CHAPTER 4 ACCOUNTS RECEIVABLE TECHNICAL KNOWLEDGE To know the classification and presentation of receivables. To know the initial and subsequent measurement of accounts receivable. To identify the adjustments necessary in determining the net realizable value of accounts receivable. To understand the gross method and: net method of recording credit sales. To know the accounting for doubtful accounts, worthless oo written off and recoveries of accounts written off. “ 113_———————— ABLES RECELV. ‘TRADE AND NONTRAD! fer wane 27 {OM ale Trode resvables et he ana o8t® of bunt ae = receivable and otey ‘Trade receivables incl receivable de accounts ayes apc ei any cue bs ‘not supported by promiscory — ES ona ate vr names of accounts ‘receivable Ms, Othe pe and wade oxcunts es Nove reeivable are thowe supported by form FOMise8 to yy in the frm of notes axising from co [Nontrode receivables represent claime arising from soues, Jintao mechande or services in the ordinary tours of busines, Classification rode receivobles which are expected to be realized in cath within the normal operating cycle or one year, whichever is longer, are classified as current assets. Nontrade receivables which are expected to be realized in cath ‘within one year, the length of the operating cycle notwithstanding are classified as current assets If collectible beyond one year, nontrade receivables are clase! ‘as noncurrent assets, ‘The classifications are in accordance with PAS 1, Presentati® of Financial Statements, paragraph 66, which states: sity an asset as current when the ent aset or intends to sell or consume #2 the entity's normal operating eye at 92 xe? or when the entity Pond te eet within twelve months after the report a4 Presentation ‘rode receivables and ona ee se carenly calcite reindeer eaten eg positon nome ie Rem ed do cee However, the dete of he tal tae and other recive thal be dled ini nets ona en coun ria ‘Allowarcs for doubtful accounta Coen) Narre 4 Meteora on nce esrb ‘lon. ‘Samces noes and capes {osteo Bienderevble te. ea ead nd ober rcivaben 6.0000 Examples of nontrade re Advances to or recuvables from shareholders, director, officers for employees. If collectible ip one year, such advances oF receivables should be classed as curent assets b. Advaneus to affiliates are noncurrent investments. ©. Advances to supplier are current asses, 4. Subscriptions receivable should be shown preferably as a deduction from subscribed share capital unless collectible currently. ©. Creditors’ accounts with debit balances as a result of overpayment or returns and allowances are classizied as current assets, {Special deposits on contract bids normally are classifed as noneurrent assets beeause such deposits are ikely to remain outstanding for a considerable long period of time. & Dividend receivable, accrued vent receivable, accrued royalties receivable and accruod interest receivable are ‘usually classified as current assets. h. Claims receivable such as claims against common carriers for losses or damages, claim for rebates and tax refunds are normally classified as current assets. 5—<—<—<—<<—=——— ‘Customers’ credit aes) cet balances Creer bloc 1 St nen, Cute Slee Sem om Svat ste nd ce Hail Cammarata aa Se SSounta enepe wes OOS Tay be prevented jvable controlling account deta the esto? ae Contes A 13000 Seeent 20.000) ‘Accountareciabe cond Em sczoun of Customer Creeulted from “Te rit tlann inte crerperment amet, cette ann of Cer aA othe eat to Oxtomer vecouns receivable sould te presented a current act se eet rapes the counts ofA and. rod blac in the aan of Cin classified as cet Teese Pee pint dt bases inthe asus cana No adjustment is near to formally engi the customer ot ular toca kintly the ret balances a ‘Stoel fr slo snd cash sete. ‘But an adjustment may be made only for worksheet puxpos®® meaning, not formally uralized and posted to the ledger Accounts resivable 0,000 ‘Customer credit balances 60,000 us Initial measurement of accounts receivable ‘the fair value ofa financial aneet is usually the transaction. price, meaning, the fair value of the consideretion given. or short-erm receivables the fae value ia equa ote face [amount of original invoice amount, Cash flows relating to short-term receivables are not Aiscounted because the effect of discounting is usually immaterial Accordingly, accounts receivable shall be magsured initially ‘at face amount or original invoice amon With respect to accounts receivable, transaction costa are not normally incurred because the accounts simply arise fom the act of selling goods in the ordinary course of business, Subsequent measurement In accordance with PFRS 9, paragraph $2.1, after initial recognition, accounts receivable shall be measured at ‘amortized cost. ‘The amortized cost is actually the net realizable value of, accounts receivable, ‘The term amortized cost has more relevance in long-term note receivable, ‘Thus, the term net realizable value is preferably used in relation to accounts receivable The net realizable value of accounts receivable is the amount f cash expected to be collected or the estimated recoverable ‘mount utot realizable vsl0¢ to ronlrae Ne tye eopute inary course ‘The initial amount T0COR ich i? We Verable from et Resets enone Count #0" is ts re bene “amount ret ite aci eslsable value of trode econ inning 2 actos are made a te eel te flowing Verma SEITE pdengd FOB destination Rogie and Freight prepaid. eS, term POB destination means that ownership ol Themed vend inte bayer upon receipt thereat ‘Accréingy, the aller sal be reponsble forthe fight Sores a 2 the pn of destination. term FOB shipping point means that ownezshi ofthe pase pscnd Svea te bayer upon shim Exec ‘Thus, it i incumbent upon the buyer to pay for the transporition charge from fe print of akipment the pat of dcninaton ‘The term freight calle! men charge on: tha eight charge nthe Se shipped sot yet ped. The common rier, fSkne from the buyer Tous : ° ene, Thus under thi, the freight chare® ‘The term freight prepaid means the er rt ce at te hr us “Accounting for freight charge omits, goods ar wi FOP daaination bat vi ‘Some clit withthe undersandice ate bo A cae ca ete at bree a Rn (on the part ofthe seller, the freight charge i recorded by Gihiting freight out and crediting allowance for teight charge For example, an entity han a P100,000 acrunt receivable at the ond of acoounting period ‘The terms are 2/10, 2/30, FOB destication and freight (ollec. The customer paid fesight charge of P5,000. 1. To record the sale: Accounts receivable 100,500 Preightout 5000 Sales 100,000 Allowance for fvight charge 15000 2, To record the collection withia the discount period cash 000 Sale discount 2.000 Allowance for freight charge 8000 ‘osounterecevable 300,000 Allowance for sales returns ‘The measurement of accounts receivable shall also recognize the probability that some cusicmere will retuen goods that are Unsatisfactory or will maXe other claims requiring Feduotion in the amount due se in the case of shipment shortages and defects, For example, an amount of P50,000 of the total accounts receivable at year-end represents selling price of goods that, will probably be returned. The journal entry to recognize the Probable return is Sale return 50000 ‘Allowance for sales eta 0.000 ue—— Sales discount eS tora conten, « ning rl Sn 8 PENH aa, Sch discount it # ‘of prompt payment con the part of “rca disease kaon 82008 ar of the buyer, fier and ie wed a8 5710,°2/30. Ty, A cash dicount may Be Gpeaied 0 OY decouny i mean tah pag om om ie . within the 10-day discount perio, Ieee cutmet ee aes oc ua e ald within Supe eo te save dt ‘Methods of recording eredit sales Grose method ~The accounts receivable and sales are Gro et eta teva, The ere Meth ode et ny used bethod because iti inp ‘0 apa [Net method ~The accounta receivable and sales ae Meicisl at ndomount ofthe fave, meaning the inva Seine te cach dacont whothor taken or nt take Tllustration - Gross method 1. Sale of merchandise for P100,000, terms 6/ 10, n /0. ‘Account receivable 100,000 ‘Sect 100,000 2 Asoume collection is made within the discount peried- Cash 95,000 Sales diseount 5.000 ‘Acounta receivable 100,008 = collection Is made beyond the discount perio ‘Accruntrectvale 100.000 soa go 120 illustration ~ Net method 1, Sale of merchandise for P100,000, rms 6/10, 2/30. ‘Acsnunta receivable mania 98,00 195,000 2 Asgume collection ie made within the discount period onm00 acount reeivaile 95,000 8., Assume collection is made beyond the discount period. aah 100,000 ‘Account receivable 95,0 Sales discount orfeited 8.000 ‘The soles discount forfeited account is classified as other Allowance for sales discount If customers are granted cash discounts for prompt payment, then, conceptually estimates of eash discounts on open accounts at the end of the period based on past experience shall be made, For example, of the accounts receivable of P1,000,000 at the end of the period, itis reliably estimated that discounts to be taken will amount to P50,000. ‘The adjustment to record the expected sales discount is Sales discount 50,000 Allowance forsale discount 50,000 ‘The adjustment may be reversed at the beginning of the next Period in order that discounts can then be charged normally to sales discount account. aancrater than only 0" cash ci ree SncOe ssoumes the ak iy that lO sant as veces amas 86 OBEY hy Wien ap sen aio imo 0 he con, ong bons om ‘two meth ae fll ie aametr 1. Allomance method 2 Difet wate metiod Allowance method “The allowance method requires recognition ofa bed debt les Pike accounts are doubfal of collection. The journal entry fo recognine the doubtful accounts is ed in ecounting for thin bad ety “Alwar doubt counts xi ‘The “allowance for doubtful accounts” is deduction from ‘accounts receivable. If the doubtful accounts are gubsequently found to be worthless, the accounts are writen off ax uncollectible. Allowance for doubt acscunte oe ‘Aewusisrsiabie fe Generally scoped scuntng pri e ca Principles require the use ae eaueicnforme with the matchlag Maceore, stats min ane ola vue MM Would be properly measur ue Recoveries of accounts written off tt election je made on count prevouly writen of a8 3a coe the cunenary proces Bee ty recharge the «qu tre anourtprevioely Sarge of fo few exposed ec se rodia ee te calecion is then ede normal by dblng ethan Te glee ie resale. ‘The recharging of the customers account is usually followed Teauwe itis an evidence of the attempt of the customer to establish his credit with the entity. What account should be credited when the customer’ acount is recharged! ‘The generally accepted approach is simply reverse the original Thuy of writeoff regardless of whether the recovery is during fhe year of writeoff oF subsequent thereto Mlustration - Allowance method 4, Accounts of P30,000 are considered doubtful of ecllection. Doub acrounte 20,000 “Allowance for doubtful accounts 30,000 2, The accounts are subsequently discovered to be worthless cof uncollectible Allowance for doubeful scounts “Rowoumnterecevable 30,00 30,000 3, ‘The same accounts that are proviously written off are unexpectedly recovered or collected, Accounts receivable 30.000 “Allow noe for doubt accounts 30,00 cash 30.000 Accounts eosvable ‘9.000 "The effect ofthe recovery of accounts written off is 2er0 on accounts receivable because the zecharging and collection fre offsetting. However, te allowance for doubtful accounts is increased by the recovery. 1s.day dabiting bad debta ang by genta are only doubt eon) Revere Teognian, he Bureau of Int Ag ESS ot nome to PTO vee eam etd et matching pranapebecrn he bd Et hich the anes Tove ae mato ia peritedunder IFRS, Mlustration - Direct writeoff method 1. Accounts of P9000 are considered doubful of collection. [No eotry i etsy 2. The scant proved to be wrt. Bad debes 30,000 ‘esmuntareoarable sn000 4. The same ascounts that are previously written off # wortles are reaered or elected Aecourtrecirab ‘Ba eine 30000 s00 cain “Accounts receivable samo, 30,000 a acres Ano met amet sear of writ ana the dite, to other income aay simply be ered? - Doubtful accounts in the ineome statement 1. Distribution come If the granting of credit and collection of accounte are ‘under the charge ofthe goles manager, doubtful account shall be considered as disirutton cost. 2. Administrative expense If the granting of credit and collection of accounts are lunder the charge of an officer other than sales mandger, doubtful accounts shall be considered as administrative expense. In the absence of any contrary statement, doubtful ‘accounts shall be classiGed ae administrative expense, 1aQUESTIONS 1. Define receivables, exact ren 2 Explain the camiaton end presenta big in the statment of fas! son 8. Explain the treatment of customers’ credit balances, 4. Explain the initial and subsequent measurement of trade accounta receivable 5. Explain the two methods of recording accounts reéeivable and credit sales. 6. Explain the allowance method of accounting for bad debts, 7. Bxplain the direct writeof emthod of accounting for bad debes, 8. Give the proforma entry under the allowance method for each of the fllowing: 1. Doubtful accounts . Accounts receivable proved to be worthless & Recovery of accounts previously written off 2 Give the poms entry under the dist writeoff method for each othe wing ne Atv Doub scunte b. Accounts receivable proved to be worthles worthless © Recovery of assounta previously wrrtes ott 10. Explain the presen: income statngeeae®'stion of doubtful accounts in the 126 PROBLEMS Problem 4-1 (IAA) Dreamer Company reported the “Receivables” account with ‘a debit balance of P2,000,000 nt yeer-ena ‘The allowance for doubtful accounts had a credit balance of 'P50,000 on same date. Subsidiary details revealed the following: ‘Trade account recivable 775.000 ‘Trade note receivable 100.000 Installments receivable, normally due tear totwoyears 500000 Cortomere accounts reportingeredit, ‘alancee arising fom sale return 30,000) Advance payments for purchase of merchandise 130.000 (Castomers account reporting credit ‘balances arising rom advance paynenta 20.000) (Cash advance to suboidinry 400,000 Claim from insurance entity 18,000 ‘Subscriptions receivable de in 60 days ‘00,000 ‘Aerued interet receivable _10.000 2,000,000 Required: ‘&. Prepare one compound entry to reclassify the receivables account, . Compute the amount to be presented aa “trade and other. receivables” under current assets © Indicate the classification and presentation of the other items excluded from “trade and other receivables” 137Problem 42 GAA) Credible Company provided the following T-accoy, frummarizing the tananctions acting the AC00UNtS recent for the carat year Accounts Rcsvable Jan balan 600,00] Catectons fom customers 600,093 Charge sales 000 000|Wriott 35.000 ‘Shareholder | erchadie returns 000 subecripons 200000] Alwances ws customer Deposit on contrac: 120,000| frahiping demagee 25,99) (Claims agaist common Jcatecions on caver claims 4.009 camierfordamegee 100,000 Calectin on oubseptons 50,09) smenployeee 10000 ance t liter 100,00 Advances tow sapplar 60,000 Required: 8. Compute the correct amount of accounts receivable 'b. Prepare one compound entry to adjust the aacounta receivable © Compute the amount to be presented as “trade and other receivables” under current assets 4. Indicate the dassication and presentation of the other items, Problem 4-8 (ACP) Affectionate Company sold merchandise on account for 600,000. The terms are 3/10, 1/30. The related freight charge amounted to P10,000. The account was collected within the discount period Required: Prepare journal entries to record the transactions under the following freight terms: F O8 dent it 2 ESR is fete, i Serco, 2 rea a eee, 10 Problem 4-4 (ACP) ‘Fiancee Company records sales return during the year an a Credit to accounts receivable However, at the end of the accountng period, the entity fstmates the probable sales return and tcorés the ton fy means ofan allowance accoune. The following transactions occurred in summary form: 1. Saleof merchandise on eeount, 2/10, 0/90 4000 000 2 Collecton within the dicount ped 170.000 44 Collection beyond the dicount period 100,000 4 Saleereburn granted 10,000 {5 Saleereturnentimstad atthe end ofthe year 20,00 Required: Prepare journal entries to record the transactions, Problem 4-5 (IAA) On June 15, 2021, Romela Company sold 100 airconditioning units. The sale prioe for each unit is P&5,000. All of sales are subject to terms 2/10, 230. The entity used the gross method of accounting for accounts receivable, Required: 1. Prepare journal entry to record the sale 2 Prepare journal entry to record receipt of the payment assuming the correct amount was received on June 25, 202%, 8. Prepare the journal entry to record receipt ofthe payment: ‘assuming the correct amount was received on July 10, 2021. 129Problem 4.6 (AA) On February 14,2021, Prine Company sold 9g, Snag at The el ie Bech a ys All of the sales are aujbect to terms 2/10, 230. The ong teed the net method of acrounting for accounts reeiona” Required: 1. Propare the journal entry to record the sale. 2. Prepare the journal entry to record receipt ofthe pay, ‘aseuming the correct amount was received on Pet 24 2021. = 3. Prepare the journal entry to record receipt of the payment, sssuming the correct amount ws ‘March 10, 2021 Problem 4-7 (IAA) During the current year, Raven Company started business Sates for the frst year totaled P4,000,000. The entity priced its merchandise to yield a 40% gross profit based on ealee Industry statistics suggest that 10% of the merchandise sold to customers will be returned, ‘The entity estimated sales roturns based on the industry average. During the current year, eustomers returned goods with sale price of P300,000, Require Prepare journal entries to record sales, sales returns and the year-end adjusting entry for estimated sales roturn 130 Problem 4-8 (AICPA Adapted) Valiant Compeny reported the fellowing analysis of current reesivables at yoursend ‘Trade acount exiable 24000000 owanee fo dou rman teocoe) Gian win chipper for gods ot in transit in November 00000 Seng price of nol goods vent by Vallanton consignment a 150% of cont nd otincuded mending ventory ‘icant deposit ae of warchone ‘Tal Whet total amount should be reported as current trade and other receivables? Pen =. 2.200.000 400.000 ©. 3/300,000, 4 Sooo,a00 Problem 4-9 (AICPA Adapted) ‘Jinx Company provided the following information for the ‘current year in relation to accounts receivable, Aconunts receivable January 1 1 soa.o00 Green 5300000 Se ‘sao00 Acsurta writen, ic.o00 Colton rom cstomers 000.000 EBetinated future sales return on December 31 £0,000 stinateduncolectibleassountsperagingatyearend 250000 What amount should be reported as net realizable value of ‘Accounts recoivable on December 31? 131Problem 4-10 (AICPA Adapted) Rapture Company had the following information fop ‘current year relating to accounts receivable: te meat tmnt es k Sitirencaernntvereney SRE a mage STS caer eet ‘eee ee er a Ribs anount should be reported a accounts receivable before alowance for doubtful eccounte on Decessbee yt 1895.00 b 1a80.000 & 1880000 4 1.990.000 Problem 4-11 (PHILCPA Adapted) ot Betggtd, Hazem Company reported accounts receivable ‘9f PS 200,000 with the following hnalyci Acoust nora ob wre mo ‘vm prensa dee ‘eto dines ase? xe (osfomery acount reporting credit balance siting en — sono Beleeanie ce ‘sont Seeprertnten dy 2ionm it rere te Soni [ing tnared Gane arg PSN 00 Peiseecute eatin terse, 0008 scotch wi pn someones madconnea te 200.000 What amount should be ‘Teported as trade accounts receivable? 4010 & Stade ¢. $0000 oso. Problem 4-12 (AICPA Adapted Faith Company provided the folowing information relating {a current operations: counts receivable, January 1 “4,000,090 ‘Accounts receivable collected ‘840000 Casto 2,000,000, Inventory, January 1 4300;000, ventory, December 31 ‘400.000, Pochesss 5000.000, ‘200.000, What amount should be reported as accounts receivable on December 31? 1 §:200,000 6,200,000 2,000,000 4 4,200,000 Problem 4-13 (AICPA Adapted) Steven Company provided the following information during the frst year of operations {olelmerchandio purchasesforthecureatyear 7000000 Merchandise inventory on December 400,000 Catlections from customers 4,000,000, All merchandise was marked to sell at 40% above cost, All sales are on a credit basis and all accounts are collectible ccounts receivable on ‘What amount chould be reported December 31? '& 1,000,000 . 8,840,000 © 6,000,000 5,800,000Problem 4-14 (IAA) ‘Aroma Company used the thod of woounti any used the net price method of accounting for {gash discounts, In one of itn tranenctions on December 2— 02K, the eotiy sald merchandiee with w list price af 9,000,000 to a customer who was given a trade discount 2046, 10%¢ and 5%. Credit terme were 4/10, 99000 The goods were shipped FOB destination, freight cole ‘Total freight charge paid by the customer was P100,000, Ox ber 27, 2021, the customer returned damaged goody originally billed at P500,000, What amount should be reported as net realizable value of the accounts receivable on December 31, 20217 Problem 415 (AICPA Adapted) On June 1, 2021, Pitt Company sold merchandise with alist price of P5,000,000 to Burr on account. Pitt allowed trade Aiscounts of 30% and 20%. On June 11, 202, the customer paid in full Credit terms were 2/10, 1/90 and the ale was made FOB shipping point. Pitt prepaid P200,000 of delivery costs for ‘Burr as an accommodation, 1 What amount should be reported as a 5,000,000 b. 2,800,000 e. $500,000 4. 2/500,000 2 What amount was re remittance in full? a 2,744,000 b. 2,940,000 © 2944.00 d. §,140,000 es revenue? 134 ee problem 416 (PHILCPA Adapted) Germany Company started business at the beginning of Gsfrent sear. The entity established an allowance for Gpbeful accounts estimated at 89 of eroditwalen ‘uring the your, the entity wrote off P50,000 of uncallectible sezounte, Farther analysis showed thet merchandise purchased ranted to P9,000,000 and ending morchandise inventory {fas P1,500,000. Goods were sold at 40% above cost. ‘The total sales comprised 80% sales/on account and 20% cash {nles. Total collections from customers, excluding cash sales, mounted to P6,000,000, 1, What amount should be reported as cost of goods sold? a. 7,500,000 ws 5,400,000 3,600,000 4. 6,900,000 2 What amount should be reported as sales on account? 10,500,000 18,750,000 12,000,000 8,400,000 8. What amount should be reported as net realizable value of accounts receivable at year-end? 1,980,000 . 2'350,000 © 1,930,000 4. 2'400,000 138Rene r ae Pie, eee Problem 4-17 (IAA) ‘Von Company provided the following data for the current year in relation to accounts receivable: Debits ‘amuary 1 balance afer deducting credit balance PHN 000 _ 530 hargo sales 5350000 Charge for goods out on consignment 30.00 Shareholdetysubecriptions 1,000,000 Accounta writin off but reovered 10.000 Cash paid cuetomer for Januery 1 credit bala 23.000 ‘Goods shipped to cover January I ret balance 000 on long-term contract 500,000 Claim against omrmon carrier 400,000 ‘Advanote to oupplie 300.00 Credits Collections from customer, ncuding overpayment of P 90.000, 5,200,000 Writeatt 35,000 Mérchadioe returoa 23000 ‘Allowances ts curtamereSo shipping damages 13.000 Collscdon on carrer cai 20.000 allecton ou oxbecition 200,000 1 What amount should be reported as accounts receivable on December at? a. 565,000 B 595,000 © 549,000 & i800 2. What total amount of trade and other receivables should be reported under current assets? 136 problem 4-18 (IAA) Wonder Company provided the following transactions Affecting accounta receivable during the current year: cash and credit. 15,900,000, Se received from credit customers, all of whom took advantage ofthe dicount feature ofthe creditterme 410,190 3,028,000 cash reotived from cash customers 2,100,000 receivable written offs worthleas 50,000 (Credit memorandum iseuod to credit customers for onleeetarna and allowances 280,000 ‘cash refunds given tocash customers for sales ‘returnaand allowances 20,000 ‘Recoveria on accounts receivable written off as | ‘uncelletble in price periods not included in cash received from credit customers 130,000 Balances on January 1 Accounts receivable 980,000 [Allowance for doubtful accounts 100,000 ‘The entity provided for uncollectible accounts by erediting allowance for doubtful accounts in the amount of P70,000 for the current year. 1. What amount should be reported as accounts receivable ‘on December 317 1,300,000 1,426,000 1,280,000 1220,000, 2 What amount should be reported as allowance for doubtful ‘accounts on December 31? 120,000 200,000 260,000 170,000 137Problem 4-19 Multiple choice (IAA) 1 Trade receivables are classified as curtent a reasonably expected to be collested a % Within one year.” Within the normal operating cyt, Within one year or within the operating eye, 4 Within one year of within the operating eye, whichever is longer. 2 2 Nontrade receivables are classified as current assets on} if reasonably expected to be realized in cash 2s 4% Within one year or within the operating cycle bi Whichever ‘is shorter. 3 sree Vithin one year or within the operating cycle, whichever is longer. i ©. Within the normal operating cycle. 4. Within one year, the length of the op notwithstanding ing eyele 8. Credit balances in accounts receivable are classified as ‘a. Current liabilities b. Part of accounts payable ©. Long term liabilities d. Deduction from accounts receivable 4. Which of the following does not change the balance in accounts receivable? a. Return on credit 6 @ fie dott wepane elpeay oot e ‘expense adjusting entry a. Waiteott 6. Which is recorded by a credit to accounts receivable? saventory on acount & Estimating the alowance fr doubital accounts © Extmating annoal sales returns & Write’ of accounts receivable 138 Which accounting principle support, the ae of © Mwance fr doubthl asoouest 1. Continuity principle &, Fall disclose principle ©) Matching principle 4 Conservatem 17. Why ia the allowance method preferred over the direct \weitoff method of scouting for bad debts? a. Allowance method is used for tax purposes Estimates are deed Determining worthless accounts under direct writeof? rmothod is difteult to do, 4, Improved matching of bad debt expense with revenue 8. The entry debiting accounts receivable and crediting allowance for doubtful aesaunts would be made when 8. Acustomer pays an account balance Bb. customer defaults on the account. ©. ‘A previously defaulted customer pays the balance, 4. Estimated uncolleceible accounts are too lov. 8. In recording cash distounts related to accounts receivable, which is moe theoretically correct? a. Net method b. Grose method © Allowance method 4. All three methods are theoretically correct 10, All of the following are problems associated with the ‘measurement of accounts receivable, exept 4. Uncollectible accounts & Returns © Cash discounts under the net method 4. Allowance geantod 139Problem 4-20 Multiple choice (AICPA Adapted) 1. Which method of recording bad debt loss is consistent, with accrual accounting? & Allowance method rect writeoff method ¢. Percent of sales method , d. Percent: of accounts receivable method When the allowance method is used, the entry to record the writeoff of a specific account would a. Decrease both accounts receivable and the allowance b. Decrease accounts receivable and increase allowance c. Increase both accounts receivable and the allowance d. Increase accounts receivable and decrease the allowance Under the allowance method, the journal entry to record the writeoff 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 Under the allowance méthod, the entries at the time of collection of an account previously written off would a. Decrease the allowance for doubtful accounts b. Increase net income ¢. Have no effect on the allowance for doubtful accounts d. Have no effect on net income Collection of accounts geceivable previously written off results in an increase in cash and an increase in Accounts receivable Allowance for doubtful accounts Bad debt expense Retained earnings Bo Tp 140CHAPTER 5 ESTIMATION OF DOUBTFUL ACCOUNTS TECHNICAL KNOWLEDGE To identify the methods of estimating doubtful accounts expense. To understand the argument for and against the aging of accounts receivable method. To understand the argument for and against the percentage of accounts receivable method. To understand the argument for and against the percentage of sales method. To determine the doubtful accounts expense and the allowance for doubtful accounts under aging, percentage of accounts receivable and percentage of sales method. 141om — of te 4 “stimating doubtful accounts 7 hee methods of timating doubtful accounts, 8 the Position gtcSOUnts receivable or “statement of fnanci) E 2 cil patton apprnch ent Petce 't Of sales or “income statement approsch” “ging of accounts receivable The a tha BENE of accounts receivable involves an analysis where #€ accounts are classified into not due or past due, @. Not due b. 1 to 30 days past due ©. 81 to 60 days past due 4. 61 t0 90 days past due fe. 91 to 120 days past due £121 to 180 days past due 181 to 365 days past due hh, More than 1 year past due The allowance is then determined by multiplying the total of teach classification by the rate or percent of loss experienced by the entity for each category. ‘The major argument for the use of this method is the more accurate and scientific computation of the allowance for doubtful accounts. ‘This method has the advantage of presenting fairly the accounts receivable in the statement of financial position at net realizable value. ‘The objection to the aging method is thatt violates the matching process. Moreover, this method could become prohibitively time ‘consuming if large number of accounts are in 142 ~~ — Hustration following data are summarized in aging the accounts Mrsivable at the end of the period: ) (axb) oat pile ae: Stee us vt mas me SR ime, Be ie venree e S iee a a ice, Se ee gaoeee Se es ae 000 ‘The amount computed by aging of accounts receivable Tepresents the required allowance for doubtful accounts at the end of the period. ‘Thus, ifthe allowance for doubtful accounts has a credit balance of P10,000 before adjustment, the doubtful accounts expense is determined as follows: Required allowance 50,000 Lee: Allowance balance before adjustment 10.000 Doubtful account expanse ‘The journal entry to record the doubtful accounts expense Doubtful accounts om ‘Allowance for doubtful accounts 40,000 143? past doe ee sani 0 re terms will determine were 2/10, n Ee riletie ena -mcoount is 45 days: re diets th pea Becta ane cal the Se my dt pd 9 Percent of accounts receivable | cetin rat i mui bythe pen scott atthe endo | PS pe ee ocean Te rate used is usually determined from past-experionce o¢y, | ‘entity. | Tis proc haste sratge of presenting the acy et in na rola coke Th tread a Sore | However, the application ofthis approach violates the | feign aun els revenue, Moreover the lee exerince rate may be dificult to o and may oot be relate e ee Mlustration emittance of sccounts resivable is P2,000,000 and the Fis ealnes in the alowance for dontone oe rages ect ar xin a zou Journal entry Dowel counts ‘Allowance fo doe accounts oe ‘50000 Regul ovina a Ceci fla ign oe Posten pene oi Mae Percent of amount of tet th er mld by actin dat owt the doubena accuses asi certain Iles on erste once a ‘Teor, the rte ob wed in empuied by ding Te od doe enn pa ers he ing fad ‘The rts th obtained in mun by the cures years tare ate dota san ease charge Practically, however, there is no substantial ditfrence if in the computation of the rate, the basis is total aalen of the 8 obtained is multiplied by the to-get the doubefel accounts ‘his procedure of determining the sate has the advantage af eliminating the extra work of making a record ofcash salee and credit sales, However, this approach may prove unsatisfactory when, there is a considerable uctuation in the proportion of cash, and eredit sales periodically, Argument for percent of sales method When the “percent of sales” method is used in computing doubtful accounts, proper matching of cost against revenue is achieved. ‘This isso because the bad debt loss is directly related to sales ‘ond reported in the year of sale. ‘Thus, this method is an income statement approach because ‘it favors the income statement. 145eee r poreonofmiemethod fn thatthe Ln ied wealiable ant that from time to time 4 ‘Ths, beumes meer crain He DPObAIG log ua conequec te rae pled oes DU be eva —— Illustration The fatorng nuts rete un he Inder eal 120009 ony Fro = 50,000 mee Allowance for doll esosmte in case ws eee esis Sees Es Doubtful aamunts “Allow ane fr dost accounts 50.000 sao00 If this method is used, the resulting amount of the computation is already the amunt ofthe doubiful accounts expense and not the required allowance, in contradistinction uth the aging method andthe pereet of acounta receivable metho ‘The allowance balance before adjustment is ignored ia Aetermining the doubtul accounts expense to be recorded. However, the allowance for doubtful accounts should havé 43 adjusted balance of P0000 the begionine sliowance 'P20,000 plus the adjustment of Psosong us As pointed out ercent of sales method of Sumating tcctunia baa the duadconsege ott ‘Mlowance for doubtful nccounte betne feof tt Ag ee tn yt eine Whey sero a aco came, xen isos as to the proper treatment of the ncy, whether Sands Walaa len read St Tecra te ere ne ma ene aR aap sen tn ‘The reason a tha the correction athe natural result ofa change in estimate. Changes in eatinate are treated Correa we prospectively, if necessary ‘Accordingly, an inadequate allowance is adjusted an follows: Doub accounts x “Allowance fo doibel aecounta sx ‘An excessive allowance is recorded aa follows: Allowance fr doubt accounts ax Doubt ecoants a Wien the allowance is excessive, there isa coroliary problem hen the discrepancy is more than the debit balance in the oubtful accounts expense: account. For exemple, if the amount of correction due to excrasive allowance is 30,000 and the doubtful accounts expense acount ‘has a debit belance of P20,000, fllowing the above procedure vill result to a crodit balance in the ‘expense ‘ccount of P10,000. Such balance is obviously abnormal ‘a believed that in such a case, the P10,000 difference shall ‘ot be treated as a prior period error but included in the Aetermination of the inoome of the current period. Journal entry Allow ance fr doubtful ccounts sa.000 Doubtful acount 20.000 Miscellaneous income 11000 urceount Debit balance in aoa et Ie How? What dove Degen hae mom em 8 ay Balance QUESTIONS 1. What are the three methods of estimating doubtful 2. Explain the aging method of estimating doubtful 8. Explain the percent 4, the allowance, account befor, or example oo Japon th tora seta bet, shee a cel a a meio 0.000 Alowanc i dott sate soo “anata ‘run ce Desert alorannosthe debi blancs PBS eles sane ‘oe ible it tnd tr alone tio becuse hss ein of ing tn ara ang’ Se cars maya rs fom ere Jar aa Thun, car nh love ct simply predate ‘he Mooriag aol Sa (theca of he pro when edutmet ar made the dat Sne me Te cote the eaaple if on Decmber 31, the required lower P03, e dae a Dil aunt 00 Allowance for doubtful acoounte - Rauized allowance ‘Ada: Det balance in eowasce Doubt ccountaexpenae estimating doubt 4 Explain why the aging method andperentag of acxounta receivable are lnown ac "steteneet feet dpproaeh 5. Explain the percentage of sales method of estimating doubeat account 7. When is an scsount pest due? of an inadequate or excessive 6 Explain the treatme allowance for doubt 8.1s a debit balance in the allowance for doubtful accounta possible? 10, What does a debit balance accounts indicate? the allowance for doubtful 9PROBLEMS Problem 5-1 (LAA) Marvelous Company reported the following information before adjustmente at year-end Arcountsresvabie eson ‘Note reatabie sie Allowance for doubt acounts ad Salee bier) Seles eturn and allowances pose, Sele disease om Required: Prepare adjusting entry to provide for doubtful accounts under ach of the fllowing independent assumptions: a Past experince indicats that 78% ofall sales are credit ‘eles and that an average 2% of credit sales may prove ‘unsollectible . One percent of gross sales may prove uncelletble, An anslysis of the aging of trade accounts receivable indicates that sxounts receivable in the amount cf P80,000 ‘ay prove uncllectible, 4. The policy isto maintain an allowance for doubt accounts ‘equal co 10% ofthe cutstanding accounts resivable 10 Problem 5-2 0AA) At the berinning of curent year, Template Company showed the following atcunt alate mr Accountarecsiabie omen or dab acnunta 1.000000 80 ‘The following summary transactions occurred during the 1. Sales om account, 2/90, 9/30 1.00.0 2 Collections rom castomere witha the cacout ped 2.480.000 3 Calton fom cums beyond th isnant riod 900.000 44 Accounts eceisable writen offas wares se,000 5: Recovery af csunts previously writen not inclidedin the atorecalasons 10,000 6 Creditmame foresee stun 000 Required: «., Prepare journal entries pertsining to accounts resivable b, Prepare the adjustment for doubtful accounts at year-end if the entity uses the percentage of accounts receivable method consistently © Determine the net realizable value of accounts receivable at year-end,Problem 5-8 (IAA) jooee Company re At the boginning of current yeas J ported, ‘the follwing: 2000.00 Account recelvabe ‘Allowance doubtful assunte 16000, ‘Additional information fr the current year: 1. Cash enlos ofthe entity amount to P800,000 and represent 10% of gros sale. 2 Ninety percent of the credit ssles customers do not take ‘advantage of the 8/10, n/90 terms. 3. Customers who did not take advantage of the discount paid s,940,000. 4 It is expected that cash disounts of P10,000 will be taken on accounts receivable outstanding at the end of the year 5. Salee returns amounted t9 P80,000. All returns were from charge sles. (6. During the year accounts totaling P60,000 were written off as uncolectible Recoveries during the year amounted to P10,000. This ‘mount isnot included in the collections 7 ‘The allowance for doubtfil aezounts is adjusted co that it ‘presents certain percentage ofthe outstanding accounts reosivable at yeer-end. Required: ‘Prepare journal entries to record the transactions 1 Determine the net raze the net reliable value of accounts receivable we Problem 6-4 (IAA) At the beginning of current year, Relentless Compan; reported the following balances, a ‘Acounta recive eong00 ‘Alowance or doubtful accounts “5,000 ‘The flowing transactions took place in the current year. 1 Sales —cash and credit 3,070,000 2 Cash received from credit customers 2,455,000 8. Cash received from credit customers who took advantage ofthe 3/10, m/30 ‘credit terms (included in No. 2) 2,488,000 4 Accounts receivable written of as worthless 20,000 5. Cash received from cash customers 470,000 6. Credit memo for sales return and allowances issued to eredit customers 85,000 1. Cash refunds to cash customers 10,000 8. Recoveries of accounts written off, not Included in above collections 5,000 Required: Prepare journal entries to record the transactions, Prepare the adjustment for doubtful acount ifthe entity Provides for doubtful accounts equal to 2% of net credit sales, © Determine the net realizable value of accounts receivable at year-end? 183Problem 5-5 (IAA) [At the beginning of current year, Nostalgia Company reported the flowing information — ‘son o00 ‘Alowance for dott acne ‘om ‘The following summary transactions affecting accounts receivable occurred during the current year: See 2/8 sate Calne so10a9 ‘pected tn erie eer onsapasra ses wars set Dearest ws ‘Cumomers paying beyond the discount period 2 Ancient ssa Outta rare ie Reauied ‘Prepare journal entries to record the transactions. '. Propare the adjustment accounts if the e Penzas th aiustment for doubtful account i th consistently, ity ereentage of accounte receivable © Determine the net realizable value of a al Dewrnine f accounts receivable Problem 56 (PHILCPA Adapted) At the besinning of current yeas, Rampant Company fepited that the lias dota esos hee eee ‘balance of P170,000. se Bad debt recoveries and bad debts written off in the current year were P30,000 and P236,000, respecte. ‘The allowance account had been previously caleulated as « percentage of net sale, It was decided however to provide for duubtful accounta commencing with the yearend adjusting entry on the bass of sn analysis ofthe age ofthe acounta receivable ‘The following schedule was prepared. Peroent cancolletible Notyet due ioqo00 NIL 1.30days past due Taoac00 5 1-60 daya pest due ‘eq000 2 61-00 dayepast due 150000 0 Over 90dayepast due 12000 10 ‘Additonal acountstobe writenott "20000 Require 1. What amount should be reported as required allowance for doubtful accounts at year-end? 2 How much would be the doubtful accounts expense for the current year? 8. What is the adjusting entry for the doubtful ascounta expense fo: the current year? What amount should be reported as net realizable value of accounts receivable at yearend? 185Problem 6-7 (AICPA Adapted) operations, Savvy COmPARY cBrHed ny allowance for doubtful accounts. expensed as written off ang me as collected. From inception of Uncollectible receivables were recoveries were credited to incor management recognized that the to doubtful accounts was not accounting policy with respect Correct. and deterinined that an allowance for doubtful acounts was necessary. ‘A policy was established to maintain an allowance for doubtful ‘accounts besed on historical bad debt loss percentage applied to year-end ancounts receivable. ‘The historical bad debt lose percentage is to be recomputed teach year based on all avilable past years up toa maximum of five years. Accounts Year Creditaales written off Recoveries aor 1,500,000 15,00 ° 2 2200.00 $0,000 2000 20 53000.000 0.000, 3000 2000 300,00 15,000 500 zi +4.000,000 85,00 10,000 Accounts receivable balances were P?,260,000 and P2, 000,000 fon January 1, 2021 and December 41, 2021, respectively. ‘Required: 1. Prepare journal entry to set ream ral nyt atu he allowann fr dst 2 Compute the doubtful accounts expense for the current yest: 3 Determine the not realz Sera realizable value of accounts receivable 186 ~~ problem 6-8 (AICPA Adapted) tion of operations, Parsmount Company From inceribe actounta receivable under the allowance for unt ing the percentage of alee ste balance in the allowance for doubtful acoounta was P500,000 Seiianuary 1 2021. suing the current year, credit sales totaled P20,000,000; During Provision for doubefal accounts were made at.2% of oe, 'P300,000 of bad debts were written off, and ‘of accounts previously written off amounted to ‘Mheagingof accounts receivable showed the following summary: Classification Balance Collectible [November to December 15,000,000 208% {aly to October 2,000,000, 90% ‘Jenuary toJune 1,000,000 73% 500,000, 25% Prior to Janssry 1, 2021 Based on the review of collectbilty of the account balances in ‘prior to January 1, 2021" aging category, additional accounts ttaling P100,000 are to be written off on December 31, 2021. ‘Effective with the year ended December 31, 2021, the entity ‘adopted a new accolnting method for estimating the allowance: {or doubtful accounts at the amount indicated by the year-end aging of accounts receivable. allowance for doubtful accounts before 2 Determine the required allowance for doubtful accounts (on December 31, 2021, 8. Prepare adjusting entry to record the doubtful accounts expense for 2021 167en oan ned caine ya Jansary 1, 2021, Setermining the allow ‘Spplving certain perentags fo Z Percent uncolletible Days past invoice date x 5 = » © i> Over 180 Im addition, the entity wrote off all were over 1 year a ellowing additional information related to the years ende ‘Biter Sf 2021 and 2020 accounts receivable that on om cooceo 280000 ee Cec ne: Amant en reiouly writen 7000 ee Daye putiovle date : wooo mage ane "80,000 ‘90,000 nos aed ‘Over 150 25,000 18,000, Required 1. Determine the allowance for doubt ssounts on Janus? eat 2, Determine the allowance for doubtful accounts on December 81,2021 before adjustment. 8, Determine the required allowance on December 31, 2021 4. Prepare the adjustment to record the doubtful accounts ‘expense forthe current year 188 Problem 5-10 (AICPA Adapted) Ore Company prepared ‘of accounta receivable on December 31 and determined that the et realises value of the acoounte receivable was P2,600,000. ‘azote recivabl on December 31 70,009 Allowance for doubtful accounta on January i eo cunts writen oes cle 20.00 econ clacoumta mano 0,00 What amount should be recognized as doubtful accounts expanse for the eurrent year? a. 230,000 200,000 ©. 150,000 4. 100,000 Problem 5-11 (AA) Roanne Company used the allowance method of accounting foruncellectible scounts. During the current year, the entity hhad charged P800,000 to bad debt expense and wrote off accounts receivable of P8900,000 as uncellectibe. ‘What was the decrease in working capital? ‘=. 900,000 800,000 100,000 a 0 Problem 6-12 (AICPA Adapted) Mill Companys allowance for doubtful accounts was P1,000,000 atthe end of 2022 and P900,000 atthe end of 2021. For the year ended December 81, 2022, the entity reported ‘doubtful accounta exponse of P250,000in the income statement. ‘What amount was debited tothe appropriate account to write off uncollectible accounts in 2022? 150,000 100,000 250,000 360,000 PEER 189Problem 6-18 (AA) Gruesome Compeny the current year Alacer dots acranton ans807 1 amon provided the flowing information for Seles e deed wore and writen cll 2000 ult of «ree accounts recsivable, it ASAE ta tittene ee dcotal nt [F400 000 need on December 31. sat amount shuld be recorded as doubtful accounts Titel he cument you? Problem 5-14 (AICPA Adapted) Tantrum Company provided the following information in ‘elation to accounts roovivable at year-end: Daye Bainated eststnding ‘Amount 6 Uncollectibe o- © 1% a> wo ct Over 120 x During the current year, the entity wrote off P70,000 in sccounta receivable and recovered 20,000 that hed beet ‘atten off in prior years At the beginning of curtent.year, the allowance for cot ccounts was P60, 000. Under the aging method, what amount of uncollectible coounta expense should be reported for the current yout? 60,000, 60 Problem 5-15 (AICPA Adapted) ‘Delta Company sold goods to wholesalers on terms 2/15, net 30, The entity had no cash aales but 80% ofthe customers took advantage ofthe dacount. ‘The entity used the gross method of recording sales and sccounte receivable, ‘An analysis ofthe trade acoounte receivable at year-end revealed the following: Age ‘Amount Collectible 0-15days 2,000,000, 100% 16-30 days 1,400,000 95% 31-60 daye "400,000 90% Over 60 days 200,000 50% 00 1. What amount should be reported as allowance for sales discount at year-end? 20,000 33,400 83,500, i 40,000 2 What amount shoul be reported as allowance for doubtful secounts at your-end? 230,000 6. 210,000 ©. 190,000 200,000 8 What amount should be reported as net realizable value ‘of accounts receivable at year-end? 4,000,000 3,760,000 8,770,000 3,790,000 161opA Adapted) ina the following unadjusteg Problem 6-16 (AIK Namesske Company Teno" lances at yearend: hae Debit Creag — Lent ‘Alowance for doubt anus Be sono Netoreit aie ‘Te entity estimated that 3% ofthe gross accounts receivable sould become uncollectible. doubtful accounts What amount should be reported ‘expenee for the current year? a 240000 100000 90,000 a. 80,000 Problem 5-17 (AICPA Adapted) Bestial Company reported the following accounts at year-end before adjustments: Debit Credit Allowance for doubtful accounts 5000 Sie 7,200,000 Sale return 200,000 The eit etnated uncle account resivabe at 2% of net sales. 7 ad What amount of doubtful accounts expense should be reported for the current year? 140,000 145,000 © 142000 & 144000 162 > ae Problem 6-18 (AICPA Adapted) Castaway Company provided the following information for the current year: for dost acounta~ January 2000 ‘cos alton credit, 9.900.000 Stes dicount 000, Sai returns and allowancea $00,000 Saints writen of ag uncllectble 100,000 ‘covery ofacoounta writen of 20.000 ‘The entity recorded doubtful accounts expense at the rate of 5% of net credit sales. ‘What amount should be reported as allowance for doubtful accounts on December 81? 450,000 625,000 £600,000 '550,000 Problem 6-19 (AICPA Adapted) Efiective with the current year, Fateful Company adopted a new accounting method for estimating the allowance for doubtful accounts at the amount indicated by the year-end ‘aging of accounts receivable, ‘liane for oul acount, January 300 Provision fr dof account uring ne year = (eon ceditulesofP10C00,000 200.000 Azote writen rng the yer 2os.0m Betimeted uncollectible actountaper aging, December 31 220,000 What amount should be reported as doubtful accounts expense for the current y '& 220,000 . 205,000 © 200,000 4. 175,000Problem 5-20 (AICPA Adapted) From inception of operations, Comprehensive Company Provided for uncollectible accounts expense under the allowance method using the percentage of sales method, Noyear-end adjustments tothe allowance account Were made, ‘The balance in the allowance for doubtful accounts wag 1,000,000 at the beginning of current year. During the current year, credit sales totaled P20,000,000, interim provisions for doubtful accounts were made at 2% of credit seles, bad debts of P200,000 were written off, and recoveries of accounts previously written off amounted to 50,000. ‘An aging of accounts receivable was made for the first time (on December 31 Aaing Balance Uncollectible o- © 1,000,000 10% 61 - 10 2,000,000, 20% 181 - 950 11800,000, 30% Over 360 ‘00,000 50% Baced on the review of colletibilty of the acount balances in the "over 360 days’ aging category, additional accounts totaling P100,000 are to be written off on December 81. Effective with the current year, the entity adopted a new ‘counting method for estimating the allowance for doubtful fcenunis tthe amount indicated by the year-end aging of ‘accounts receivable, 164 a a a What amount was reported as allowance for doubtful accounts on December 31 before adjustment? a. 1,100,000 b. 1,150,000 1,250,000 4. 1,200,000 What amount should be reported a required allowance for doubtful accounts on Devember 317 a. 1,650,000 ». 1,950,000 1,700,000 4. 1,450,000 What amount should be reported aa doubtful accounts ‘expense for the current year? 1,200,000 1,650,000 ‘800,000 50,000 What is the yearend adjustment to the allowance for doubtful accounts on December 317 1 900,000 debit . 900,000 credit & 500,000 debit 500,000 credit What amount should be reported as net realizable value of accounts receivable on December 31? |. 9,900,000 b. 8:250,000 © 8,350,000 4. 8,200,000 165Problem 5.21 (PHILCPA Adapted) Qc January 1, 2021, Bary Company reported 8ecounty Bi eceivable P2,670,000 and allowance for doubtful account, 80,000. Weltet™ Recover 20000 22,000 2018 236,000, 31,000 ae Jono 38,000 2021 10.000 40,000 ‘The collections from customers during 2021 totaled 'P14.000,000, excluding recoveries Doubtful accounts are provided for as a percentage of credit sale. ‘What amount should be reported av doubtful accounts expense for 20217 ‘8. 310000 300,000 © 222000 4 378000 ‘2 What amount should be reported as allowance for doubtful accounts on December 21, 20217 110000 b 378.000 ©. 300,000 4. 478,000 3. What amount should be reported as net realizable value of accounts receivable on December 81, 20217 8 2,650,000 b. 2690,000 © 2,760,000 4. 2/800,000 Problem 6-22 (AICPA, Adapted) sppable Company began operations on January 1; 2018. Iie entity provid for dosBe scans taeed os Be inna ordi male a pie ye On January 1, 2021, the entity changed the method of Sctermining the allowance for doubt nocsenes ean cing echedule. cites 10inome sone0 apnea gone0 Slimtnerntuagemer ks aoa trots Saat, Aeotentenod terete "sao “ianeo “ona Ree Key cone wetence — Tonoot ‘apooo awe Sh DeyeAccoustOvtutanding Amount Probably ofCoiletion audererin sexnce 0 ‘Beever and 80 days 1000 Es 1. What amount should be reported as allowance for doubtfil accounts on December $1, 2081" ‘2 1,350,000 . 1480,000 ©. 1,250,000 4. 1,000,000 What amount should be reported as doubtful accounta expense for 2021? ‘a 500,000 600,000 ©. 700,000 400,000 What amount should be reported as net realizable value of accounts receivable on December 31, 2021? 8,900,000 77,000,000, 5,550,000, 5,650,000,» Problem 5-28 (AICPA Adapted) Sky Company provided the following information 4, year-end: omy Accounts receivable 80000 S000) Allowance for doubtful accounts (10,000) (15,000) Allowance for sales returne {28.000) Net realizable value e000 ‘The entity reported doubtful accounts expense in 2021 o P3000 and had protuctsretrged for rite ting P15 00 at sas price. Gross sales for 2021 amounted to P6,150,000. 1. What amount of accounts receivable was written during 20217 a. 35,000 b. 30,000 e. 15,000 4. 10,000 ‘What amount was collected from customers during 2021? a. 6,035,000 6,070,000 6,020,000 4. 6,100,000 What amount was recorded as estimated sales returis during 20217 ‘a. 10,000 b. 15,000 © 20,000 4d. 5,000 4, What amount was reported as net sales for 2021? ‘a. 6,160,000 b. 6,140,000 = 6,100,000 4. 6,135,000 168 2 eae Problem 6-24 Multiple choice (AICPA Adapted) 1. Amethodofestinatng ba debt that focuses onthe income statement rather than the statement of foes isthe allowance method based on rans! Position a. Direct writeot? b. Aging the trade accounts receivable ¢. Credit salea 4. Trade accounts receivable 2A method of estimating uncollectible accounts that emphasizes asset valuation rather than income ‘measurement is the allowance method based on 1. Aging of accounts receivable b. Direct writeotf & Gross sales 4. Credit sales less returns and allowances 3. The advantage-of relating the bad debt experience to accounts receivable is that this approach Gives a reasonably accurate measurement of accounts receivable in the statement of financial position. b. Relates bad debt expense to the period af sale ¢. I the only generally accepted method for measuring accounts receivable. 4. Makes estimates of uncolletible accounts unnecessazy. 4, Which is an accurate method of determining the amount of the adjustment to bad debt expense? 4. A percentage of sales adjusted for the balance in the allowance 1b. A percentage of aes not adjusted for the balance inthe allowance © Apercentage of account 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 169© No effecr 2n both allowance for doubt acounts a vb, foubtful accounts expense = ‘ttect on aliowance for doubtful accounts ang decrease in doubtfl asounis expense {ncreate allowance for dul emunt and no joubehil nouns expense 4. Increase in allowance for doubtful accounts and decrease Jn doubtfal scounts expense ‘When an accounts receivable aging schedule is prepared, 9 series of compulations ie made to determing the estimated ‘Sccounts, The resulting amount from this let ting: aging @. When added to the total accounts written off during the year ia the desired credit balance of the allowance for ‘doubtful accounts at year-end b, Ie the amount of doubsful accounts expense for the year e. Is the amount that should be added to the beginning allowance for doubtful accounts to get the doubtful ‘eccounte expense for the year 4. Is the amount of desired credit balance of the allowance for doubtful accounts to be reported at year-end ‘When an aging approach is used for estimating uncollectible accounts a. Bad debt expense is measured indirectly and the allowance for uncollectible accounts is measured directly, b. Bad debt expense is measured indirectly and the allowance for uncollectible accounts is measured irectly. for uncollectible accounts is measured 4. Bad debt expence ie measured directly andthe allowano® {for uncollectible accounts is measured indirectly. 170 18, Which concept relates to the allowance methed in tecounting for uncollectible sccounts receivable? fa. Bad debt expense in an estimate based on historical tnd prospective information, b, Bad debt expense is the actual amount determined to be uncollactible ‘e. Bed debt expense ie an estimate based only on aging of accounts receivable. 4. Bad debt expense is management determination of which nocounte are considered doubtful. 9, Which of the following is not acceptable in estimating lneolletible aecounta receivable? ‘a. The estimate of uncolectible accounts is based on percentage of sales for the period. b, ‘The estimate of uncellectible accounts is based on & percentage of the accounts receivable at the end of ‘aging schedule. 4. No estimate of uncollectible accounts is made but accounts are written off when it is determined that the accounts cannot be collected. 10. The estimate of uncollectible accounts receivable based fon a percentage of sales ‘4. Emphasizes measurement of the net realizable value of accounts reccivable, Emphasizes measurement of bed debt expense. ce Emphasizes measurement of total assets. 4. Te only acceptable for tax purposes. am2 choice ¢ ' pad debt expense docs ry 1 Problem 6-25 MultiP® i 1. Which method of doterrenue? Match expense af ae percentage of sales Unde, pte wit i bad thod debts wil | 2 | a. Chargini | the allowance b. Charging bad reoeivable under te c. Charging bad debts witht the accounts receive Sa d. Charging bad debts uncollectible roentage of account, h a pel od metho | ount derived from Aging the allowance methog written off a, | a th an am nder counts are nse 2. Which method of determining pad dent expense most closely matches expense to revenue? | a. Charging bad debts only as accounts are written off | b. Ghasgang bad mb with a percentage of sales of that eriod., | c. Estimating the allowance for doubtful accounts as q | percentage of accounts receivable. | d. Estimating the allowance for doubtful accounts by | aging the accounts receivable. 3. A debit balance in the allowance for doubtful accounts Should never occur. . Is always the result of manay iding gement not provi a large enough allowance in order to mana; earnings. ¢. May occur before ¢i tien - t sy * uncollectible accounts, *arend adjustment for d. May exist even aft uncollectible ebsbunte, Year-end adjustment for 4. Which is not Permi i mitt ‘ accounts receivable? aan Accounting for uncollectible a. Percentage of acco Parone eee a ts receivable » Direct writeoff m, &. Di ‘ethod Aging of accounts "eCeivable 172CHAPTER 6 NOTES RECEIVABLE TECHNICAL KNOWLEDGE To understand the concept and naturé of notes receivable. To know the initiaJ.and subsequent measurement of notes receivable. To know the accounting for interest-bearing note receivable. To know the accounting for noninterest-bearing note receivable. 178OTE RECHABLE yn oie promise in ‘by tho maker, te ee, sine A mei omic et Sees ature writing made or at ee ee = Sen eu rac in which is ey wo ay another ein oi Siena ean MON one iaobe represents only Standing alone, the 6 Hperchanine oF service in. the ‘leime ariaing fom sale of merchané ‘edinary course of busines. ‘Tus, notes received from ofcer, employe and afliat ell be designated separately shareholders Dishonored notes ‘When a promissory note mature and isnot pai, it ie 8 r paid, itis said to seri oa e a ane ‘Account and transferred eas Toons era ‘note has lost. aa SESSLER EAS rate ets Soa Tena see ear mex ermal sould include 14 Initial measurement of notes receivable Conceptually, notes receivable shall be measured initially ft present value. jum of all future cash flows ‘the present value is the ing market rate of interest for discounted using the pre ‘The prevailing market rate of interest is actually the effective interest rate However, short-term notes receivable shall be measured at face amount. Cash flows relating to short-term notes’receivable are not Aleeounted Because the effect of dtcountng i weually not material Interest-bearing notes receivable ‘The initial measurement of long-term notes will depend on whether the notes are interest-bearing or noninterest bearing. Interest-bearing long-term notes are measured at face amount which is actually the present value upon issuance. Noninterest-bearing notes receivable Noninterest-bearing long-term notes are measured at present value which is the discounted value of the future cash flows using the effective interest rate. Actually, the term *noninterest-bearing” is a misnomer because all notes implicitly contain interest. It is simply a case of the interest being included in the face ‘amount rather than being stated as a separate rate. 175soto sits ne che cot ennement in Ty awbich tbe note roeivabla of any difference amount and the principal satus amount eton fr impeinent or uncollectbility. Mina mneuora nonineres-esrng ates receivable, the a a et ps emdrtiation ofthe (eS ac anrant nus the uzamortized unearned {terest inoxme “Accordingly, only lng term interest bearing and noninterest ‘eering notes exible wil be dscusedin conjunction with the present volue coset. When intereti eeponit Seamer tthe pasince ‘Tho oalling price of Pog, BOE Mew rey uae wb the note is interest Journal entries First year seme 400,000 ‘land Gainon and offend ‘Aun intent resin 120900 imerentincome (42% 1,600,000) Second year Acerandinteren receivable 134400 Tnteretincome Face amount Interest accrued for firt year ‘Total Interetfor seco yoar (12% x 1,120,000) ‘Third year Cash 1.404.908 ‘Note recsivable ‘Acorued interest receivable Interespincome Face amount Tnteretscred: Firetyear 1,000 ‘Second year uso Tota Tnteret for third yor (12% «1.254:400) Cash received amt——— te pearing ™* ‘Mustratioa 1 Nonineeres? wpery. On January 1, ‘An entity manufacurs 194 1 74 90,000 for P 400,000, 2021, tect meee ing note for P400,000, The bayer signed nse renyDeeober 81. pare Sars ‘The cash nk pi of be meio Eh cap — 380.000 eo asat ware intent S009 cuba 20.000 Seatac ae Gromit Journal entries for 2021 ‘To record the le: — 400000 py 2380.00 Tormditeetnoe 000 ‘To meer the St nmalinentcllstion: cot eerste 100,000 ‘To recognize the unearned se Ber ‘intrest a income over the term end te come 20000 20.000 s % seat eile tere SS eum tion income = ee ano 20000 = B10 a0 16.000 — ue ‘o00 enn 5000 0 ry Explanation ‘The first installment is received on December 31, 2021. ‘Thus, for 2021 the note payable is P400,000 and decreased by P100,000 each year ‘The fractions are developed from the note receivable balance every year. fractions developed are multiplied by the total unearned interest of P50,000 to get the yearly interest income. ‘Thus, for 2021, 4/10 x P50,000 equals P20,000 and so on. ‘Statement presentation Ifa statement of financial position is prepared on December 431, 2021, the current portion of the note receivable is classified ‘as current asset. ‘Note reeivable-current portion 100,000 ‘Uncerned interest income Casc00) Carrying amount or amortized cost 35.000 ‘Total unearned interestincome 50.000 Realized in 2021 (20.000) Balance-December 81,2021 30,00 Realizablein 2022-current portion 15,000 ‘Realisable beyond 2021-noncurrent portion 38,000, ‘Total sna ‘The noncurrent portion of the note receivable is classified as noncurrent asset. Note receivable -noncurrent portion 200,000 ‘Unearned interest income (48,000, Carrying amount or amortized coat 388,000 479‘Mlustration 2 - Noninterest bearing note On January 1, 2021, an entity sold an equipment with a cost ches haha eearen Ta ‘and signed a noninterest bearing note for P300,000 payable inl anu nalnee cf Bajo every Boomer ‘The market interest rate for this note is 10%. The present value of an ordinary annuity of 1 for three periods at 10% ig, 2.4868, ‘The present vain ofthe note is computed by multiplying ‘the annual installment . 32 present value factor of 2.4869 or P248,690 Face amount ofncte 100,000 Preeent value cf note (100,000 x2.4869) 248,600 ‘Unearnod interest income Prosent value of note (Coch recrved down payment Sale price Cost ofequipment Geinonseleofeqipment Journal entries for 2021 1. To record the sale of equipment: 250,000, 99,600 51,310 i ltegpment Unset ome 2 To record the fst instalime 100,000 24,8609 Computation ‘The computation of the interest income is made using the Goctve nee matt Anoual Interest Preven ‘Date collection income Principal > Jan. 1.2001 Bec siZ0at 10000 249 roan Becsiizoee — ionmo tg «SURE Dee ai.2023 © ronaso “Sane Signs “ONE ‘The interest ‘income is computed by multiplying the Present value by 10%. Thus, for 2021, 10% x P248,690 ‘equals P24,869, ‘The principal payment is equal to annual collection minus interest income. Thus, for 2021, P100,000 minus P24,869 ‘equals P75,131, ‘The present value is equal to the preceding balance minus the annual principal payment, Thus, on December 31, 2021, P248,690 minus P75,181 equals P173,559. Journal entries for 2022 1. To record the second annual collection: aah 100.00 "Note rosivable 100,00 2 To record the interest income for 2029: ‘Unesrnedintoreet income 17386 Tterest income 17886 Journal entries for 2028 1. To record tho third annual colletion: Coat, 100,000, ‘Note receivable 100.000 2. To record the interest income for 2028: nerned interest income 9.085, “ntoretineome 181Mlustration 3 ~ Noninterest bearing note 0 Sanary 1 202, ud $y wd on euipmet eo ei 0 wih amend deta Bugs mine The entity received as considera ‘400,000 noninterest 2 P100,000 cash and a ‘ote due on January 1, 2024 eo ; See cera eee ie Fhe BSc ne ae oe Observe that the note is collectible on a lump sum basis after 3 years. Face amount ofnote 400,000 Present value (400,000 x.7813) 300520 Uneamed interest income 080 ‘The unesrned interest income is sometimes described as discount on note receivable. Computation io 00520 trae nase yrice 4 ‘Sale ping amount of equipment (600,000 - 250,000) 350,000 Gainoneale feauipent a Journal entties 2021 Jan, 1 Cash 200,000 ‘Note receivable £00,000 ‘otmtd deprecation 250,000 ‘Equipment eno Gainon ele ofequipment 050 neared intrest income 9.80 interest income nose Doct Unsarned interest fies Tnterest income 182 ~~ Computation - effective interest method Interest Unearned Present Date Tneome interest ale ian. 1, 2021 99480 300,520 Dee 31, 2081 snose oes 300572 Dae 81,2022 33087 saa. 363.620 Dae 31, 2028 aga71 = 400,000 + The interest income is computed by multiplying the present value by 10%, ‘Thus, for 2021, P300,520 x 10% equals P30,052. The unearned interest income ia arrived at by deducting ‘the interest income from preceding balance. ‘Thus, on December 31, 2021, P99,480 minus P30,052 equals Po9,428. * The present value is arrived at by adding the intorest income tn the preceding present value balance. ‘Thus, on December 91, 2021, P300,520 plus P30,052 equala 330,572. Or face amount of note minus unearned interest income ‘equals present value ‘Thus, on December 31, 2021, P400,000 minus P69,428 ‘equals P390,572, one DecS1 Unearned intrest ncome 33.057 terest income 33,057 2028 Dee 31. Unearned interest income gsm Tnterest inc sear amu Jan. Cook 400,000 ‘Note receivable 400,000 183or QUESTIONS 1. Define notes receivable, 2 Define a negotiable promissory note, 8. Explain the trestment of dishonored notes receivable, ‘4 Explain the inital measurement of short-term notes 5. Explain the initial measurement of long-term notes receivable. t bearing note 6. What is the meaning of noninter receivable? 7. Explain the subsequent measurement of long-term notes receivable. 8 Explain compounding of interest in relation to interest bearing notes receivable. 9, What is the meaning of present value of notes receivable? 410, Explain the computation of present value of long-term notes receivable. = ss PROBLEMS Problem 6-1 (ACP) ‘Feasible Company 2old to another entity a tract of land coating 5,000,000 for P7, 000,000 on January 1, 2021. buyer paid P1,000,000 down and signed a two-year ‘Pramlnsry note for the remainder of the purchase peice pe TEs intent compounded annually. The note matures, Jamvary 1, 2023, Required: Prepare journal entries for 2021, 2022 and 2023. Problem 62 (ACP) Bygone Company manufactures and sells computers. On ‘January 1 2021, the entity ald s computer costing P400,000 or P600,000. ‘The buyer signed @ noninterest bearing note for P600,000 payable in three equal installments every December 31. ‘The cash welling price of tbe computer is PS40,000. Require Prepare journal entries forthe current year. Problem 6-8 (ACP) Innovative Company manufactures and sella electrical generators. On January 1, 2021, the entity sold an elactrical ‘enerator costing P700,000 for Pi, 000,000. ‘The buyer paid P100,000 down and signed a P§00,000 oninterest bearing note payable in three equal installments ‘The prevailing interest rate for a note of this type is 12%, The ‘resent value of an ordinary annuity of 1 for three periods is 24018, Required: Prepare journal entries for the current year. 185dealer in cold an ot atiPment. On Decembar PV ott at 8% fr s PV ofan. aay, ‘ordinary annuity of} at 8% for 5 periods i Prepare journal entries for 2021 and 2022 Determine the carrying amount of the ote renal on December 31, 2022, ys 8. Determine the interest income for 2023. Problem 6-5 (AICPA Adapted) On January 1, 2021, Enigma Company sold an equipment costing P500,000 which had a carrying amount of P360,000, receiving a P125,000 down payment and, a6 edditional ‘consideration, a P400,000 noninterest bearing note due on January 1, 2024, ‘There was no established exchange price for the equipment, and the note had no ready market. oie ofthis type at prevailing rate of intrest for a note of cise at ce eee DOE wes 12% Th preent valve of 1a Jere periods i 0.7138 Required: ial entries for 2021, 2022, 2023 and 2024 Prepare jow 186 Problem 6-6 (AICPA Adapted) (On January 1, 202, Remaskable Company had th flowing ‘coount balances: Netra fom ae ofa it ding a Niece rom star Yomooe ‘The 7,500.00 note resiae i dated May 1,202, bare interes at 9% and represents the balance of the consideration received from the aale of an idle building to Solid Company, Principal payments of P2,600,000 plus interest are duie annually beginning May 1,'2021. Solid Company made the ‘Bret principal and interest payment on May 1, 2021 ‘The P2,000,000 note receivable is dated December 81, 2018, bears interest at 8% and is due on December 81,2025, ‘The note is due from the president of Remarkable Company, Interest is payable annually on December 31 and al interest payments were made through December 31, 2021. (On July 1, 2021, Remarkable Company sold a parcel of land ‘0 Boom Company for P4,000,000 under'an inatallment aale contract Boom Company made a P1,200,000 eash down payment. on {oly 1, 2021, and signed a ear 10% note forthe P2 800,000 ‘Tho equal annual payments of principal and interest on the ‘ote totaled P880,000, payable on July 1 of each year fom: 2021 through 2028, ‘The fair value ofthe land at the date of eale was 4,000,000 land the cost of tho land was P3,000,000. Required: 1, Determine the amount of notes receivable including accrued intereat that should be classified ea current ‘asset on December 31, 2021 2 Determine the amount of notes receivable that should be ‘lassified aa noncurrent asset on December 81, 2021, 187—— 6-7 (AICPA Adapted) FascetRe 1, 2021, Yola Company loaned Dale P500,000 on te, bavabie in ive ann inotallmonte of F100 beeinning January i, S088 e 2 connection with this loan, Dale was requir devon P5000 in a nonistereet beeing vero noon The amount held tobe at held in esrow isto be returned to Dale afer Principal and interest payments have brea made. Interest on the note ie payab on the note is payable on the firt day of exch ‘month beginning duly 1, 2021 Dale made sly sagen Hhrough November 1 202 ote Qn January 1, 2022, Yon Company received payment of the Bret principal ittalimeat plus all itoret dos On December 31, 2021, what amount should be reported: \cerued interest receivable? a ° b. 5,000 e 10,000 15,000 Problem 6-8 (AICPA Adapted) Frame Company has an 8% note receivable dated June 30, 2021, in the original amount of P1,500,000. Payments of 500,000 in principal plus accrued interest are due annually on July 1, 2022, 2028 and 2024 1. What is the balance of note receivable on July 1, 20227 ‘a. 1,500,000 1,000,000 e. '500,000 ey 0 June 80,2028, what amount should be reported © en Pisssroa ible on the note receivable’ 188 ~S Problem 6-9 (AICPA Adapted) ¢ year-end, Jet Company recsived two P1,000,000 notes ‘Jvodivable from customers in exchange for services rendered. On both notes, interest exeustd on te outatanding principal Siete othe annual ato of 9 und peas at ma e note from Hart Company, made under customary trade Teens, io due in ine months and the note from Maxx erSptay is due i Bve year market interest rate for similar notes at year-end was BE The compound interer factors to convert future value {nto present value st 89 are Prasen value of iene month oe Provent value of dein ive years 0 What total carrying amount of notes receivable should be Teported at year-end? a. 1,624,000 747,200 © 180,000, 1,782,000 Problem 6-10 (AICPA Adapted) ‘At the beginning of current year, Jean Company purchased from Carmina Company a P2,000,000, 8%, five-year note that required five equal annual year-ond payments of P500,900. ‘The note was discounted to yield 9% to Jean Company. At the date of purchase, Jean Company recorded the note at the present value of P1,948,500. 1. What amount of total interest revenue should bé recognized by Jean Company over the life of this note? 2. 504,500 556,000 ‘800,000 4. 900,000 2. What amount should be recognized for the current year? 175,965 '. 160,000 & 111,200 4. 180,000 interest revenuePr Pa On Jan Reet, 2021. Mill Company sold « building and Domine St Esideration 1 SOU a and Pa terest bearing note due Sonus 1 SOL SOFC tit sage rt he tn The ey 1 ao§ TSS of tereat for w note ofthis type on three Pergo et present value of 1 at 10% for What amount of What amount of interest revenue should be reported for 370,000 400,000 © 300,000 4. 330,000 Problem 6-12 (AICPA Adapied) On January 1, 2021, Akin Company sold equipment with « ‘carrying amouint of P4,800,000 in exchange for a P6,000,000 ‘noninterest-bearing note due January 1, 2024. There was no ‘established exchange price for the equipment. ‘The prevailing rate of interest for a similar note was 10% and the present value of 1 at 10% for three periods is 0.75. 1. What amount should be reported as interest income for 20217 2. What amount should be reported as gain or loss on ale of equipment for 2021? a. 1,200,000 gain b. 2700,000 gain @, "800,000 gain 4. 300,000 Toss eee 190 2 Problem 6-13 (IAA) Nova Company reported the following receivables on December 31, 2021: recessble 15,100,000. ‘Alowance for doubtful accounta 500,000, Interest receivable 190,000 Notes receivable 4,000,000 ‘+ The notes receivable comprised: 1,000,000 note dated October 31, 2021, with principal and interest payable on October 31, 2023. 'P3,000,000 note dated March 31, 2023, with principal and {8% interest payable on March 31, 2022. * During 2022, sales revenue totaled P21,000,000, 18,000,000 cash was collected from customers, and ‘accounts receivable of P600,000 were written off All sales ‘were made on a credit basis. * Doubtful accounts expense was recorded at year-end by. adjusting the allowance account to an amount equal t0 410% of year-end accounts receivable, 1, What amount should be reported as interest income for 2021 a 110,000 % 240,000 © 60,000 4. "80,000 2 What amount should be reported as doubtful accounts expense for 2021? a. 750,000 880,000 ‘600,000 100,000 191Problen Jann if (AICPA Adapted) CongStBAEy 1, 2021, 0% Company wld goods to Fox Fequiriny: Fex Company signed « noninterest-beating note ‘The far’ Payment of P600,000 annually for seven years, The eet Payment was made on Senuary 1, 2081 Prevailing rate of interest for this type of note a of sonnet rat of intron for thi typeof not at date PV of PV 1 ‘an ordinary annuity of 1 at 10% for 6 periods 4.36, of an ordinary annuity of 1 at 10% for 7 periods 4.87 What amount should be recorded as ealee revenue in January 20217 @. 3,216,000 b. 21922:000 © 2616,000 2142.00 2. What is the carrying amount of the note rece January 1, 20217 for 2021? ‘4, What is the carrying amount of the note receivable on * December 31, 20217 ‘a. 3,600,000 'b. 8,000,000 ¢, 227,600 4. 287,600 ~~ oe Problem 6-26 (AA) Persevere Company is a dealer in equipment. On December 81, 2021, the entity sold an equipment i ge for a poninterest bearing note requiring five te of {P00,000. The fret payment was made on December 31, 2022. ‘The market interest rate for similar notes wag 8%. | PV of 1 8% for 8 periods 088 PV ofan ordinary annuity of at 8% for 6 periods 399 1. (On December 81; 2021, what is the carrying amount of note receivable? 2,500,000 1995,000 4,700,000 1,495,000 2. What amount of interest income should be reported for 20227 pese ‘605,000 B. 101,000 ‘e 159,600 @. 119,600 3, What is the carrying amount of the note receivable on December $1, 2022? a. 1,654,600 B 2'164,600 2,000,000 1,498,000 4. What amount of interest income should be reported for 20287 a. 132,968 b. 172,368 160,000 . 200,000 103Problem 6-16 (AICPA Adapted) On Decemb: ‘equi ember 81, 2021, Precious Company sold an Sawipment with euryng tmount of 2,000,000 and rcnved alnonintront bearing nate rgrine payne of 0 000 Snnualyforten eee. The ne permet due December ‘The prevailing rate of interest for this type of note at date of issuance is 12%. Present value of 1 at 12% for 10 periods osm Present value of ordinary annuity of Lat12%6for periods 6.650 1. On December 31, 2021, what is the carrying amount of the note receivable? ‘=. 5,000,000 b. 2,176,000 1,610,000 d. 2)826,000 2, What amount should be recognized as gain on sale of ‘equipment in 2021? ‘a. 8,000,000 . 2,175,000 825,000 4 0 3, What amount of interest income should be recogniaed for 2022? ‘a. 600,000 839,000 319,800 4. 300,000, 4. What is the carrying amount of the not December 81, 20227 ‘a. 2,826,000 4,500,000 e, 2,826,000 . 2,664,000 to receivable on 194 i, ie Problem 6-17 (AICPA Adapted) on December 81, 2021, Chang Company wold « machine ia {he ordinary cours of business to Door Company in exchange fora noninterest bearing note requiring ten annual payments cf P1,000,000. ‘The entity made the first payment on December 81, 2021. ‘The market interest rate for similar notes at date of issuance was 8%. PV of an ordinary annuity of 1 at 8% for 9 periods 6.25, PV of an ordinary annuity of 1 at 8% for 10 periods 6.71 1. What amount should be reported as sales revenue? ‘a. 7,250,000 5,000,000 @. 6 250,000 4. 8,000,000 2, On December 81,'2021, what is the carrying amount of the note receivable? ‘a. 4600,000 . 4,600,000 6,250,000 6,710,000 8. What amount should be reported as interest income for 20227 a. 580,000 b. 720,000 500,000 d._625,000, 4. What is the carrying amount of the nate receivable on December 81, 2022? 8,000,000, 6,750,000, 5,260,000, 5,750,000 195,—_—=>—— Ea Problem 6-18 (aA) On January 1, 2021, wary 1, 2021, Allure 8 carrying amo Company a ‘i ering AmOUDE of PS00,000, Seen aunt with P1,000000 Tes, ‘in three years with a face amount of equipment. © established market value for the ‘The intvet rte on sndar ci ae value of tat 125 fortes onan i 12%. Th 1. What amount should be i ar equip hguld be reported as gain o ow onthe cle a. 200,000 gain 'b. 200,000 loss 88,000 gain d. 88,000 loss 2. What amount should be reported as intarest income for 2021? a. 288,000 b. 120,000 96,000 a. 85,440 3, What is the carrying amount of note receivable on ‘December 81, 2021? a. 869,600 b. 712,000 ce. 797,440 . 800,000 44. What amount should be reported ae interest income for 20227 a. 95,693, b, 96,000 . 75,000 . 60,000 196 8. An entity us problem 6-19 Multiple choice (AICPA Adapted) 1. On October 1 of the current yesr, an entity received one-year note receivable bearing interest at the market tate, The face amount ofthe note receivable and the entire famount of the interest are due on September 80 of next oar. The interest receivable on December 31 of the Gurrent year would consist of an amount representing a. Three months of accrued interest income Nine months of accrued interest income ¢, Twelve months of accrued interest income 4. The excess on October 1 of the present value of the note receivable over the face amount (On July 1 of the current year, an entity obtained a two-year 8% note receivable for services rendered. At that time, the market rate of interest was 10%. The face amount of the note and the entire amount of interest are due on the date of maturity. Interest receivable on December 31 of the current year is 1. 5% of the face amount of the note Bb. 49% of the face amount of the note ©, 5% of the present value of the note 4, 4% of the present value of the note the installment method to recognize revenue from installment sales, Customers pay the inatallment notes in 24 equal monthly amounts which include 12% interest. What is the carrying amount of the installment notes receivable six months after the sale? 8. 75% of the original sales price. b. Lose than 75% of the origingl sales price. ©. The present value ofthe remaining monthly payments Aiscounted at 12%. 4. Leos than the present value of the remaining monthly payments discounted at 12%. 197© Whar. ‘imputed interest? E Eatarse st rate st based on the steed intrest ra 2 Interest paced 22 Re implicit interest rate {Rtereet based on the average interest Fate Trterest based on the bank Prime Interest rato Accounting forthe intereat in a ‘noninterest bearing note theeiYable ie an example of what aspect of acounting Relevance b. Verifiabaity & Substance over form Form over substance © On July 1 ofthe current year, an entity received oné-yar ote receivable bearing interest at the market Tate, The fa02 amount ofthe note receivable and the entire ununt t the interest are due in one year. The interest receivable ‘account would show a balance on July 1 but not December 31 December 31 but not July 1 uly 1 and December 31 Neither July 1 nor December 31 7. On July Lof the current year, an entity received a one-year ‘ote receivable bearing interest at the market rate. The face amount of the note receivable and the entire amount of the interest are due in one year. When the note receivable was ‘corded on July 1, which ofthe flowing was debited? 4 Interest receivable 1b, Unearned discount on note receivable © Interest receivable and unearned discount on note receivable 4. Neither interest receivable nor unearned discount of note receivable 198 2 Unearned discount 1. Intarest receivable & Prepaid interest 4. Interest revenue 8. On July 1 ofthe current year, an entity received one-year ‘ote receivable bearing interest at the market rate Ti face amount of the note receivable end the entire anveny of the interest are due on June 50 of next year: On Deseabcr 31 of the current year, the entity should report te the atement of Gnancial position i A deterrod credit fr interest applicable t next year . No interest receivable Interest receivable forthe entice amount ofthe interest due on June 30 of next year 4. Interest receivable forthe interest accruing in the ‘current year December 31,2022. What interest rate should be weed ‘alculte the interest revenue from the transaction fo the ‘years ended December 3, 2021 and 2022, weapattve? 8 O% and ow b. T%and 7% © Mand 9% 4. 6% and 9%CHAPTER 7 LOAN RECEIVABLE TECHNICAL KNOWLEDGE To understand the initial measurement of loan receivable. To understand the subsequent measurement of loan receivable. To recognize the impairment of loan receivable. To describe the three-stage approach of loan impairment. ~~ LOAN RECEIVABLE ‘A loan reesivable is a financial asset arising from a loan ‘granted by a bank or other financial institution to a borrower or client ‘the torm of the loan may be short-term but in most cases, the repayment periods cover several years. Initial measurement of loan receivable ‘At initial recognition, an entity shall measure a loan receivable at fair value plus transaction costa 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, meaning, the amount of the Joan granted, ‘Transaction costs that are directly attributable to the loan receivable include direct origination costs. Direct origination costs should be included in the initial ‘measurement of the loan receivable. However, indirect origination costs should be treated as ‘outright expense, Subsequent measurement of loan receivable PERS 9, paragraph 4.12, provides that ifthe business model in managing financial asset is to collect contractual cash flows on specified dates and the contractual cath flows are solely payments of principal and interest, the financial asset shall ‘be measured at amortized cost. ‘Accordingly, aloan receivables measured at amortized cost using tho.effective interest method, 01~—=—— Meaning of amortized cost ‘The amortized 2 costs the amount at which the loan receivaby measured initially: : v. Minus principal repayment Pale al : or minus camulative amortization of any diffrence Setoma the inital carne amount and Ue Princ maturity amount © Minus reduction for impairment oF uncsletibiity Tn other words, if the initial amount recognized is lower than Principal amount, the amortization of the difference is ‘added to the carrying amount If the intial amount recognised is higher than the princi amount, the amortization ofthe difference is deduced or the carrying amount Origination fees Lending activities usually precede the actual disbursement of funds and generally include efforte to identify and attract potential borrowers and to originate a loan, ‘The fees charged by the bank against the borrower for tthe creation of the loan are known as "origination fees" Origination fees include compensation for the following activities: a. Evaluating the borrower's financial condition 'b. Evaluating guarantees, collateral and other security cc, Negotiating the terms of the loan ing the documents related to the e ‘e. Closing and approving the loan transaction ‘Accounting for origination fees origination fee received rom borrower are recognized ‘ecard inter: Income a emoriaed over the term af Shean If the origination fees are not chargeable against the borrower, the fees are known a» "direct origination costs". ‘The direct origination costs are deferred and also amortized cover the term of the loan, Preferably, the direct origination costs are offset directly against any unearned origination fees received. If the origination foes received exceed the direct origination coats, the difference is unearned interest income and the ‘amortization will increase interest income If the direct origination costs exceed the origination fees received, the difforence is charged to "direct origination costs” tnd the amortization will decrease interest income ‘Accordingly, the origination fees received and the direct origination costs are included in the measurement of the loan- receivable Mustration Global Bank granted a loan toa borrower on January 1, 2021. ‘The interest on the loan is 12% payable annually starting December $1, 2021. The loan matures in three years On December 31, 2028. Frindpal amount 100,000 Origination fees received from borrower 4 Dinctorgietoncrtnncued i Initial carrying amount of the loan Principal amount Origination fos received origination eta incurred Initial carrying amount of oan,Effective interest method Interest received = Principal times nominal rate $000,000 ‘Interest income = Carrying amount times effective rate 5,000.00 December 31,2021 8 received from the Interest recived (5,000,000 x 12%) = jenna San Me 1 oe the Weert the direct otiginatios costs incu: see smoent Donan to wemty — S Cee ae mn a the unearned interest income has edit bals ta eam, Beceem | See sctive interest met oo rthod. (Carrying mount December 31, 2021 Because of the ofigination fees received and the direct (Carrying amount ~December 31, 2022 ‘origination costs, o new effective rate must be computed. fs He must be computed. December 81,2028 Since the initial carrying amount of the loan receivable of Interest rece ‘P4,768,200 is lower than the principal amount, it means there Interest income ewer is a discount and therefore the effective rate must be higher ‘ * e224 count and therefore th Anorizaton sr2e1 than the nominal Carne trun - December 31,2082 asi ‘After considering the origination fae rectived from the Caring mount -Deember 312083 00 009000 borrower and the direct origmation cot the elective interet : borrower snd the diet ori 491275010 gue POOT.785, Therein a feonce of FEBS dhe rounding of penn rae oe Amortization table - effective interest method Journal entries on December $1,202 Interest Interest ot ma Dato teetlved ‘ncomt Amortization smrant cu oo 4,768,200 Interest income me, ‘600,000 2021 Dec aI 20H moo corsas arsine earned iotrtncone ors Dec si.2022 gonace er7ge ier OD Toteretincone i Ke 205Interest income ae axe enen ‘Unearned interest income T1096 terest income m0, Journal entries on December 31, 2023 ba a est income 200.000 Unearned interest income erat Tntereet income’ east Cash 5:000,000 , es $5000.000 Impairment of loan PERS 9, paragraph 5.5.1, provides that an entity shall recognize a loss allowance for expected eredit losses on financial asset measured at amortized cost. Paragraph 5.5.8 provides that an entity shall measure the {os allowaioe for’ Gnancal inetroment at an emount equal to the lifetime expected credit losses the eet risk on that financial inetrument has inereaaed significantly ince initial recognition, Credit losses are the present value of all eash shortfalls. sted credit losses are an estimate of credit losoce over the life of the financial instrument. 206 ‘Measurement of impairment When, measuring expected eredit losses, an entity should ‘a. The probability weighted outcome ‘The eatimate should reQect the possiblity that a credit Joa occure and the pouty tht wo ore ose asta, 1b. Thetime value of money ‘The expected credit lonsen should be discounted. © Regsonable and supportable information that is availabe without undue cost or etlor PERS 9 does not prescribe particular method of measuring txpected credit lone, ‘may use various sources of data both internal or specific and external in measuring expected credit Tyan gta ee he ie ls a eel of elimated future cosh flows discounted atthe oristeed ae asin ot ea a eat crimes ht a Menino e Citak eo nem Si eh tery ahem te hc aes Os ‘i mee et a act prt ‘he ak dove not necessarily relate tothe credit worthiness or example fan entity inoue a collateralized inility and noncolateralized Mabilty tas are theres dene sredit risk ofthe two habits wil be different, ‘Te cadt rg of she calateralian Lb ig nuely tne than‘the credit risk of the nonedlsteraied hab ‘Tho credit risk for a collateralized lability may be zero, 207pisstration ‘e™national B, on Janney, Sank ted P8.000.000 to Baskard Company The terms of, each, the loan req Year ire principal payment 4° 5 youre plus interest at 10% 2000.00 The frst prin 31, 2019, inital and interest payment is due on December ‘Company made the revere maber 31, 2019 and December Sr sean ed Payments on Bod oy ei oc ark Coney ge ng Deal nd nse re eke Re On Decembes 31, 2 ot Sonat geal eons ‘The loan receivable has carrying amount of P3,800,000 including the acerued interest of P300,000 on December 31, 2021. International Bank projected the cash flows from the loan on December 31, 2021. Date of cash flow Amount projected December 31,2022 500,000 December 31, 2028, 1,000,000 December 31, 2024 4,500,000 sing tho original effective rate of 10%, the present value of PEeMGoat for one period, 8264 for two periods and. 7518 fr thee periods. Present value of the cash flows case aersi.20% (500000 099 “a nn December 3nmt C0005 7819 ito peepee arch owt arse 208 ee Computation of impairment loss ‘The impairment los isthe difference between the carrying mount of the loan and the present value of the cash flows. Carrying amountcfioan ‘3.00.00 ‘recontvalofcaah ows 3401900 Impairment one ~s22,100 Journal entry on December 31, 2021 ‘oan impirmet oe 07,100 cern ners rciable 00.000 ‘Alowanc for loon inpaiment 182,100 ‘The accrued interest receivable is eredited directly because the collection of interest is unlikely. ‘Statement presentation on December 31, 2021 Loan resivable 8,000,000 Allowance for loan impairment (532,100) Carrying amount 2,407,900 ‘Journal entries on December 31, 2022 1, To record the cash collection: cash 500,000 ‘Loenzeceiveble 500,000 2. To rocord the interest income using the effective interest method: Allowance forloan impairment 240,790 Intereetincome 240,700 ‘The interest income for 2022 is computed by multiplying ‘the carrying amount ofthe loan by the effective rate, ‘Thus, P2,407,900 times 10% equal P240, 790. ‘Note thatthe recognition of interest income is charged against the allowance for loan impairment account.