arrangement with a bank
→ results in the reduction of the amount borrowed because the
compensating balance provides a source of fund to the bank as
partial compensation for loan extended
(entity needs to maintain a minimum compensating balance)
Classification of compensating balance
→ if deposit if not legally restricted as to withdrawal by the
borrower because of an informal compensating balance
agreement, the compensating balance is part of cash
→ if the deposit is legally restricted because of formal
compensating balance agreement, the compensating balance is
classified as cash held as compensating balance under current
assets if the related loan is short-term
Under noncurrent
investments if the related loan is long-term
Undelivered or unreleased check
→ a check that is merely drawn and recorded but not given to
the payee before the end of reporting period
→ there is no payment when the check is pending delivery to → if the reason to disclose the cause of shortage
payee cannot be determined
→ undelivered check is still subject to the entity’s control and Loss from cash shortage xx
may be canceled anytime before delivery Cash short or over xx
Adjusting entry is required to restore the cash balance and set
up the liability (sometimes ignored because the amount if not
very substantial and there's no evidence of actual cancelation Accounting for cash overage
of check) → cash overage: cash count shows cash which is more than
Cash xx the balance per book
Accounts payable or appropriate account xx Cash xx
Cash short or over xx
Postdated check delivered → if cash overage is due to the cashier
→ is a check drawn, recorded and already given to the payee Cash short or over xx
but it bears a date subsequent to the end of reporting period Payable to cashier xx
→ the original entry recording a delivered postdated check → if the reason to disclose the cause of shortage
shall be reversed and therefore restored to the cash balance cannot be determined
(there is no payment until the check can be presented to the Cash short or over xx
bank for encashment/deposit) Miscellaneous income xx
Cash xx
Accounts payable or appropriate account xx Imprest system
→ system of control of control of cash, requires that all cash
Stale check or check long outstanding receipts should be deposited intact and all cash disbursements
● Stale check – check not encashed by the payee within a should be made by means of check (checks offer more
relatively long period of time information)
→ Negotiable Instruments Law – instrument is payable on → internal control requires all payments be made by means of
demand, and presentment must be made within a reasonable check unless it’s impractical or inconvenient (e.g. small
time after issues amounts)
Reasonable time: depends on the nature of the
instrument, usage of trade or business (banking practice = Petty cash fund
stale after 6 months) → money set aside to pay small expenses which cannot be
– even after 3 months only, the entity may issue a paid conveniently by means of check (miscellaneous
stop payment order to the bank for the cancelation of a expenses)
previously issued check
→ if the amount is immaterial: accounted for as Two methods of handling the petty cash:
miscellaneous income 1. Imprest fund system
Cash xx Disbursements from petty cash funds are recorded upon
Miscellaneous income xx replenishment
→ if the amount is material and liability is expected to Accounting procedures:
continue: cash is restored and liability is set up a. Check is drawn to establish the fund
Cash xx Petty cash fund xx
Accounts payable or appropriate account xx Cash in bank xx
b. Payment of expenses out of the fund
Accounting for cash shortage - No formal journal entries are made
→ cash shortage: cash count shows cash less than the balance - Petty cash cashier requires a signed petty voucher
per book for such payments and prepares a memorandum
Cash short or over xx entries in the petty cash journal
Cash xx c. Replenishment of petty cash payments
Cash short or over (temporary/suspense account) - When petty cash fund is low, a check is drawn to
→ if cashier/ cash custodian is responsible for replenish it (replenishment check is usually equal to
shortage petty cash disbursements
Due from cashier xx - petty cash disbursement should be replenished only
Cash short or over xx by check, not from undeposited collections
Expenses xx
 Cash in bank xx
d. Adjust the unreplenished expenses to state the correct
petty cash balance
- adjustment is reversed at the beginning of the next
accounting period
Expenses xx
Petty cash fund xx
e. Increase in the fund
Petty cash fund xx BANK RECONCILIATION
Cash in bank xx → needed for cash in bank
f. Decrease in fund ● Contract of loan – when you deposit in the bank –
Cash in bank xx although you can get back the same values, the actual
Petty cash fund xx money is different
● Contract of deposit – the thing you deposit is the very
2. Fluctuating fund system same thing you get back
→ the checks drawn to replenish the fund do not necessarily Bank Deposits
equal the petty cash disbursements Three kinds of bank deposits
→ replenishment checks are simply drawn upon the request of 1. Demand deposits
the petty cashier → is the current account or checking account or commercial
→ petty cash disbursements are immediately recorded thus deposit where deposits are covered by deposit slips and where
resulting in a fluctuating petty cash balance per book from funds are withdrawable on demand by drawing checks against
time to time the bank
a. Establishment of the fund → usually noninterest bearing, but some banks allow
Petty cash fund xx 2. Saving deposit
Cash in bank xx → the depositor is given a passbook upon the initial deposit,
b. Payment of expenses out of the petty cash fund this is required when making deposits and withdrawals
- The disbursements from the petty cash fund are → withdrawals are made anytime but the bank may require
immediately recorded notice of withdrawal
Expense xx → is interest bearing
Petty cash fund xx 3. Time deposit
c. Replenishment/ increase of fund → is interest bearing
- replenishment check may or may not be the same as → evidenced by a formal agreement ⇒ certificate of deposit
petty cash disbursements (an instrument)
Petty cash fund xx → may be pre terminated or withdrawn on demand or after a
Cash in bank xx certain period of time agreed upon
- At the end of reporting period, no adjustment is
made ● Bank reconciliation – a statement which brings into
d. Decrease of fund is reverted back to general cash agreement the cash balance per book and cash balance per
Cash in bank xx bank (prepared monthly, the bank provides depositor w
Petty cash fund xx bank statement- exact copy of the depositors)
Shows:
1. Cash balance per bank at the beginning
2. Deposits made by the resposit and
acknowledged by the bank
3. The checks drawn by the depositor and paid
by the bank
4. Daily cash balance per bank during the
month
– bank statement comes with the depositors
canceled checks and any debit or credit
memoranda that affected the depositors
account
 ● Canceled checks – canceled by stamping or punching to ○ note receivable collected by bank in favor of
show that it has been paid depositor and credited to the account of the
→ when an account is opened at the bank, the person depositor
authorized to draw checks against the account will be required ○ proceeds of bank loan credited to the
to sign cards furnished by the bank, to show the specimen account of the depositor
signatures to be used on the checks ○ matured time deposits transferred by the
→ specimen signatures will be filed by the bank so bank to the current account of the depositor
that any telling unfamiliar with a depositor's signature can test b. Debit memos – items not representing checks paid by
for authenticity bank which are charged or debited by the bank to the
→ if depositor is a corporation, bank will request that the account of the depositor but not yet recorded by the
directors pass a resolution authorizing certain officers of the depositor as cash disbursements
corporation as signatories of checks and a copy be filed with – decreases bank balance
the bank ○ No sufficient fund checks (NSF)/ Drawn
a. Collection and subsequent deposit (company) against insufficient fund (DAIF) – checks
Cash / Cash in bank xx deposited but returned by the bank due to
Accounts Receivable xx insufficient fund
Books of the bank ○ technically defective checks – checks
The account credited by the bank is demand deposit deposited but returned by the bank because of
account, but the same is posted to the subsidiary technical defects (no sig/ countersignature,
ledger of the company erasures, mutilated checks, conflict in amount)
Cash xx ○ bank service charges – include bank charges
Company name xx for interest, collection, checkbook, and penalty
When a deposit is made, there is a debtor(bank)- ○ reduction of loan – amount deducted from the
creditor(depositor) relationship current account of depositor to pay for loan to
the bank which has matured
b. Payment of an account payable (company) c. errors
Accounts payable xx
Cash xx Bank reconciling items:
Books of the bank a. Deposits in transit – collections recorded by
Company xx depositor as cash receipts but not yet reflected on
Cash xx bank statement
When a check is issued, payee will present it to the bank Include:
Depositor is actually ordering the bank to pay the payee out of – collections forwarded to bank but too late to appear in
its deposit in the bank (this is why the bank debits the account the bank statement
of depositor=reducing the liability to depositor) – undeposited collections or those still in the hands of the
= when depositors account is decreased, the same is debited depositor (cash on hand waiting to be deposited)
b. Outstanding checks – checks already recorded by
Explanation: depositor as cash disbursements but not yet reflected
○ Two accounts have equal or the same balances → they on the bank statement
are reciprocal accounts Include:
○ When one account is debited, the other account is credit – checks drawn and already given payees but not yet presented
(vice versa) → the accounts cover or reflect the same for payment
transactions – certified checks – one where the bank has stamped on its
○ If there are no errors, they should be balanced face the word “accepted”/ “certified”= sufficient fund
– is immediately debited
Reconciling items: – should be deducted from total outstanding
Book reconciling items: checks, they are no longer outstanding
a. Credit memos – items not representing deposits c. Errors
credited by the bank to the account of depositor, but
not yet recorded by the depositor as cash receipts Forms of bank reconciliation
– increase bank balance Formats used in reconciling book and bank balance:
 1. Adjusted balance method – book balance and bank Deposits in transit xx xx
balance are brought to a correct cash balance that Bank balance xx
must appear on balance sheet (prefered method)
2. Book to bank method – book balanced is reconciled Explanation:
with the bank balance ○ Book to bank method – book balance is adjusted to equal
3. Bank to book method – bank balance is reconciled the bank balance
with the book balance ○ Deposits in transit (DEDUCTED) – already increased
book balance, no effect on bank balance because
Proforma reconciliation deposits are not recorded by bank (book balance is
Adjusted balance method-add credit memos, less debit memo overstated)
-add deposits in transits, less outstanding checks ○ Outstanding checks (ADDED) – already decreased
Book balance xx book balance, no effect on bank balance because checks
Add: Credit memos xx are not yet paid by bank (book balance is understated)
Total xx
Less: Debit memos xx
Adjusted book balance xx
Bank balance xx Bank to book method- less credit memos, add debit memos
Add: Deposits in bank xx add deposits in transits, less outstanding checks
Total xx Bank balance xx
Less: Outstanding checks xx Add: Deposits in transit xx
Adjusted bank balance xx Debit memos xx xx
xx = double line Total xx
– reconciling items of the book are called credit and debit Less: Outstanding checks xx
memos Credit memos xx
– in actual formal reconciliation, details are shown Book balance xx
– errors are reconciling items of the party which committed
them Explanation:
○ Bank to book method – bank balance is adjusted to equal
Explanation: book balance
○ Adjusted balance method – book balance and bank ○ Debit memos (ADDED) – already decreased bank
balance are adjusted to equal the correct cash balance balance, but have no effect on book balance because they
○ Credit memos (ADDED)– already increased the bank are not recorded by the depositor (bank balance is
balance but have no effect on book balance because it understated)
hasn't been recorded by depositor (book balance is ○ Credit memos (DEDUCTED) – already increased the
understated) bank balance but have no effect on book balance because
○ Debit memos (DEDUCTED) – already decreased bank they are not yet recorded by the depositor (bank balance
balance but have no effect on book balance because it is overstated)
hasn't been recorded by depositor (book balance is
overstated) Unadjusted bank balance Unadjusted book balance
○ Deposits in transit (ADDED) – already increased book + Credit memos + Deposit in transit
balance, no effect on bank balance because deposits are – Debit memos – Outstanding check
not recorded by bank (bank balance is understated) +/ – errors +/ – errors
○ Outstanding checks (DEDUCTED) – already decreased Adj. balance = Adj. balance
book balance, no effect on bank balance because checks must equal
are not yet paid by bank (bank balance is overstated)
Unadj. book bal + CM – DM = Unadj. bank bal + DIT -OC
Book-bank method -add credit memos, less debit memo
-less deposits in transits, add outstanding checks → to find unadj. Bank balance = go backwards starting from
Book balance xx the adjusted balance (everything added will be subtracted, vice
Add: Credit memos xx versa)
Outstanding checks xx xx
Total xx
Less: Debit memos xx
PROOF OF CASH
ACCOUNTS RECEIVABLE
● Trade receivables – claims arising from sale of
merchandise/ services in the ordinary course of business
○ Accounts receivable (customers accounts,
trade debtors, trade accounts receivable) –
open accounts arising from the sale of goods
and services in the ordinary course of
business and not supported by promissory
notes
○ Notes receivable – supported by formal
promises to pay in the form of notes
● Nontrade receivables – claims arising from sources other
than the sale of merchandise or services in the ordinary
course of business
Classification
→ trade receivables: current assets ( within one year or
within the operating cycle, whichever is longer )
→ nontrade receivables: current assets (if expected to be
realized in cash within one year, the length of the operating
cycle notwithstanding)
noncurrent assets (collectible beyond
one year)
PAS 1, par 66 (Presentation of Financial Statements)
Entity shall classify an asset as current when the entity expects
to realize the asset or intends to sell or consume it in the
entity’s normal operating cycle, or when the entity expects to
realize the assets within twelve months after the reporting
period
Presentation
→ trade receivables and nontrade receivables: statement of
financial position as one line item - trade and other
receivables (details of total trade and other receivables: notes
to financial statements)
Accounts receivable xx
Allowance for doubtful debts xx
Notes receivable xx
Accrued interest on note receivable xx
Advances to officers and employees xx
Dividends receivable xx
Total trade and other receivables xxxxx
Examples of non trade receivables:
1. Advances to or receivables from shareholders,
directors, officers or employees (current assets if it is
collectible in one year)
2. Advances to affiliates (noncurrent investments)
3. Advances to supplies (current assets)
4. Subscriptions receivable (current- collectible w/i one
year, deduction of shareholders equity –beyond one
year)- utang shares
5. Creditors accounts with debit balances (result from
overpayment/ returns and allowances) (current
assets)
6. Special deposits on contract bids (noncurrent assets)
– likely to remain outstanding for a considerable long
period of time
7. Divided receivable, accrued rent receivable, accrued
royalties receivable and accrued interest receivable
(current assets)
8. Claims receivable - claims against common carriers
for losses or damages, claim for rebates and tax
refunds (current assets)
Customers’ credit balances
● Customers’ credit balances – credit balances in accounts
receivable resulting from overpayments, returns and
allowances and advance payments from customers
(current liabilities not offset against the debit balances in
other customers’ accounts, except when the same is not
material in which case only net amounts may be present)
Initial measurement of receivable
PFRS 9, par 5.1.1
Financial assets shall be recognized initially at fair value
plus transaction costs that are directly attributable to the
acquisition
→ fair value of a financial asset is usually the transaction
price→ fair value
→ short-terms receivables: fair value = face amount/ original
invoice amount
→ cash flows relating to short term receivables are not
discounted= effect of discounting is immaterial
→ accounts receivable: face/original invoice amount
→with respect to accounts receivable, transaction costs are not Accounts receivable xxx
normally incurred because the accounts simply arise from the Freight out xx
act of selling goods in the ordinary course of business Sales xxx
Allowance for freight charge xx
Subsequent measurement
PFRS 9, par 5.2.1 2. To record the collection within the discount period
After initial recognition, accounts receivable shall be Cash xx
measured at amortized cost Sales discount xx
→ amortized cost = net realizable value of accounts Allowance for freight charge xx
receivable Accounts receivable xx
NRV=(A/R – allowances)
→ amortized cost has more relevance in long-term note Allowance for sales returns
receivable, NRV is preferably used in relation to A/R → measurement of accounts receivable shall also recognize
→ NRV of accounts receivable is the amount of cash expected the probability that some customers will return goods that are
to be collected or the estimated recoverable amount unsatisfactory or will make other claims requiring reduction in
the amount due as in the case of shipment shortages and
Net realizable value defects
→ initial amount recognized for accounts receivable shall be Sales return xx
reduced by adjustments which in the ordinary course of Allowance for sales return xx
business will reduce the amount recoverable from the
customer Sales discount
→ based on the basic principle: assets shall not be → entities usually offer cash discounts to credit customers
carried at above their their recoverable amount → each discount is a reduction from an invoice price by
reason of prompt payment
In estimating the NRV of trade accounts receivable, these ● Cash discount – sales discount to seller, purchase
deductions will be made: discount to buyer (5/10, n/30) – customer is entitled to a
1. Allowance for freight charge 5% discount if payment is made within 10 days, if he
2. Allowance for sales return fails, gross amount of invoice must be paid within 30 days
3. Allowance for sales discount
4. Allowance for doubtful accounts Methods of recording credit sales
a. Gross method – accounts receivable and sales are
Terms related to freight charge recorded at gross amount of invoice, the gross
● FOB destination – ownership: seller until it reaches buyer method is the common and widely used method
– seller shall be responsible for freight because its simple
charge up to the point of destination (freight out- 1. Sale of merchandise for P100,00, terms 5/10,n/30
expense account) Accounts receivable 100,000
● FOB shipping point – ownership: buyer upon shipment Sales 100,000
– buyer pays for transportation charge
(freight in- adjunct account) 2. Assume collection is made within the discount period
● Freight collect – freight charge is not yet paid Cash 95,000
– common carrier shall collect the same Sales discount 5,000
from buyer = freight charge is paid by buyer Accounts receivable 100,000
● Freight prepaid – freight charge is already paid by seller
3. Assume collection is made beyond the discount period
Accounting for freight charge Cash 100,000
→ sometimes, goods are sold FOB destination but shipped Accounts receivable 100,000
freight collect with the understanding that the buyer will pay
for the freight charge and deduct the same when remittance is b. Net method – accounts receivable and sales are
made by him recorded at net amount of invoice (invoice price –
→ seller: freight charge is recorded by debiting cash discount whether taken or not)
freight out and crediting allowance for freight charge 1. Sale of merchandise for P100,000, terms 5/10,n/30
Accounts receivable 95,000
1. To record the sale Sales 95,000
 Allowance of doubtful accounts xx
2. Assume collection made within the discount period Accounts receivable xx
Cash 95,000
Accounts receivable 95,000 3. Account previously written off are unexpectedly
recovered
3. Assume collection made beyond discount period Cash xx
Cash 100,000 allowance for doubtful accounts xx
Accounts receivable 95,000 → the effect of recovery of accounts written off is zero on
Sales discount forfeited 5,000 accounts receivable because the recharging and collection are
Sales discount forfeited is classified as other income offsetting, allowance for doubtful accounts is increased by the
recovery
Accounting for bad debts
→ business entities sell on credit rather than only for cash to b. Direct write-off method
increase total sales and thereby increase income → requires recognition of a bad debt loss only when the
→ an entity that sells on credit assumes the risk that some accounts proved to be worthless/ uncollective
customers will not pay their accounts → worthless accounts are recorded by debiting bad debts, and
→ bad debt loss – when an account becomes uncollectible, crediting accounts receivable
this loss is one of the costs of doing business on credit → if accounts are doubtful of collection, no adjustment is
made
Two methods in accounting for bad debt loss → usually applies to small businesses
a. Allowance method → BIR recognizes only this method for income tax purposes
→ conforms with the matching principle → this method also violated the matching principle because
→ accounts receivable would be properly measured at net bad debts is often recognized in later accounting period than
realizable value the period in which the sales revenue was recognized
→ requires recognition of a bad debt loss if the accounts are → not permitted under IFRS
doubtful of collection 1. xx is considered doubtful of collection
Doubtful accounts xx No entry necessary
Allowance for doubtful accounts xx
– allowance for doubtful accounts is a deduction from 2. Account is worthless
accounts receivable Bad debts xx
Accounts receivable xx
– if doubtful accounts are subsequently found to be worthless,
the accounts are written off as uncollectible 3. Account previously written off is recovered
Allowance for doubtful accounts xx Accounts receivable xx
Accounts receivable xx Bad debts xx

Recoveries of accounts written off Cash xx

→ if a collection is made on account previously written off as
uncollectible, the customary procedure is to recharge the
customer's account with the amount collected and possibly
with the entire amount previously charged off if it is now
expected that that collection will be received in full
→ collection is recorded manually (debit cash, credit A/R)
→ recharging is an evidence of the attempt of the customer to
reestablish his credit with the entity
→ simply reverse he original entry of writeoff
1. xx amount is considered doubtful of collection
Doubtful accounts xx
Allowance for doubtful accounts xx
2. Accounts are subsequently discovered to be
uncollectible
Accounts receivable xx
→ if recovery is subsequent to the year of writeoff and the
direct writeoff method is used, recovery may simply be
credited to other income
Doubtful accounts in the income statement
1. Distribution cost
→ if the granting of credit and collection of accounts are
under the charge of the sales manager, doubtful accounts shall
be considered as distribution cost
2. Administrative expense
→ if the granting of credit and collection of accounts are
under the charge of an officer other than sales manager,
doubtful accounts shall be considered as administrative
expense
→ in the absence of of any contrary statement, it shall be Recovery
administrative expense End, Bal

*DAE/provisions/Bad debt/ADA

When is an account past due?

→ credit terms will determine (2/10,n/30= everything past 30
days
→ past due: period beyond the maximum credit term

Required allowance balance =certain rate x open accounts at

the end of the period
→ rate used is determined from past experience
→ advantage: presents the accounts receivable at estimated
net realizable value, simple
→ disadvantage: loss experience rate is difficult to obtain and
may not be reliable, violated principle of matching bad debt
loss against sales revenue

ESTIMATION OF DOUBTFUL ACCOUNTS

Methods of estimating doubtful accounts Doubtful accounts receivable xx
3 methods of estimating doubtful accounts Allowance of doubtful accounts xx
1. Aging the accounts receivable Required allowance (% x xx) xx
Balance sheet method Less: Credit balance in allowance xx
Amount gotten=end bal Doubtful accounts expense xx
2. Percent of accounts receivable
3. Percent of sales – IS method Percent of Sales / Credit Sales
Amount gotten = DAE → method of estimating bad debts that focuses on the income
statement rather than the statement of financial position is
Aging of accounts receivable allowance method based on
→ method of estimating bad debts that focuses on the income Doubtful accounts expense = amounts of sales for the year x
statement rather than the statement of financial position is certain rate
allowance method based on → rate may be applied on credit sales of total sales
→ involves an analysis where the accounts are classified into Rate = bad debt loss in prior years / charge sales of prior years
not sue or past due → there is no substantial difference if in the computation of
→ advantage: presents accounts receivable fairly and the rate, the basis is total sales of the prior periods
scientific computation of the allowance for doubtful accounts → advantage: eliminating extra work of making a record of
→ disadvantage: violates matching process, could be time cash sales and credit sales
consuming is large number of accounts are involved → disadvantage: may prove unsatisfactory when there is a
→ amount computed represents the required allowance for considerable fluctuation in the proportion of cash and credit
doubtful accounts at the end of the period sale periodically
allowance = total of each classification x rate/ percent of loss
experiences Argument for percent of sales method
1. Record doubtful accounts expense → there is proper matching of cost against revenue
Doubtful accounts xx → bad debt loss is directly related to sales and
allowance for doubtful accounts xx reported in the year of sale
→ this method is an income statement approach: it favors the
ADA income statement
Writeoff Beg, Bal
DAE Argument against percent of sales method
→ the accounts receivable may not be shown at estimated
realizable value because the allowance for doubtful accounts
may prove excessive or inadequate
→ makes it necessary for the accounts to be “aged” from time
to time to ascertain the probable loss
→ rate applies on sales should be revised accordingly

Accounts receivable xx
Sales xx
Sales return xx
Allowance for doubtful accounts xx

→ the resulting amount of the computation is already the

amount of the doubtful accounts expense, and not the required
allowance
→ allowance balance before adjustment is ignored in
determining the doubtful accounts expense to be recorded

Correction in allowance for doubtful accounts

→ has the disadvantage of the allowance for doubtful
accounts being inadequate or excessive = aging accounts is
necessary to test the reasonableness of the allowance
→ correction is to be reported in the income statement- either
as an addition to or subtraction from doubtful accounts
expense
1. Inadequate allowance adjustment
Doubtful accounts xx
Allowance for doubtful accounts xx
2. Excessive allowance (there is a corollary problem
when the discrepancy is more than the debit balance
in the doubtful accounts expense account)
Allowance for doubtful accounts xx
Doubtful accounts xx
Debit balance in allowance account
→ allowance for doubtful accounts is normally credit balance,
but it may have a debit balance because it may be the policy of
the entity to adjust the allowance at the end of the year and
record accounts written off during the year
→ debit balance does not indicate that the allowance is
inadequate because the accounts written off during the year
and charged to the allowance may have arisen from current
year sales
→ charge to the allowance account simply predates
the recording of doubtful accounts
→ at the end of the period when adjustments are
made, the debit balance should be considered
Doubtful accounts xx
Allowance for doubtful accounts xx
Required allowance xx
Add: debit balance in allowance xx
Doubtful accounts expense xx
NOTES RECEIVABLE
● Notes receivable – claims supported by formal promises
to pay usually in the form of notes
– represents only claims arising from
sale of merchandise or service in the
ordinary course of business
(notes received from officers, employees,
shareholders, affiliates, are separate)
● Negotiable promissory note – unconditional promise in
writing made by one person to another, signed by the
maker, engaging to pay on demand or at a fixed
determinable future time a sum certain in money to order
or to bearer
● Promissory note – a written contract in which one person
(maker) promises to pay another (payee) a definite sum of
money
→ note may be payable on demand or at a definite future date
Dishonored notes
● Dishonored – when a promissory note matures and is not
paid
→ dishonored notes receivable should be removed from notes
receivable and transferred to accounts receivable
→ amount debited to accounts receivable should include the
face amount, interest and other charges
→ such approach is defended on the ground that the overdue
note has lost part of its status as a negotiable instrument and
really represents only an ordinary claim against the maker
Initial measurement of notes receivable
→ present value: (to preserve and value the purchasing
power)
Present value = sum of a all future cash flows discounted
using the prevailing market rate of interest for similar notes
→ Prevailing market rate of interest is the effective interest
rate
→ face amount: short-term notes receivable
→ cash flows relating to short-term notes receivable are not
discounted , the effect of discounting is not material

Interest-bearing notes receivable

→ initial measurement of long-term notes will depend on
whether the notes are interest-bearing or non interest bearing
→ face amount, the present value upon issuance:
interest-bearing long term notes

Non Interest-bearing notes receivable

→ present value, it the discounted value of the future cash
flows using the effective interest rate: non interest-bearing
long-term notes
→ non interest = interest is already included in the face
amount rather that being stated as separate rate (all notes
contain interest)

Subsequent measurement
→ amortized cost using the effective interest method:
long-term notes receivable
● Amortized cost – amount at which the note receivable is
measured initially:
○ Minus principal repayment
○ Plus or minus cumulative amortization of any
difference between the initial carrying amount and
the principal maturity amount
○ Minus reduction for impairment or uncollectibility
→ long-term non interest bearing notes receivable, amortized
cost = present value + amortization of the discount/ the face
amount minus the unamortized unearned interest income
*rely on book for computations and examples*
LOAN RECEIVABLE
● Loan receivable – a financial asset arising from a loan
granted by a bank or other financial institution to a
borrower or client
– term of the loan may be short term but
in most cases, the repayment periods cover several years
Initial measurement of loan receivable
→ fair value plus transaction costs/directly attributable
costs/ direct origination fees that are directly attributable
to the acquisition of the financial asset
→ the fair value of the loan receivable at initial
recognition is normally the transaction price (amount of
loan granted)
→ transaction costs that are directly attributable to the
loan receivable include direct organization costs (direct
organization costs should be included in the initial
measurement of the loan receivable)
→ indirect organization costs should be treated as
outright expense

Subsequent measurement of loan receivable

→ amortized cost using the effective interest method
● Amortized cost – amount at which the loan receivable is
measured initially:
○ Minus principal repayment
 ○ Plus or minus cumulative amortization of → if origination fees received exceed the direct organization
any difference between the initial carrying costs, the difference is unearned interest income and the
amount and the principal maturity amount amortization will increase the interest income
○ Minus reduction for impairment or → if the direct origination costs exceed the origination fees
uncollectibility received, the difference is charged to “direct origination costs”
→ if initial amount recognized is lower than the and the amortization will decrease interest income
principal amount, the amortization of the difference is → origination fees received and the direct origination costs are
added to carrying amount included in the measurement of the loan receivable
→ if initial amount recognized is higher than the
principal amount, the amortization of the difference is Illustration:
deducted from the carrying amount Global Bank granted a loan to a borrower on Jan. 1, 2021. The
interest on the loan is 12% payable annually starting Dec. 31,
Origination fees 2021. The loan matures in three years on Dec. 31, 2023
● Origination fees – fees charged by the bank against
borrower for creation of loan Principal amount 5,000,000
– include compensation for the Origination fees received from borrower 331,800
following activities: Direct origination costs incurred 100,000
○ Evaluating the borrower’s financial condition
○ Evaluating guarantees, collateral and other Initial carrying amount of the loan
security Principal amount 5,000,000
○ Negotiating the terms of the loan Origination fees received from borrower( – ) (331,800)
○ Preparing and processing the documents related Direct origination costs incurred (+) 100,000
to the loan Initial carrying amount of loan 4,768,200
○ Closing and approving the loan transaction
if principal = CV, then
– May either be charged to the nominal interest rate(the loan given, 12% ^) = effective
borrower (borrower will shoulder the expense→ will be interest rate (actual interest incurred)
deducted from carrying amount - like advanced Annual receipt = interest income
payment/interest) or not charged to borrower (added to
carrying amount being a direct attributable costs) → if principal and initial carrying amount do not equal, you
need to compute the effective interest rate
Carrying amount = principal + direct origination fees –
origination fees charged to the borrower/ received from 3 years, 12% annually
borrower P=5,000,000
→ means that principal amount may not equal to carrying Interest= 600,000 (5,000,000 x 12%)
amount 5M
→ effective interest rate greater than nominal 600k 600k 600k
interest rate – if carrying amount is less than principal 0 1 2 3
amount
→ effective interest rate lesser than nominal PV of annual payment + present value of lump sum
interest rate – if carrying amount is greater than principal PV = PMT (
1 − (1+ 𝑖)
−𝑛
) + PMT (
1
)
𝑖 𝑛
amount (1 + 𝑖)
i = effective interest rate
Accounting for origination fees
→ origination fees received from borrower are recognized as Computing for annual – use nominal, interest for i is the
unearned interest income and amortized over the term of the effective interest rate
loan
→ if origination fees are not chargeable against the Computing for new effective interest rate:
−𝑛
borrower, the fees are known as “direct origination PV = PMT (
1 − (1+ 𝑖)
) + PMT (
1
)
𝑖 𝑛
(1 + 𝑖)
costs” which are deferred and amortized over the term of −3
1 − (1+ 𝑋) 1
the loan 4,768,200 = 600,000 ( ) + 5,000,000( 3 )
𝑋 (1 +𝑋)
→ direct origination costs are offset directly against
X = 13.99 or ≈14%
any unearned origination fees received
 → carrying amount of loan receivable shall be reduced
directly or through use of an allowance account
Solving for x in Casio fx-570ES PLUS:
X → alpha + )
= → alpha + CALC Meaning of credit risk
Shift + SOLVE ● Credit risk – risk that one party to a financial instrument
will cause a financial loss for the other party by filing to
discharge an obligation
Impairment of loan
→ risk contemplated is the risk that the issuer will fail to
→ impairment of loan is similar to write off in accounts
perform a particular obligation (risk does not necessarily relate
receivable (those deemed uncollectible)
to credit worthiness of issuer)
● Credit losses – present value of all cash shortfalls
– caused by credit risk
Illustration on p. 208
– risk that a person will lose because of
Steps:
financial instability of the other
1. Make schedule of payments
→ entity shall recognize a loss for allowance for expected
2. Compute for carrying amount of loan receivable
credit losses on financial asset measured at amortized cost
(principal + accrued interest)
→ entity shall measure the loss allowance for a financial
3. Compute present value of schedule of payments
instrument at an amount equal to the lifetime expected credit
21 22 23 24
losses if the credit risk on that financial instrument has
500k 1M 1.5M
increased significantly since recognition
→ get the present value
→ you cannot use PV ordinary annuity if amounts are not
3 stages of expected credit losses:
equal, you have to use lump sum method
Stage 1: slight increase in credit risk (client is buying a lot)
500,000
→ this stage covers debt instruments that have not 1 =454545.4545
(1 + 10%)
declined significantly in credit quality since initial recognition 1,000,000
=826446.28
or that have low credit risk (1 + 10%)
2

Stage 2: significant increase in credit risk (might file for 100,500,000

3 =1126972.20
(1 + 10%)
bankruptcy, but no objective evidence)
→ this stage covers debt instruments that have ___________
declined significantly in credit quality since initial recognition 2,407,963.94
but do not have objective evidence of impairment 4. Difference between 2 and 3 = impairment loss
→ a lifetime expected credit loss is recognized CA 3,300,000
→ there is rebutable presumption that there is PV 2,407,900
significant increase in credit risk if the contractual payments 892,100 → impairment loss
are more than 30 days past due
Stage 3: there is already objective evidence of impairment Impairment loss 892,100
→ a lifetime expected credit loss is recognized Accrued interest receivable 300,000
Allowance for IL 592,100
Measurement of impairment
→ when measuring expected credit losses, an entity should 5. Prepare amortization table
consider:
● probability- weighted outcome– estimate should Interest Income Allowance of IL Balance/ CA
reflect the possibility that a credit loss occurs and the
possibility that no credit loss occurs 592,100 2,407,900
● Time value of money – expected credit losses should
240,790 351,310 2,167,110
be discounted
(2,407,900 x 0.1) (592,100 - (2,407,900 –
● Reasonable and supportable information that is 240,790) 240,790)
available without undue cost or effort

→ PFRS 9 does not prescribe particular method of measuring PMT Interest Allowance Balance/ CA
expected credit losses Income of IL
Amount of impairment loss = carrying amount – present value
of estimated future cash flows discounted at the original 592,100 2,407,900
effective rate (recoverable amount)
 500,000 240,790 259,210 2,148,398
(2,407,900 x (500,000 - (2,407,900 –
0.1) 240,790) 259,210)

1,000,000 214,839.8 785,160 1,363,230

1,500,000 136,323.8 1,363,229 0

Cash 500,000
Loans receivable 500,000 (1st payment)

Allowance for impairment losses 240,790

Interest income 240,790

Allowance for impairment losses 214,839

Interest income 214,839

Allowance for impairment losses 136,323

Interest income 136,323

→ if loans receivable has undergone impairment, any interest

income is charged against allowance for loan impairment

12-month expected credit loss

→ defined as the portion of the lifetime expected credit loss
that results from all default events over the expected life of the
instrument
→ shall always be recognized for trade receivables through
aging, percentage of accounts receivable and percentage of
sales

Interest income
(1) Under stages 1 and 2, interest income is computed RECEIVABLE FINANCING
based on the gross carrying amount/ face amount Pledge, assignment, and factoring
(2) Under stage 3, interest income is computed based on ● Receivable financing – financial flexibility or capability
the net carrying amount which is equal to the face of an entity to raise money out of its receivables
amount minus allowance for loan impairment → entity may be forced to look for cash by financing its
receivables if they are in a tight cash position due to business
Interest payment = face value x nominal interest rate decline
Interest income = carrying value x effective interest rate
Forms of receivable financing
(1) Pledge of accounts receivable
→ is general because it encompasses all of A/R to serve as
collateral security for loan
→ record loan:
Cash xx
Discount on note payable (if loan is discounted) xx
Crediting note payable xx
→subsequent paying of loan
Note payable xx
Cash xx
→ no entry is necessary to pledged accounts, disclosure made
in note to financial statement is sufficient enough
(2) Assignment of accounts receivable
→ borrower called the assignor transfers rights rights in some
accounts receivable to a lender (assignee) in consideration for
a loan
→ specific because specific accounts receivable serve as
collateral for loan (assignor retains ownership of accounts
assigned)
→ may either be:
○ Nonnotification basis – customers are not informed
that their accounts have been assigned = customers
continue to make payments to the assignor, who
remits the collections to assignee
○ Notification basis – customers/trade debtors are
notified to make their payments directly to assignee
– Notes payable is debited when
there's payment of accounts payable since the
customers payment to the bank is treated as your own
payment
If it wasn’t assigned:
Cash xx
Saes discount xx
A/R xx
Since bank is the one who received cash and that cash is
treated as settlement of loan = notes payable
Cash xx
Service charge xx
Notes payable- bank xx
→ assignee usually lends only a certain percentage of the face
value of the accounts assigned because the assigned accounts
may not be fully realized by reason of such factors (sales
discount, sales return and allowances and uncollectible
accounts)
→ assignee usually charges interest for the loan that it makes
and requires a service or financing charge or commission for
the assignment agreed
(3) Factoring of accounts receivable
→ sale of accounts receivable usually on without recourse,
notification basis
→ entity sells accounts receivable to a bank or finance entity
(factor)
→ gain or loss is recognized for the difference between the
proceeds received and the net carrying amount of the
receivables factored
→ an entity actually transfers ownership of the accounts
receivable to factor = factor assumes responsibility for
uncollectible factored accounts
→ customers whose accounts are factored are notified and
required to pay directly to the factor
→ factor has the responsibility of keeping the receivable
records and collecting the accounts
→ may take the form of the following:
○ Casual factoring
→ entity finds itself in a critical cash position, may be forced
to factor some or all of its accounts receivable at a substantial
discount to a bank or a finance entity to obtain the much
needed cash
→ NRV = carrying amount of A/R
○ Factoring as a continuing agreement
→ may involve a continuing arrangement where a finance
entity purchases all of the accounts receivable of a certain
entity
→ factor assumes the credit function as well as collection
function if factor approves of credit approval of the selling
entity, then, the merchandise is shipped to factor
→ factor may withhold a predetermined amount as a
protection against customer returns and allowances and other
special adjustments
● Factor’s holdback– amount reserved by bank for any
sales return and sales allowances (asset account)
– factor returns excess bank
(receivables from bank)
● Credit card – plastic card which enables the holder to
obtain credit made up to a predetermined limit from the
issuer of the card for the purchase of goods and services
– enables retailers and other business to
continue to sell goods and services where the customers
obtain possession of the goods immediately but do not
have to pay for the goods for about a month
→ two entries: (1) one at the time of sale and (2) when
payment is received from the card issuer
Discounting of note receivable
→ as a form of receiving financing, discounting specifically
pertains to note receivable
→ promissory note: original parties → maker (the one liable)
and payee (the one entitled to payment on date of maturity)
→ when note is negotiable – payee may obtain cash before
maturity date by discounting the note at a bank or other
financing company
→ to discount the note, payee must endorse it = payee
becomes an endorser and the bank becomes an endorsee
● Endorsement – transfer of right to a negotiable instrument
by simply signing at the back of the instrument
– may be with recourse – endorser shall
pay endorsee if maker dishonors the note
(in absence of evidence to the contrary,
endorsement is assumed to be with recourse)
→ legal parlance: secondary liability of endorser
 → accounting parlance: this is the contingent liability to
endorsee
– may be without recourse – the endorser avoids
future liability even if the maker refuses to pay the
endorsee on the date of maturity

Terms relating to discounting of note:

● Net proceeds — discounted value of the note received by
endorser from endorsee
Net proceeds = maturity value – discount
● Maturity value – amount due on the note at the date of
maturity
Maturity value = principal + interest
● Maturity date – date on which the note should be paid
● Principal (Face value)– amount appearing on face of
note
● Interest – amount of interest for the full term of the note
Interest = principal x rate x time
● Interest rate – rate appearing on the face of the note
● Time – period within which interest shall accrue ,it is the
period from date of note to maturity date (the entire
period or full term of the note)
● Discount – amount of interest deducted from the bank in
advance
Discount = maturity value x discount rate x discount period
● Discount rate – rate used by the bank in computing the
discount (if no discount rate is given, interest rate is safely
assumed as discount rate, BUT both should not be
confused with each other)
● Discount period – period of time from date of discounting
to maturity date (the unexpired term of note)
Discount period = term of the note – expired portion up to the
date of discounting

→ note receivable discounted account is deducted from the

Conditional Sale
total notes receivable when preparing the statement of
financial position with disclosure of the contingent liabilities LIABILITIES
Notes receivable carrying amount = Notes receivable – note ● Liabilities – present obligations of an entity to transfer an
receivable discounted economic resource as a result of past events
Characteristics:
1. Entity has a present obligation
● Obligation – duty or responsibility that an entity has no
practice ability to avoid
– entity liable must be identified, but payee owed
may not be identified
2. Obligation is to transfer an economic resource
– is the very heart of the definition of an accounting
liability
– obligation must be to: (1) pay cash,
(2) transfer non cash asset
(3) provide service
at some future time
 ● Economic resource – asset that represents a right with a
potential to produce economic benefit
3. The liability arises from a past event
– liability is not recognized until incurred
● Present obligation – may be a:
1) legal obligation – obligation may be legally
enforceable as a consequence of binding
contract or statutory requirement (accounts
payable for goods/ services received)
2) constructive obligation – gives rise to
liability by reason of normal business
practice, custom and a desire to maintain
good business relations or act in an equitable
manner
Transfer of an economic resource
→ without payment of money, without transfer of non cash
asset, without performance of service = no accounting liability
⇒ accounting liability: payment of dividend – there is an
obligation to pay cash
⇒ no accounting liability: payment of share dividend (issue
entity’s own shares) – is not a transfer of non cash asset
because share capital is an equity item (included in equity
rather than an accounting liability)
Past event
● Obligating event – past event that leads to a legal or
constructive obligation
– creates a present obligation because
the entity has no realistic alternative but to settle the
obligation created by the event
Ex:
– Acquisition of goods (obligating event)⇒ gives rise to
accounts payable
– Receipt of a bank loan (obligating event = cash received
from the bank as a consequence of the bank loan) ⇒
obligation to repay loan
Examples of liabilities:
(1) Accounts payable to suppliers for the purchase of
goods
(2) Amounts withheld from employees for taxes and for
contributions to the Social Security system (SSS)
(3) Accruals for salaries, interest, rent, taxes, product
warranties, and profit sharing bonus)
(4) Dividends payable in cash or non cash asset
(5) Deposits and advances from customers
(6) Debt obligations for borrowed funds – notes,
mortgages, bonds payable
(7) Income tax payable
(8) Deferred or unearned revenue
Current liabilities
Current when:
(1) Entity expects to settle the liability within the entity’s
operation cycle
(2) Entity holds the liability primarily for the purpose of
trading
(3) Liability is due to be settled within twelve months
after reporting period
(4) Entity does not have the right at the end of the
reporting period to defer settlement of the liability for
at least twelve months after the reporting period
→ Trade payables, accruals for employee and other
operating costs are part of working capital used in the entity’s
normal operating cycle
→ such operating items are classified as current
liabilities even if settled more than twelve months after
reporting period (when normal operating cycle is not clearly
identifiable, 12 months is the assumed duration)
→ other current liabilities are not settled as part of the normal
operating cycle, BUT are due for settlement within 12 months
after reporting period or held primarily for trading
→ ex: financial liabilities held of trading, bank
overdrafts, dividends payable, income tax payable, other non
trade payables due within 1 year and current portion of
noncurrent financial liabilities
→ financial liabilities held for trading are financial liabilities
that are incurred with an intention to repurchase them in the
near term
→ ex: quoted debt instrument that the issuer may buy
back in the near term depending on changes in fair value
Measurement of current liabilities
⇒ initially measured at present value
⇒ subsequently measured at amortized cost
⇒ current liabilities/ short-term obligations measured at face
amount and not discounted anymore because discount or
difference between face amount and present value is not
material
Presentation of current liabilities
Face of the statement of the statement of financial position
should include at least::
(1) Trade and other payables (includes accounts payable,
notes payable, accrued interest on note payable,
dividends payable, accrued expenses)
(2) Current provisions
(3) Short-term borrowing
(4) Current portion of long-term debt
(5) Current tax liability
 ● Estimated liabilities – obligations which exist at the end
of reporting period although their amount is not definite
– date when obligation is due is not
also definite, the exact payee cannot be identified or
determined (in some cases)
– existence of the estimated
liabilities is valid and unquestioned
● Deferred revenue (unearned revenue) – income already
received but not yet earned.
– may be
realizable:
(1) within one year (current liability) ⇒ ex: unearned
interest income, unearned rental income, unearned
subscription revenue
or
(2) more than one year after the end of the reporting
period (noncurrent liability) ⇒ ex: unearned revenue
from long-term service contracts and long-term
leasehold advances
Noncurrent liabilities
→ noncurrent liabilities is a residual definition (all liabilities
not classified as current are noncurrent)
Examples:
(1) Noncurrent portion of long-term debt
(2) Finance and lease liability
(3) Deferred tax liability
(4) Long-term obligation to officers
(5) Long-term deferred revenue
Long-term debt falling due within one year
→ a liability due to be settled within 12 months after reporting
period is CURRENT even if:
a. Original term was for a period longer than 12 months
b. Agreement to refinance or to reschedule payment on
a long-term basis is completed after the reporting
period and before the financial statements are
authorized for issue
BUT
If refinancing on a long-ter, basis is completed on or
before the end of the reporting period, the refinancing
is an adjusting event and therefore the obligation is
classified as noncurrent
→ if the entity has the right at the end of the reporting period
to roll over an obligation for at least 12 months after the
reporting period under an existing loan facility, the obligation
is NONCURRENT
→ right to defer settlement for at least 12 months
after reporting period must exist at the end of the reporting
period IF NOT, there is no potential to refinance and therefore,
liability is CURRENT
Measurement of noncurrent liabilities
⇒ noncurrent liabilities (bonds payable, noninterest bearing
note payable) measured at present value
⇒ subsequently measured at face amount (face amount =
present value of note payable, amortized cost for bond
payable)
Covenants
● Covenants – usually attached to borrowing agreements
which represent undertakings by the borrower
– are actually restrictions on the borrower as
to undertaking further borrowings, paying dividends,
maintaining specified level of working capital and so
forth
Breach of covenants
→ if certain conditions relating to the borrower’s financial
situations are breached = liability becomes payable on demand
= CURRENT even if the lender has agreed after the reporting
period and before the statements are authorized for issue
(current because at the end of the reporting period, the entity
does not have the right to defer settlement for at least 12
months after the end of reporting period)
BUT
NONCURRENT if lender has agreed on or before the end of
the reporting period to provide a grace period ending at least
12 months after the end of reporting period
● Grace period – period within which the entity can rectify
the breach and during which the kender cannot demand
immediate repayment
Bonus computation:
→ purpose: motivate officers and employees by directly
relating their well-being to the success of the entity
Variations of bonus compensation:
Bonus is expressed as a certain percent of income:
(1) BEFORE bonus and BEFORE tax
(2) AFTER bonus but BEFORE tax
(3) AFTER bonus and AFTER tax
(4) AFTER tax but BEFORE bonus
Income before bonus and before tax 4,400,000
Bonus 10%
Income tax rate 25%
BEFORE bonus and BEFORE tax
Income before bonus and before tax 4,400,00
Bonus x 10%
440,000
AFTER bonus but BEFORE tax
B = bonus rate (income - bonus rate)
 → ex: customer deposit required for returnable
B = 0.10 (4,400,000 - 0.10)
B = 440,00 -0.10B containers (bottles, drums, tanks, barrels)
B + 0.10B = 440,000 Deposit – P 10,000 from the customer deposit required for
1.10B = 440,000 returnable containers. Containers cost P8,000
B = 440,000 Cash 10,000
1.10 Container’s deposit 10,000
B = 400,000
→ container’s deposit account is usually classified as current
Proof:
Income before bonus and before tax 4,400,000 liability
Bonus 400,000 → if the customer returns the containers, the deposit
Income after bonus but before tax 4,000,000 is simply refunded
Bonus rate 10% → if the customer does not return the container,
Bonus 400,000 deposit is considered the sale price of the containers
→ excess of the deposit over the cost of the
AFTER bonus and AFTER tax
containers is considered a gain
B = bonus rate (income - B - T)
T = 0.25 (4,400,000 - B)
B = 0.10 [ 4,400,000 - B - 0.25 (4,400,000 -B)]
B = 0.10 (4,400,000 - B - 1,100,000 + 0.25B)
B = 440,000 - 0.10B - 110,000 + 0.25B
B + 0.10B - 0.25B = 440,000 -110,000
1.075B = 330,000
B = 330,000
1.075
B = 306,977
T = 0.25 (4,440,000 - 306,977)
T = 1,023,255

Proof:
Income before bonus and before tax 4,400,000
Bonus (306,977)
Tax (1,023,255)
Income after bonus and after tax 3,069,768
Bonus rate 10%
Bonus 306,977

AFTER tax but BEFORE bonus

B = 0.10 (4,400,000 – T)
T = 0.25 (4,400,000 – B)
B = 0.10 [4,400,000 – 0.25 (4,400,000 – B)]
B = 440,000 – 110,000 + 0.25B
B – 0.25B = 440,000 – 110,000
0.975B = 330,000
B = 330,000
0.975
B = 338,462
Proof:
Income before bonus and before tax 4,400,000 NOTE PAYABLE
Tax (4,400,000 – 338,462x 25%) (1,015,385) ● Promissory note – an unconditional promise in writing
Income after tax but before bonus 3,384,616
Bonus rate 10% made by one person to another, signed by the maker,
Bonus 338,462 engaging to pay on demand or at a fixed or determinable
future time a sum certain in money to order or to bearer

● Refundable deposits – consist of cash or property

Measurement of Notes Payable
received from customers but which are refundable after
⇒ initial measurement: fair value minus transaction costs that
compliance with certain conditions
are directly attributable to the issue of the note payable
BUT if note payable is irrevocably designated at fair value → when a property or non cash asset is acquired by issuing a
through profit or loss, transaction costs are EXPENSED promissory note which is interest bearing, the property or asset
immediately is recorded at the purchase price
→ purchase price is the present value of
→ Fair value = present value of the future cash payment to note = fair value because note issued is interest bearing
settle the note payable using market rate of interest
On Jan. 1, 2021, an entity acquired an equipment for
⇒ subsequent measurement: (1) amortized cost using effective P1,000,000 payable in 5 annual equal installments every Dec.
interest method 31 of each year. Interest is 10% on the unpaid balance
→ amortized cost = amount at which the note 2021
payable is initially measured initially: 1/1 Equipment 1,000,000
a. Minus principal repayment Note Payable 1,000,000
b. Plus or minus the cumulative amortization
using the effective interest method of any 12/31 Interest expense (10% x 1M) 100,000
difference between the face amount and Note payable 200,000
present value of the note payable Cash 300,000
★ discount or premium = face amount – present value Payment of the first installment
and the interest for 2021
: (2) at fair value through profit or
loss (if note payable is designated irrevocably as measured at 2022
fair value through profit or loss) 12/31 Interest expense (10% x 800k) 80,000
(1M- 200k)
Note issued solely for cash Notes payable 200,000
→ when a note payable is issued solely for cash, the present Cash 280,000
value is equal to the cash proceeds
Noninterest bearing note issued for property
Note payable xx → when a non interest bearing note is issued for property, the
Discount (% x note payable) (xx) property is recorded at the cash price = present value of note
Net proceeds xx issued

Cash (net proceeds) xx ★ Imputed interest = Cash price – face amount

Discount on note payable xx (total interest expense – based the philosophy that no lender would part
for one year) away with his money or property interest free
Note payable xx
On Jan. 1, 2021, an entity acquired an equipment with a cash
Interest Expense xx price of P350,000 for P500,000, P100,000 down and the
Discount on note payable xx balance payable in 4 equal annual installments
(note payable x n/12) → n = remaining months 1/1 Equipment 350,000
Discount of note payable 150,000
● Straight line method – used in amortizing the discount on Cash 100,000
note payable for simplicity (since not payable has a term Note payable 400,000
of only 1 year)
Note payable xx 12/31 Note payable 100,000
Discount on note payable (xx) Cash 100,000
Carrying amount xx Payment of annual
→ discount on note payable is a direct deduction from the face installment
amount of the note payable 12/31 Interest expense 600,000
→ the carrying amount is the amortized cost of the note Discount on note payable 60,000
payable Amortization of the discount
for 2021
Interest bearing note issued for property
Amortization table
 Year Note payable Fraction Amortization Year Payment Interest (I) Principal (P) PV
(PMT)
2021 400,000 4/10 60,000 1/1/21 758,160
150,000 x 4/10
12/31/21 200,000 75,816 124,184 633,976
2022 300,000 3/10 45,000
150,000 x 3/10 12/31/22 200,000 63,398 136,602 497,374

2023 200,000 2/10 30,000 12/21/23 200,000 49,737 150,263 347,111

150,000 x 2/10
12/31/24 200,000 34,711 165,289 181,822
2024 100,000 1/10 15,000
150,000 x 1/10 12/31/25 200,000 18,178 181,822 –

1,000,000 150,000
Current portion of note payable of Dec 31 that is reported as
→ note payable represents the amount outstanding every year current liability
Note payable 200,000
No cash price Discount on note payable (63,398)
On Jan. 1, 2021, an entity acquired an equipment for Carrying amount (amortized cost) 136,602
P1,000,00 in 5 equal annual installments on every Dec 31 of
each year Noncurrent portion of the note payable should be reported as
→ cost of the equipment is equal to the present value of the noncurrent liability
P200,000 (1,000,000 / 5 installments) annual installments at Note payable 600,000
an appropriate rate of 10% (10% is assumed to be the Discount on note payable (102,626)
prevailing market rate of interest) Carrying amount (amortized cost) 497,374
−𝑛
1− (1 + 𝑖)
★ Ordinary Annuity: PVF = 𝑖
Non interest bearing note payable lump sum
−5 On Jan. 1, 2021, an entity acquired an equipment for
1− (1 + 0.1)
⇒PVF = 0.1
= 3.791/3.790786769 (present value of P1,000,000. The entity paid P100,000 down and signed a non
five P200,000 installments is P758,160 (200,000 x 3.7908) interest bearing note payable for the balance which is due after
three years on Jan. 1, 2024
1/1 Equipment 758,160 → no established cash price
Discount on note payable 241,840 → prevailing interest rate for this type of note is 10%
1
Note payable 1,000,000 ★ Lump sum: PVF = 𝑛
(1 + 𝑖)
1
12/31 Note payable 200,000 ★ PVF = 3 = 0.7513
(1 + 0.1)
Cash 200,000 Computation:
First installment payment Downpayment 100,000
Present value of note payable 676,170 (900,000x 0.7513)
12/31 Interest expense 75,816 (758,160 x 10%) Cost of the equipment 776,160
Discount on note payable 75,816
Imputed interest
Face amount of note payable 900,000
Present value of note payable (676,170)
Imputed interest 223,830

Equipment 776,160
Discount on note payable 223,830
Cash 100,000
Note Payable 900,000
To record the purchase of
Effective interest method is followed in the amortization if equipment on 1/1/21
discount Interest expense 67,617
(PV x i%) PMT – I PV – P Discount on note payable 67,617
 To record the interest expense On Jan. 1, 2021, an entity borrowed from a bank P4,000,000
for 2021 on a 12% 5-year interest bearing note
The entity received P4,000,000 (fair value of the note on
Discount on note payable is amortized as interest expense 1/1/21) Transaction cost of P100,000 was paid by the entity
using the effective interest method Fair value of the note payable was P3,500,000 on 12/31/21
The entity has elected irrevocably the fair value option for
Note payable 900,000 measuring the note payable
Cash discount 900,000 Change in fair value comprised P50,000 attributable to credit
To record the full payment risk and P450,000 attributable to interest risk
of the note on 1/1/24
1/1 Cash 4,000,000
Table of amortization Note payable 4,000,000
PV x i% previous discount – I PV + I
1/1 Transaction cost 100,000
Date Interest Discount on note PV
expense payable Cash 100,000

1/1/21 223,830 676,170 12/21 Interest expense 480,000 (12% x 4,000,000)

900,000 – 676,170 900,000x 0.7513
Cash 480,000
12/31/21 67,617 156,213 743,787
12/31 Note payable 500,000
12/31/22 74,379 81,834 818,166 Gain from change in fair value 450,000
Gain from credit risk – OCI 50,000
12/31/23 81,834 – 900,000
To make it 0
Carrying amount 4,000,000
Fair value – 12/31/21 3,500,000
Fair value option of measuring note payable
Decrease in fair value of liability – gain 500,000
→ at initial recognition, a note payable may be irrevocably
designated as at fair value through profit or loss (PFRS 9)
Gain from change in fair value : profit or loss
→ gain or loss on financial liability designated at fair value
Gain from credit risk : other comprehensive income
through profit or loss shall be accounted for as follows:
a) Change in fair value attributable to the credit risk is
recognized in other comprehensive income
● Credit risk – risk that the issuer of the liability would
cause a financial loss to the other party by failing to
discharge the obligation (does NOT include market risk
→ ex: interest risk, currency risk, and price risk)

→ amount recognized in other comprehensive income

resulting from change in fair value attributable to credit risk
shall not be subsequently transferred to profit or loss
→ the cumulative gain or loss recognized may be transferred
within equity or retained earnings

b) The remaining amount of the change in fair value is

recognized in profit or loss

→ under fair value option, any transaction cost is recognized

as outright expense
→ there is no amortization of discount and premium on note
payable
→ interest expense is recognized using the nominal or stated
interest rate

BONDS PAYABLE
● Bond – a formal unconditional promise, made under seal,
to pay a specified sum of money at a determinable future
date, and to make periodic interest payment at a stated
rate until the principal sum is paid.
– a contract of debt whereby one party (issuer)
borrows funds from another party (investor)
– are used primarily by corporations and
government units
– is evidenced by a certificate and the contractual
agreement between the issuer and investor is contained in
a document - bond indenture
→ mortgages or notes: whenever funds being borrowed can
be obtained from a small number of sources
→ bond issue: when large amounts are needed, entity may
have to borrow from the general investing public
Term and Serial Bonds
● Term bonds – bonds with a single date of maturity
– may require the issuing entity to establish
a sinking fund to provide adequate money to retire the
bond issue at one time
● Serial bonds – bonds with a series of maturity dates
instead of a single one
– allow the issuing entity to retire the bonds
by installments
Secured and Unsecured bonds
● Mortgage bonds – bonds secured by a mortgage on real
properties
● Collateral trust bonds – bonds secured by shares and
bonds of other corporations
● Debenture bonds – unsecured; bonds without collateral
security
Registered and Bearer bonds
● Registered bonds – require the registration of the name
of the bondholders on the books of the corporation
Bondholder ⇒ Old bond ⇒ New bond
sells bonds certificate is certificate is
surrendered to issued to the
entity buyer
interest is periodically paid by the issuing entity to
bondholders of record
● Coupon or Bearer bonds – are unregistered bonds
– names of bondholder is not
recorded on the entity books
– issuing entity does not maintain
a record of who owns the bonds at any point in time
interest on coupon bonds is paid to the person submitting
a detachable interest coupon
Other types of bonds
● Convertible bonds – bonds that can be exchanged for
shared of the issuing entity
● Callable bonds – bonds which may be called in for
redemption prior to the maturity date
● Guaranteed bonds – bonds issued whereby another party
promises to make payment if the borrower fails to do so
● Junk bonds – high-risk, high-yield bonds issued by
entities that are heavily indebted or otherwise in weak
financial condition
● Zero-coupon bonds – bonds that pay no interest but the
bonds offer a return in the form of a “deep discount” or
huge discount from the face amount
(no interest, but there’s advance payment)
Loan: Php 100,000
Given: Php 800,000 ⇒ Php 200,000 is the advance payment
Features of a bond issue
(1) Bond indenture or deed of trust – document which
shows in detail the terms of the loan and the rights
and duties of the borrow and other parties to the
contract
(2) Bond certificates are used.
→ each bond certificate represents a portion
of the total loan (usual minimum denomination is Php
1,000, although smaller denominations may be
issued)
(3) If property is pledged as security for the loan, the
trustee is named to hold title to the property to
serve as security.
● Trustee – acts as the representative of the
bondholders and is usually a bank or trust
entity (usually a bank or trust entity)
(4) Bank or trust entity is usually appointed as
registrar or disbursing agent
→ borrower deposits interest and principal
payments with the disbursing agent, who then
distributes the funds to the bondholders
Content of bond indenture
● Bond indenture – contract between the bondholders and
the borrower or issuing entity.
a. Characteristics of the bonds
b. Maturity date and provision for repayment
c. Period of grace allowed to issuing entity
d. Establishment of a sinking fund and the periodic
deposit therein
e. Deposit to cover interest payments
 f. Provisions affecting mortgaged property (taxes, Subsequent measurement of bonds payable
insurance coverage, collection of interest or
dividends on collaterals)
g. Access to corporate books and records of trustee
h. Certification of bonds by trustee CHECK SCREENSHOTS
i. Required debt to equity ratio
j. Minimum working capital to be maintained
Sale or issuance of bonds payable
→ bonds needed for the issuance of bonds are usually too
large for one buyer to pay = divided into various
denominations of ₱ 100, ₱ 1,000, ₱ 10,000 = allows more than
one buyer or investor to purchase bonds

→ instead of selling bonds of various denominations, bonds

are sold in equal denominations of a specific amount
● Face amount – the amount with denominations
● Bond certificate – each bond is evidenced by this
certificate
Bonds with a face amount of ₱ 50,000,000 are divided into ₱ 1,000
denominations = 50,000 bond certificates containing a face amount of
₱ 1,000

→ although the entity may sell the bonds, they normally do

not sell straight to the public, but to an underwriter or
investment banks that assumed responsibility for reselling the
bonds to investors
→ sometimes, underwriter merely undertakes to sell
bonds on the basis of commission to be deducted from the
proceeds of sale

→ when the entity sells a bond issue, it undertakes to pay the

face amount of the bond issue on maturity date and the
periodic interest
→ interest is usually payable semiannually (every 6 months)
→ there are certain bonds that pay interest annually
(end of every bond year)

Initial measurement of bonds payable

→ bonds payable not designated at fair value through
profit or loss: fair value minus transaction cost directly
attributable to the issue of the bonds payable
→ bond issue costs shall be deducted from fair
value or issue price of the bonds payable in measuring
initially
BUT
→ if bonds are designated and accounted for at fair value
through profit or less, bond issue costs are expensed
immediately

→ Fair value of bonds payable = present value of future cash

payments to settle bond liability
→ fair value = issue price or net proceeds from the issue of the
bonds, excluding accrued interest