Chapter 3

Chapter 3
Receivables
Roxanie C. Calixto, CPA, MSA
Accounts Receivable
Notes Receivables FS Presentation Analysis of AR
Receivables Financing
Learning Objectives
After this chapter, the student should be able to:
+ Understand the financial nature of receivables as a financial asset.
+ Enumerate and describe the specific accounts that are classified under
receivables.
+ Know the requirements for the initial recognition, subsequent recognition,
and derecognition of short-term and long-term receivables.
+ Measure the net realizable value of receivables.
+ Understand the basic disclosures needed for trade and other receivables.
+ Compute for the net present value of notes receivables.
+ Prepare an amortization table for notes receivable.
Accounts Receivable
Receivables Financing 2
What is a Receivable?
+ Receivable is a financial asset that represents
a contractual right to receive cash or other
financial asset from another entity.
+ Types of receivables:
• Trade Receivables
• Other Receivables
Accounts Receivable
Examples of Other Receivables
+ Claims Receivable – represents amounts expected to
receive from an insurance company for any claims in
one’s insurance policy.
+ Interest Receivable – represents the amount of interest
already earned but not yet received as of the end of the
year.
+ Advances to affiliates – represent amounts given in
advance to employees and suppliers.
Accounts Receivable
Types of Trade Receivables
+ Accounts Receivable – short term
receivables arising from the ordinary course
of trade or business.
+ Notes Receivable – more formal claim
which can be short-term or long-term.
Accounts Receivable
Accounts Receivable
+ Arises from the sale on account of the entity’s goods or
merchandise and presented as part of current assets on the
statement of financial position.
+ Initial recognition – recorded at cost (i.e., invoice price,
revenue, sales).
+ Subsequent recognition – at the end of the reporting period,
accounts receivable is reported at its net realizable value
(NRV).
• NRV is the estimated amount that could eventually be
collected from the customers’ accounts.
Accounts Receivable
Accounts Receivable (cont’d)
+ Derecognition – account receivable is derecognized, or
removed from the books, when either of the two occurs:
1. The contractual rights to the cash flow expires.
2. The entity transfers the receivable and the transfer qualifies
for derecognition.
Accounts Receivable
Estimating Loss on Accounts Receivable
Allowance for Doubtful Accounts = Accounts Receivable
Balance – Net Realizable Value of the AR
There are two methods of estimating ADA:

a) Using a certain percentage of accounts receivable
b) Aging the accounts receivable
Accounts Receivable
• The about of doubtful accounts expense is estimated
through the allowance accounts under the following
scenarios:
1. ADA is estimated at a certain percentage of AR
2. ADA is increased to a certain percentage of AR
3. ADA is increased by a certain percentage of AR
Accounts Receivable
(cont’d)
Accounts Receivable, end ₱ xxx

Multiplied by estimated loss rate x%
Required allowance ₱ xxx
ADA, before adjustment (xxx)

Doubtful accounts expense ₱ xxx
Accounts Receivable
Illustration:
New Millennium Trading shows the following balances in its books
as of December 31, 2020:
Accounts Receivable ₱ 500,000
Allowance for Doubtful Accounts, before adjustment 30,000
Determine the amount of doubtful accounts expense to be recorded

by the entity in 2020.
Accounts Receivable
Scenario 1:
The Allowance for Doubtful Accounts is estimated at 10% of AR.
Accounts Receivable, end ₱ 500,000

Multiplied by estimated loss rate 10%
Required allowance ₱ 50,000
ADA, before adjustment (30,000)

Doubtful accounts expense ₱ 20,000
Accounts Receivable
Scenario 2:
The Allowance for Doubtful Accounts is increased to 15% of AR.

Required allowance ₱ 75,000
ADA, before adjustment (30,000)

Doubtful accounts expense ₱ 45,000
Accounts Receivable
Scenario 3:
The Allowance for Doubtful Accounts is increased by 5% of AR.

Doubtful Accounts Expense ₱ 25,000
ADA, before adjustment 30,000

ADA, after adjustment ₱ 55,000
Accounts Receivable
Effects of scenarios 1 to 3 on the balances of accounts receivable,
allowance for doubtful accounts, and net realizable value
Allowance for
Accounts Net Realizable
Scenario Doubtful
Receivable Value
Accounts
1 ₱ 500,000 ₱ 50,000 ₱ 450,000
2 500,000 75,000 425,000
3 500,000 55,000 445,000
Accounts Receivable
b) Aging of accounts receivable
• Estimating bad debts based on groups that show the number of
days the accounts are already past due.
• An account is past due if it is not fully paid after expiration of the
credit period.
• Example: If a credit term states 2/10 n/30, it means that
 If the customer paid within 10 days after purchase date, the
customer will be granted a 2% cash discount.
 Otherwise, the customer has to settle within the 11 th days up
to the 30th day with no discount.
 If the account is still not paid after the 30 th day, it is already
past due.
Accounts Receivable
b) Aging of accounts receivable (cont’d)
• Detailed analysis of the probability of collection or
non-collection.
• The longer the account has been past due, the higher
the estimated loss rate.
Accounts Receivable
Illustration:
The following accounts were gathers form the records of
Hannigan Company:
Accounts Receivable, 12/31/2020 ₱ 8,000,000

Allowance for Doubtful Accounts, 01/01/2020 ₱ 150,000
Accounts Receivable
Hannigan categorizes its outstanding accounts for financial reporting
purposes, as follows:
Days Past Due Amount % Uncollectible

Current ₱ 4,000,000 2%
1 to 30 1,600,000 4%
31 to 90 800,000 6%
91 to 120 640,000 10%
121 to 180 480,000 20%
181 to 360 320,000 30%
Over 360 160,000 50%
Accounts Receivable
Computation:
Days Past Due Amount % Uncollectible Required Allowance
Current ₱ 4,000,000 2% ₱ 80,000
1 to 30 1,600,000 4% 64,000
31 to 90 800,000 6% 48,000
91 to 120 640,000 10% 64,000
121 to 180 480,000 20% 96,000
181 to 360 320,000 30% 96,000
Over 360 160,000 50% 80,000
Total ₱ 8,000,000 ₱ 528,000
Accounts Receivable
Results:
• The required balance of the Allowance for Doubtful
Accounts at the end of the period is ₱528,000.
• The Doubtful Accounts Expense to be recognized
during the year is ₱378,000 (₱528,000 - ₱150,000).
• Hannigan Corporation’s Accounts Receivable should
be reported at net realizable value of ₱7,472,000
(₱8,000,000 - ₱528,000).
Accounts Receivable
Additional Notes:
+ When the accounts receivable is deemed worthless, it has
to be written off or removed from the company’s records.
+ Remove the amount to be written off from the Allowance for
Doubtful Accounts and Accounts Receivable.
+ Upon collection of the previously written off account, the
entity should recognize the cash received as other
income.
Accounts Receivable
Notes Receivable
+ A note is a written promise to pay a certain sum of money
at a specific future date.
+ Notes Receivable vs. Accounts receivable:
Notes Receivable Accounts Receivable

Supported by a document May be oral in nature
Short-term or long-term Short-term (current asset)
Interest bearing Does not earn interest
Accounts Receivable
Notes Receivable
+ Initial Recognition
• Short-term interest bearing note receivable – fair
value + transaction costs (similar with AR).
• Long-term note – present value.
+ Subsequent Recognition
• The note should be reported at carrying amount.
Accounts Receivable
Notes Receivable
+ Derecognition
• The contractual rights to the cash flows from the
financial asset expire, or
• It transfers the financial asset and the transfer
qualifies for derecognition.
Accounts Receivable
Notes Receivable
Computing for the Present Value
- The present value of the note is computed using the effective interest
rate or market rate which reflects the true amount of interest due on
any interest-paying investment when the effects of compounding over
time are taken into account.
- The effective interest rate is different from the note’s nominal or
coupon rate which determines the cash that the payee will receive
regularly from the note.
- If the nominal rate is zero, this means that the note is a non-interest
bearing one.
Accounts Receivable
Notes Receivable
Illustration: Note Receivable – recorded at a discount
Assume that on January 1, 2020, Bridge Co. received a
10%, five-year note, having a face value of ₱1,000,000. The
note pays interest every December 31. On the date of the
receipt of the note, the effective interest rate was 11%.
*If the Effective rate of interest > Nominal rate, the note is
recorded at a discount.
Accounts Receivable
Notes Receivable
Step 1. Compute for the Present Value of the Principal using
PV of a single sum formula.
PV = FV (1 + i)-t
Where:
• PV represents the Present Value of the principal.
• FV is the future value of the principal.
• i stands for the effective interest rate
• t stands for the term of the note
Accounts Receivable
Notes Receivable
PV = 1,000,000 (1 + .11)-5
PV = ₱593,451.33
Accounts Receivable
Notes Receivable
Step 2. Compute for the Present Value of the Nominal
Interest using PV of an ordinary annuity formula.
1 - (1 + i)-t
PVOA = P [ i ]
Where:
• P stands for the periodic payment.
Accounts Receivable
Notes Receivable
1 - (1 + 0.11)-5
PVOA = 100,000 [ 0.11 ]
PVOA = 369,589.70
Accounts Receivable
Notes Receivable
Step 3. Get the sum of the PV of the principal and PV of the
annual interest payments to get the PV of the note.
Present value of the Principal ₱ 593,451.33

Present value of the Interest Payments 369,589.70
Total Present Value ₱ 963,041.03
Face amount of the note ₱ 1,000,000.00
Discount on Notes Receivable ₱ 36,958.97
Accounts Receivable
Notes Receivable
Step 4. Subsequent Recognition
Date Interest Earned Cash Received Amortization Carrying Amount
A = (CA x 11%) B = (₱1M x 10%) C = (A – B) D = (Prev. CA + C)
01/01/2020 963,041.03
12/31/2020 105,934.51 100,000 5,934.51 968,975.54
12/31/2021 106,857.31 100,000 6,587.31 975,562.85
12/31/2022 107,311.91 100,000 7,311.91 982,874.76
12/31/2023 108,116.22 100,000 8,116.22 990,990.98
12/31/2024 109,009.02 100,000 9,009.02 1,000,000
01/01/2025 - - - 0
Accounts Receivable
Notes Receivable
Step 4. Derecognition
01/01/2020 963,041.03
12/31/2020 105,934.51 100,000 5,934.51 968,975.54
12/31/2021 106,857.31 100,000 6,587.31 975,562.85
12/31/2022 107,311.91 100,000 7,311.91 982,874.76
12/31/2023 108,116.22 100,000 8,116.22 990,990.98
12/31/2024 109,009.02 100,000 9,009.02 1,000,000
01/01/2025 - - - 0
Accounts Receivable
Notes Receivable
Illustration: Note Receivable – recorded at a premium
Assume that on January 1, 2020, Bridge Co. received a
13%, five-year note, having a face value of ₱1,000,000. The
note pays interest every December 31. On the date of the
receipt of the note, the effective interest rate was 11%.
*If the Effective rate of interest < Nominal rate, the note is
recorded at a premium.
Accounts Receivable
Notes Receivable
PV = 1,000,000 (1 + .11)-5
PV = ₱593,451.33
Accounts Receivable
Notes Receivable
1 - (1 + 0.11)-5
PVOA = 130,000 [ 0.11 ]
PVOA = 480,466.61
Accounts Receivable
Notes Receivable
Step 3. Get the sum of the PV of the principal and PV of the
annual interest payments to get the PV of the note.
Present value of the Principal ₱ 593,451.33

Present value of the Interest Payments 480,466.61
Total Present Value ₱ 1,073,917.94
Face amount of the note ₱ 1,000,000.00
Premium on Notes Receivable ₱ 73,917.94
Accounts Receivable
Notes Receivable
Step 4. Subsequent Recognition & Derecognition
01/01/2020 1,073,917.94
12/31/2020 118,130.97 130,000 (11,869.03) 1,062,048.91
12/31/2021 116,825.38 130,000 (13,174.62) 1,048,874.29
12/31/2022 115,376.17 130,000 (14,623.83) 1,034,250.47
12/31/2023 113,767.55 130,000 (16,232.45) 1,018,018.02
12/31/2024 111,981.98 130,000 (18,018.02) 1,000,000
01/01/2025 - - - 0
Accounts Receivable
Financial Statement Presentation
• Statement of Financial Position (PLDT)
Accounts Receivable
Financial Statement Presentation
• Notes to the Financial Statements (PLDT)
Accounts Receivable
Analysis of Accounts Receivable
1. Accounts Receivable Turnover
- used to quantify a company’s effectiveness in collecting its
receivables.
- it presents the number of times per year that a business collects
its average accounts receivable
Net credit sales

Accounts receivable turnover =
Ave. accounts receivable
Accounts Receivable
Analysis of Accounts Receivable
2. Average collection period
- refers to the number of days that an entity is able to collect from
its credit customers.
- Generally, it is more efficient for an entity to have a shorter
collection period compared to its normal credit terms.
365
Average collection period = Net credit sales
Ave. accounts receivables
Accounts Receivable
Receivable Financing
- Receivable financing is a
technique undertaken by
entities to expedite cash flows
from their accounts receivable,
which would involve selling,
pledging, assigning, and
factoring of customers
accounts.
- Additionally, cash can also be
obtained through discounting of
notes receivable.
Accounts Receivable
Different Types of Receivable Financing
1. Pledging
• Accounts receivable is offered as a
collateral against an existing loan.
• If the debtor/entity defaults on his
debt, the entire amount of
receivables pledged will be used as
payment of the existing loan.
• The accounts receivable pledged will
not be removed from the books
despite the pledging agreement
(disclosure only).
Accounts Receivable
2. Assignment
• The entity who is called the assignor
obtains a loan from a creditor called
assignee.
• The responsibility of collecting may
be given to the creditor. However, the
ownership of the accounts is still
retained by the entity.
• Set up of Accounts receivable –
assigned in the books of the entity.
Accounts Receivable
3. Factoring
• The entity actually sells outright its
accounts receivable to a buyer called
factor.
• The factor would only pay the seller a
portion of the face value of the
accounts receivable factored.
• If the receivables are deemed
worthless, the factor bears the loss
from non-collection of the accounts.
Accounts Receivable
4. Discounting of notes receivable
• The entity endorses the note to a
financial institution which is usually a
bank.
• If the note is discounted with
recourse, the bank may go after the
entity to collect the maturity value of
the note.
• If the note is discounted without
recourse, the bank can no longer
collect from the entity.
Accounts Receivable
To do:
+ Analyze the financial statements assigned to you and check
the components and presentation of receivables.
+ Compute for the company’s accounts receivable turnover

and average collection period.
+ Answer book exercises 3-1 to 3-6.
49
Thanks!
Any questions?
Email me at:
roxanie.calixto@dlsu.edu.ph
50

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There are two methods of estimating ADA:

Accounts Receivable, end ₱ xxx

ADA, before adjustment (xxx)

Accounts Receivable ₱ 500,000

Allowance for Doubtful Accounts, before adjustment 30,000

Determine the amount of doubtful accounts expense to be recorded

Accounts Receivable, end ₱ 500,000

ADA, before adjustment (30,000)

Accounts Receivable, end ₱ 500,000

ADA, before adjustment (30,000)

Accounts Receivable, end ₱ 500,000

ADA, before adjustment 30,000

Accounts Receivable, 12/31/2020 ₱ 8,000,000

Days Past Due Amount % Uncollectible

Notes Receivable Accounts Receivable

Present value of the Principal ₱ 593,451.33

Present value of the Principal ₱ 593,451.33

Net credit sales

+ Compute for the company’s accounts receivable turnover

+ Answer book exercises 3-1 to 3-6.

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