Module 2 Receivables

RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig
LESSON 2
MODULE NO. 2: RECEIVABLES
1. Nature of Receivables
2. Classify receivables according to source
3. Recognition and measurement principles in IFRS 9 Financial Instruments
and IFRS 15 Revenue from Contracts with Customers relating to receivables
4. Formulate entries for transactions affecting notes and accounts receivable
5. Formulate entries to account for different forms of receivable financing
6. Presentation and classification of receivables in the statement of financial
position
Overview
This module is prepared for the students to understand the nature of

receivables.
This module discusses nature of Receivables, classify receivables
according to source, recognition and measurement principles in IFRS 9
Financial Instruments and IFRS 15 Revenue from Contracts with Customers
relating to receivables, formulate entries for transactions affecting notes and
accounts receivable, formulate entries to account for different forms of
receivable financing, presentation and classification of receivables in the
statement of financial position. This module will cover a brief discussion of the
theory and standard behind the topic, exercises and practice problem the cover
the said topic.
INTERMEDIATE ACCOUNTING PART 1 1

Study Guide
This module is designed for the students to understand provisions,

contingencies and other liabilities. This module includes:
1. Topic Discussions - to be read by the students to fully understand the
topic.
2. Assessment – to be accomplished by the students after the discussion
to test their skills and understanding to the subject matter.
3. Assignment – activity to be done by students to be submitted to the
instructor. This is to reinforce or advance the student’s learning. It is
relevant to the past, current, and future lessons.
To complete the requirements of this module, the students are required to:
1. Read and understand the topic discussion and the guided exercises
2. Accomplish the assessment.
3. Accomplish the assignment due on next meeting.
Learning Outcomes
At the end of the discussion, the students are expected to:

1. Describe and understand the nature of Receivables, classify receivables
according to source, recognition and measurement principles in IFRS 9
Financial Instruments and IFRS 15 Revenue from Contracts with
Customers relating to receivables.
2. Formulate entries for transactions affecting notes and accounts
receivable, formulate entries to account for different forms of receivable
financing, presentation and classification of receivables in the
statement of financial position.
3. Identify the required disclosures for receivables in the financial
statements.

Topic Presentation
Receivables, in the broadest sense, represent any legitimate claim from others for
money, goods or services. In the narrower sense and as contemplated in accounting,
receivables represent claims that are expected to be settled by receipt of cash. Loans
and receivables are financial assets within the scope of FRS 9 Financial Instruments
and IFRS 7 Financial Instruments – Disclosures.
For accounting purposes, receivables include the following:
1. Amounts collectible from customers and others, most frequently arising from
sales of merchandise, claims for money lent, or the performance of services.
They may be on open accounts or evidenced by time drafts or promissory
notes.
2. Accrued revenues, such as accrued interest, commissions, rental and others.
3. Other items such as loans and advances to officers, employees, affiliated
companies, customers or other outside parties; legitimate claims against
suppliers and insurance companies; and other claims arising from nonrecurring
transactions such as calls for subscriptions receivables and disposal of
property.
Classification of receivables according to source:

As to source or origin, receivables are classified either as trade receivables or non-
trade receivables.
• Trade Receivables. Receivables arising from sale of goods or services in the

normal course of business are called trade receivables. These receivables
should include only charges for actual sales completed (when there has already
been actual or constructed delivery of goods or performance of services) on or
before the end of the reporting period. These receivables include accounts
receivables and notes receivable.
• Non-trade Receivables. Receivables that arise from sources other than from
sale of goods or services in the normal course of business are considered non-
trade receivables. Specific examples of non-trade receivables include:
1. Loans to officers and employees
2. Advances to affiliates
3. Accrued interest and dividends
4. Deposits to guarantee performance or payment or to cover possible damages
or losses
5. Subscriptions for the entity’s equity securities
6. Deposit with creditors
7. Claims for losses and damages
8. Claims for tax refunds or rebates
9. Claims against common carriers for damaged or lost goods
Classification of receivables in the statement of financial position
In a properly classified statement of financial position, trade receivables are

generally classified as current assets because they are collectible within the entity’s
normal operating cycle. The normal operating cycle is the period required for cash

to be converted into inventories through purchase and production, inventories into

receivables through sale, and receivables back into cash equivalents through
collection.
Where the normal operating cycle of the business extends beyond twelve months
because of long credit terms, as in the case of certain installment receivables (e.g.,
installment sales for household appliances), in which such accounts are an integral
part of working capital, it is appropriate to classify the receivables as current assets;
however, the amount or estimate thereof not collectible within twelve months should
be disclosed.
Non-trade receivables that are expected to be collected within 12 months from the
end of the reporting period are also classified as current assets, regardless of the
length of the entity’s normal operating cycle. Non-trade receivables that are not
reasonably expected to be collected within twelve months from the end of the reporting
period are reported as non-current assets. However, subscription receivable with call
date beyond twelve months from the end of the reporting period is appropriately
reported as deduction from shareholders’ equity.
INITIAL RECOGNITION
Based on IFRS 9 Financial Instruments, an entity shall recognize a financial asset in

its statement of financial position when and only when, the entity becomes a party to
the contractual provision of the instrument. Thus, trade receivables are recognized
simultaneous to the recognition of the related receivables are recognized simultaneous
to the recognition of the related revenues, either from sale of goods or rendering of
services.
Trade receivables are initially recognized at the transaction price. Transaction price,
as defined by IFRS 15 Revenue from Contracts with Customers, is the amount to which
an entity expects to be entitles in exchange for the transfer of goods and services (par.
47, IFRS 15).

Long term receivables that are interest bearing are initially measured at fair value
which is equal to face value.
Long term receivables that are non-interest bearing are initially measured at fair
value which is equal to present value of all future cash flows discounted using the
prevailing market rate of interest.
Accounting for accounts receivable and related revenues

Trade receivables on open accounts and are not evidenced by promissory notes or
time drafts are called Account Receivable. These are evidenced by sales invoices,
delivery receipts and other similar documents.
SUBSEQUENT RECOGNITION
Accounts receivables are subsequently measured at net realizable value (NRV)
meaning the amount of cash expected to be collected or estimated recoverable
amount. NRV is actually the amortized cost of accounts receivable.
In estimating the NRV of trade accounts receivable, the following deductions are made:
a) Allowance for freight charge
b) Allowance for sales return
c) Allowance for sales discount
d) Allowance for doubtful accounts
PRESENTATION
Trade receivables and non-trade receivables which are currently collectible shall be
presented on the face of the statement of financial position as one-line item called
trade and other receivables.
Customers’ credit balances
These are credit balances in accounts receivable resulting from overpayments, returns
and allowances and advance payments from customers. These credit balances are
classified as current liabilities.
TERMS RELATED TO FREIGHT CHARGE
FOB Destination
It means that ownership of the goods purchased is vested in the buyer upon receipt
thereof. The seller shall be responsible for the freight charge up to the point of
destination.
FOB Shipping Point (“res perit domino” → buyer bears the risk) Assumption if
silent
It means that ownership of the goods purchased is vested in buyer upon shipment
thereof. The buyer will pay the transportation charge from the point of shipment to the
point of destination.
Freight Collect
It means that freight charge on the goods shipped is not yet paid. The common carrier
shall collect the same from the buyer. The freight charge is actually paid by the buyer.
Freight Prepaid
It means that freight charge on the goods shipped is already paid by the seller.

TRADE DISCOUNT AND CASH DISCOUNTS
Trade discounts, also known as volume or quantity discounts, are means of

converting a catalog price to the prices actually charged to the buyer. These may be
used to make price differentials among different classes of customers, varying
quantities, or changes in prices. Such trade discounts are also used to avoid frequent
changes in prices. Such trade discounts are also used to avoid frequent changes in
catalogs and to hide the true invoice price from competitors. They are commonly
quoted in percentage, and at times, series of percentages.
Trade discounts are not recognized for financial accounting purposes. They are
deducted from the list prior to recording the accounts receivable arising from a credit
sales transaction. To state simply, both accounts receivable and the related revenue
are always recorded net of trade discounts.
To illustrate, assume that on July 16, 2019, ABC Manufacturing sells merchandise on
account with a list price of P100,000, less trade discounts of 10%, 10% and 5%. The
invoice price of the merchandise is computed as follows:
Alternatively, the invoice price may simply be computed as

100,000 x .90 x .90 x .95 P 76,950
Thus, the entry for the sale transaction is
Accounts Receivable 76,950
Sales 76,950
Cash discounts, or sales discounts from the seller’s point of view, are reductions
from the sales price as an inducement for prompt payment of an account. They are
expressed in terms which may read as: 2/10, n/30 (2% discount is granted if account
is paid within 1- days from the invoice date, gross amount due in 30days); 3/15, n/60
(3% discount is granted if account is paid within 15 days from the invoice date, gross
amount due in 60 days).
The timing of the recognition of the cash discounts is based on the method of
accounting adopted by the company for purchases and the related accounts payable.
These methods are as follows:
a. Gross price method,
b. Net price method, and
c. Allowance method
Gross Price Method. Under this method, both the account receivable and sales are
initially recorded at the gross sales price with no accounting recognition of the available

cash discount until it is actually taken. When the discount is taken, it is debited to the
sales discounts account.
Assume that on July 16, 2019, ABC Manufacturing sells merchandising on account
with a list price of P100,000, less trade discounts of 10%, 10% and 5%. The invoice
price of the merchandise is computed earlier as P76,950. assume further that the credit
terms were 2/10; n/30, FOB shipping point and freight paid to the shipper by ABC
Manufacturing amounted to P2,000. The sale on July 16, 2019 is recorded as follows:
Sales 76,950
Cash 2,000
The amount charged to accounts receivable includes the freight paid in behalf of the
customer. When goods are shipped FOB shipping point, the title to the goods is
transferred from the seller to the buyer. This may also be termed as FOB shipping
point, freight prepaid. Thus, freight paid by the seller under this term is an account
collectible from the buyer.
If the customer pays on or before July 26, 2019, which is within the discount period of
10 days, the journal entry is
Cash 77,411
Sales Discount 1,539
The sales discount is computed based on the invoice price (2% x P76,950), which
excludes the freight charges prepaid by the seller.
When the customer pays after July 26, which is beyond the discount period, the journal
entry is
Cash 78,950
While the gross method lacks conceptual validity, it is the simplest and most widely
used method because the cash discount is usually immaterial, and the record keeping
is less complicated. Sales Discounts are reported as deduction from Sales in the profit
or loss section of the statement of comprehensive income.
Under the gross price method, inasmuch as the sales discount is recorded only when
taken, it is possible that sales may have been recorded in one reporting period, but the
cash discount may have been taken by the customer upon payment in the subsequent
period. Thus, if no adjustment would be taken up at year-end, both the sales revenue
and accounts receivable are overstated on the financial statements. To avoid such
misstatement, an entry to set up anticipated sales discounts must be prepared at year-
end, as follows:
Sales Discount xx
Allowance for sale Discount xx
With the above adjusting entry, sales revenue in the statement of comprehensive
income is reduced by the anticipated sales discount, and accounts receivable in the
statement of financial position is reduced by the allowance for sales discount. This
brings the accounts receivable to an amount potentially collectible in cash. For
convenience, the above adjusting entry is reversed at the beginning of the subsequent
accounting period, so that the eventual collection is recorded by merely debiting cash
and crediting accounts receivable at the amount of cash collected.

The gross price method is the most popular because of its convenience. However, it
may not faithfully represent the amount of sales reported in the statement of
comprehensive income, specifically, when significant amounts of receivable are
collected beyond the discount period. The sales account is a mixture of two items of
revenues: revenue from sales to customers and the finance income earned by the
entity because of the lapse of the discount period granted.
Net Price Method. Under the net price method, both the accounts receivable and the
sales are recorded at the sales price less the available cash discount (the net price).
Using the previous illustration, ABC records the sales transaction on July 16 as follows:

Sales 75,411
Cash 2,000
The company does not recognize the cash discount if it collects the account within the
discount period. Hence, if ABC is able to collect the above account on or before July
16, it shall prepare this entry:
Cash 77,411
If collection is made beyond the discount period and therefore, the cash discount is not
taken by the customer, the difference between the amount collected (the gross price)
ad the amount originally recorded (the net price) is credited to the Sales Discounts
Forfeited (or Sales Discounts Not Taken) account.. If ABC collects the amount after
July 26, it shall prepare the following entry:
Cash 78,950
Sales Discounts Forfeited 1,539
The balance of Sales Discounts Forfeited account is reported as other operating

income (or finance income) in profit or loss section on the statement of comprehensive
income.
The net method is theoretically superior over the gross method, because it initially
recognizes the accounts receivable at its amortized cost. This method strictly adheres
to IFRS 15 which requires that variable considerations resulting from discounts,
rebates, refunds, credits, price concessions, incentives, penalties or other similar items
shall be estimated by the entity to minimize reversal of revenue in the future when an
uncertainty has been resolved.
The net method requires an adjusting entry at year-end for sales discounts forfeited
on accounts receivable that have passed the discount period. The year-end adjusting
entry is
Account Receivable xx
Sales Discounts Forfeited xx
Allowance Method. Under the allowance method, the accounts receivable is recorded
at the gross sales price, the sales revenue is recorded at net amount and the available
cash discount is recorded as a credit in the valuation account, Allowance for Sales
Discounts. If in the previous illustration, ABC uses the allowance method, it would
prepare the following entry on July 16.
Account Receivable 78,950
Allowance for Sales Discounts 1,539

Sales 75,411
Cash 2,000
The sales discount is recognized when it is offered to customer using the account
allowance for sales discount
The collection on or before July 26 is recorded as follows:
Cash 77,411
The collection beyond the discount period is recorded as:
Cash 78,950
Sales Discounts Forfeited 1,539
Under the allowance method, an adjusting entry is made at year-end when the account
remains uncollected and the discount period has already lapsed. The adjustment
cancels the related allowance for sales discount, thus increasing the amortized cost of
accounts receivable. Such year-end adjusting entry is
Allowance for Sales Discounts xx
Sales Discounts Forfeited xx
The Allowance for Sales Discount account is a valuation account that reduces
accounts receivable to its amortized cost, and Sales Discounts Forfeited is presented
as other operating income in profit or loss section in the statement of comprehensive
income.
With appropriate adjusting entries, the choice of the method used does not make any
difference in the amortized cost of accounts receivable reported in the statement of
financial position.
CREDIT CARD SALES
Credit card sales involving a national credit card company result in an accounts
receivable in the name of the card-issuing company. Credit card fees, normally ranging
from 1% to 5% of net credit card sales, reduce the value of the accounts receivable.
The account Credit Card Service Charge would be reported as an operating expense
in profit or loss.
Assume that MS Department Store has Citibank Visa drafts/receipts that total
P1,200,000 on December 20. The entry to record the Citibank Visa sales would be
Accounts Receivable-Citibank Visa 1,200,000
Sales 1,200,000
Citibank subsequently remits to SM the corresponding amount of sales reduced by

service fees charged. Assuming a 2% service fees by the bank, which is recognized
by SM as a selling expense, the entry in the books of SM is
Cash 1,176,000
Credit Card Service Charge 24,000
Accounts Receivable-Citibank Visa 1,200,000
There are some credit card companies that allow the retailer to deposit credit card
drafts/receipts directly to a current account. The bank receives the deposit slip and

credit card drafts/receipts and increases the retailer’s current account for the total
amount less the bank credit card service charge.
Under such arrangement, credit car sales of MS Department Store is recorded as

Cash 1,176,000
Credit Card Service Charge 24,000
Sales 1,200,000
The transaction is, in effect, a cash sale and the retail companies do not establish a
receivable from the card issuing bank. The credit card sales are the responsibility of
the bank that issued the credit card and the customers pay directly to them. Meanwhile,
uncollectible from these transactions are considered as losses for the card issuing
bank.
ESTIMATION METHODS OF DOUBTFUL ACCOUNTS

1. Aging the accounts receivable or “statement of financial position approach”
2. Percent of accounts receivable or also “statement of financial position
approach”
3. Percent of sales or “income statement approach”
AGING OF ACCOUNTS RECEIVABLE
It involves an analysis where the accounts are classified into not due or past due. The
allowance is determined by total of each classification by the rate or percent of loss
experienced by the entity for each category. The amount computed by aging of
accounts receivable represents the required allowance for doubtful accounts at the
end of the period. It tests the reasonableness of the allowance.
Required allowance XX
Allowance balance before adjustment (XX)
Doubtful accounts expense XX
PERCENT OF ACCOUNTS RECEIVABLE
A certain rate is multiplied by the open accounts at the end of the period in order to get
the required allowance balance. The rate used is usually determined from past
experience of the entity. This procedure has the advantage of presenting the accounts
receivable at estimated net realizable value.
PERCENT OF SALES
The amount of sales for the year is multiplied by a certain rate to get the doubtful
account expense. The rate may be applied on credit sales or total sales. The rate to
be used is computed by dividing the bad debt losses in prior years by the charge sales
of prior years.
Percentage of AR and percentage of sales method can be considered “collective

assessment approach” of measuring impairment while aging method is an “individual
assessment approach”

ACCOUNTING FOR NOTES RECEIVABLE
A note receivable is a formal claim against another that is evidenced by a written

promise, called promissory note, or a written order to pay at a later date, called time
draft.
A promissory note is an unconditional written agreement to pay to bearer or to the

order of the payee a certain sum of money on a specific or determinable date. A time
draft is a written order (made by the drawer), addressed to the drawee to pay a certain
sum of money on a specific or determinable date. A time draft may be a two-party draft
(drawer orders drawee to pay the drawer) or a three-party draft (drawer orders drawee
to pay another party, which is the payee).
Trade notes generally arise from sale involving relatively high peso amounts where the
buyer wants to extend payment period beyond the usual credit period. Likewise, sellers
sometimes request notes from customers whose open accounts have become past
due.
A note or draft that provides for the payment of interest for the period between the
issuance date and the due date is called an interest-bearing note. On the date of the
receipt of the note, the present value of an interest-bearing note, which bears a realistic
interest rate, is equal to its face value. Subsequent to the date of the note or the draft,
the present value of an interest-bearing note is equal to its face value plus accrued
interest.
Dishonored Notes
When a promissory note matures and it is not paid, it is said to be dishonored.
Dishonored notes shall be removed from notes receivable account and transferred to
accounts receivable account at an amount to include, if any, interest and other
charges.
Accounts Receivable XX
Notes Receivable XX
Interest Income XX
INITIAL RECOGNITION
Following IFRS 9, a note receivable is initially recognized when the entity becomes a
party to the contractual provision of the instrument , that is when the entity becomes
the payee of the note issued by the maker. A note is initially recognized at the
transaction price based on the circumstance that gives rise to the receipt of the note,
which is any of the following :
a) The amount of cash given up in exchange for the note;

b) the fair value of the non-cash consideration given up in exchange for the note,
or if such fair value cannot be practically determined, the fair value of the note
received, which is the discontinued cash flow of future collections, based on an
implicit interest rate.
Interest-Bearing Notes Receivable
The fair value of an interest-bearing note is generally its face value, unless it is clear
that the interest rate stated in the note does not reflect a realistic interest rate.

Illustrative Problem for Interest-Bearing Notes
To illustrative accounting for interest-bearing notes receivable, assume the following

selected transactions completed by ABC Corporation during 2019:
The following are the journal entries for the given transactions:
*The computations of interest in the foregoing entries are based on a 360-day year.
To qualify for reporting as Notes Receivable, the note must be negotiable; that is it
must be payable to order or bearer and must not yet be due. Thus, a dishonored note
receivable does not qualify to be reported as Notes Receivable in the statement of
financial position. Overdue notes from customers, together with accrued interest
thereon. Are generally reclassified as accounts receivable. Other descriptive account
titles, such as Dishonored Notes Receivable or Overdue Notes Receivable, may also
be used.

When a note makes no provision for interest, it is said to be non-interest-bearing or

zero-interest bearing. However, a non-interest-bearing note does not necessarily
mean that there is no interest accruing on the receivable. The promissory note is simply
written in a form where the face value already includes am imputed interest for the
term of the note.
When a non-interest-bearing note is exchanged solely for cash and no other rights or
privileges are exchanged, the present value or amortized cost of the note on the date
it is received is equal to the cash proceeds exchanged. If a non-interest-bearing note
is exchanged for property, goods, or services, the transaction is recorded at the fair
value of the gods or services received, unless the fair value of the note is more clearly
determinable. When neither fair value is practicably determinable, an imputed rate is
used to determine the note’s present value.
When a note bears an interest rate that is significantly different from prevailing interest
rate for similar notes, or when the face value of the note is significantly different from
the market value of the consideration given up in exchange for the note, the interest
rate stated on its face is considered to be unrealistic. The amortized cost of the note
on the date it is received is equal to the present value of principal and interest payments
discounted at the imputed interest rate, which should approximate the market rate of
interest for similar instruments.
The difference between the face amount of the note and its present value is recorded
as discount or premium. The excess of the face value of the note over its present value
is credited to Discount on Notes Receivable, while the excess of the present value of
the note over its face value is charged to Premium on Notes Receivable. The discount
or premium is amortized to interest revenue over he term of the note using the effective
interest method. Any unamortized discount is deducted from the ledger balance of the
Notes Receivable, and any unamortized premium is added to the balance of the Notes
Receivable, to arrive at the amortized cost to be presented in the statement of financial
position.
To illustrate the difference in accounting for interest-bearing and non-interest bearing

non-trade notes receivable, consider the following independent cases.
Case 1: Long-Term Interest-Bearing Note with Realistic Interest Rate
On January 1, 2019, ABC Manufacturing sells an equipment costing P800,000 and

with accumulated depreciation of P450,000. The company receives as consideration
P100,000 cash and a 15% interest bearing note for P400,0000 due in December 31,
2021. the interest on the note is payable annually every December 31. the prevailing
rate of interest for a note of this type is 15%.

The entries relative to the note for its entire three-year term are as follows:
In the statement of financial position on December 31, 2019, the Notes Receivable
balance of P400,000 shall be shown as part of non-current assets, because the note
is scheduled for collection two years from the end of the reporting period. On
December 31, 2020, the same note will be classified as part of current assets, because
it is expected to be collected within 12 months from that date.
Case 2: Long-Term Non-Interest-Bearing Note
On January 1, 2019, ABC Manufacturing sells an equipment costing P800,000 with

accumulated depreciation of P450,000. The company receives as consideration
P100,000 cash and a non-interest-bearing note for P400,000 due on December 31,
2021. The prevailing interest for a note of this type is 15%.

The transaction is recorded at the present value of the note’s maturity value, since
there is not available fair value for the equipment. The maturity value of P400,000 is
discounted at the prevailing interest rate of 15% for 3 periods. The difference between
the face value of the note and its present value is recorded as a credit to Discount on
Notes Receivable. On each reporting date, a certain portion of discount on notes
receivable is amortized and transferred to interest revenue using the effective interest
method.

On December 31, 2019, the balances are as follows:

Notes Receivable P400,000
Discount on Notes Receivable (137,000 – 39,450) 97,000
Carrying value of the note P302,450
The note is shown as a non-current asset on December 31, 2019 statement of financial
position as its amortized cost of P302,450.
On December 31, 2020, the balances are as follows:
Notes Receivable P400,000
Discount on Notes Receivable (97,550 – 45,368) 52,182
Carrying value of the note P347,818
The note is classified as a current asset on December 31, 2020 statement of financial
position at its amortized cost of P347,818, because it will be due within 12 months from
the end of the reporting period.
On December 31, 2021, which is the maturity date of the note, the remaining balance
of discount on notes receivable is transferred to interest revenue simultaneous to the
collection of the principal amount.
Case 3: Long-Term Non-Interest-Bearing Installment Notes Receivable
On January 1, 2019, ABC Manufacturing sells an equipment costing P800,000 and

with accumulated deprecation of P450,00. the company receives as consideration
P100,000 cash and a non-interest-bearing note for P300,000 due ion equal amounts
of P100,000 every December 31, starting December 31, 2019. the prevailing interest
for a note of this type is 15%.

Because, the note received is collectible in installments of P100,000 for three years,
the present value of the note is computed using the present value of an ordinary
annuity. The present value factor of an ordinary annuity of 1 discounted at 15% for
three period is 2.2832.
Face value of note P300,000

Present value of note (100,000 x 2.2832) 228,320
Discount on notes receivable P 71,680
Cash received P100,000

Add present value of note 228,320
Total sales price of equipment P328,320
Carrying value of equipment 350,000
Loss on sale of equipment P 21,680

Based on the given table, the entries at December 31, 2019, 2020 and 2021 are as
follows:
Case 4: Long-Term Installment Note Receivable (Stated Interest Rate is Lower

than the Market Rate of Interest)
On January 1, 2019, ABC Manufacturing sold a tract of land that originally cost
P400,000. ABC received a P600,000 note as payment for the land. The note is payable
in three annual installments of P200,000 beginning December 31, 2019 plus interest
at the rate of 4% based on the outstanding balance. At January 1, 2019, the prevailing
rate of interest for a similar obligation is 10%.
If a cash for the land is determinable at the date of the sale, the cash price is the selling
price and, consequently, the present value of the note. Thus, an imputed interest rate
shall be computed. Otherwise, the selling price is the fair value of the note, which is

derived by discounting all future collections (principal and interest) using the prevailing
interest rate for similar notes, as hereby illustrated.
The journal entries for the sale of land and subsequent collection of installments on
the note, including amortization of discount, follow (See amounts from the amortization
table):

Case 5: Long-Term Installment Note Receivable (Stated Interest Rate is Higher

than the Market Rate of Interest)
On January 1, 2019, ABC Manufacturing sold a tract of land that originally cost
P400,000. ABC received a P600,000 note as payment for this transaction. The note is
payable in three annual installments of P200,00 beginning December 31, 2019 plus
interest at the rate of 14% based on the outstanding balance. At January 1, 2019, the
prevailing rate of interest for a similar obligation is 10%.
The above case is similar to Case 4, except that the rate stated on the face of note
exceeds the market rate of interest. The computed amortized cost at the date of initial
recognition would result to an amount higher than the face of the note, resulting in a
premium on notes receivable.

Based on the given computations and amortization table, the entries for 2019 through
2021 are as follows:
MEASUREMENT SUBSEQUENT TO INITIAL RECOGNITION
Notes and accounts receivable meet the requirements in IFRS 9 Financial Instruments
for the financial assets to be classified as subsequently measured at amortized cost/
the two conditions are:
a) the financial asset is held within the enterprise’s business model whose
objective is to hold assets in order to collect contractual cash flows; and
b) the contractual terms of the financial asset give rise on specified dates to cash
flows that are solely payments of principal and interest (SPPI).
The amortized cost of receivables is its principal amount plus accrued interest and
any unamortized premium and minus the unamortized discount using the effective
interest method, and minus any reduction (directly or through the use of an allowance
account) for impairment or uncollectibility. Thus, amortized cost of notes receivable, is
the ledger balance of Notes Receivable account (plus any accrued interest receivable,
if interest bearing) plus any remaining balance of Premium on Notes Receivable, or in

the case of discount, minus any remaining balance of Discount on Notes Receivable.
In case some portion of the receivable is assessed to be impaired, the amount believed
to be uncollectible shall also be deducted.
Accounts receivable that are granted within the entity’s usual credit terms are not
generally discounted to their present value, because any amount of the discount or
interest is usually immaterial.
Almost invariably, some receivables will prove uncollectible, such that an amount of
account or notes receivable must be recognized as expense in profit or loss. This is
called impairment loss, or more popularly called uncollectible accounts expense or bad
debts expense.
There are two methods of accounting for uncollectible accounts: the direct write-off
method and the allowance method.
The direct-write off method recognizes impairment loss or bad debts expense by
crediting directly the receivables account. The entry to recognize impairment on
accounts receivable is
Bad Debts Expense (or Uncollectible Accounts
Expense or Impairment Loss xx
Accounts Receivable (or Notes Receivable) xx
Some accounts, which have been previously written off are unexpectedly recovered
or collected. In such a case, the entries to recover an account require its
reinstatement and the collection recorded in the usual manner. Thus, to record
recovery under the direct-write off method, the entries are
Accounts Receivable xx
Bad Debts Recovery (or Recovery xx
of Previous Impairment of Receivable
Cash xx
The direct write-off method is the only method allowed for income tax purposes.
The allowance method, on the other hand, requires the use of valuation account for
the receivables. This method recognizes the impairment of receivables bay a charge
to Bad Debts Expense or Impairment Loss and a credit to the allowance account.
Thus, the entry to recognize impairment is
Bad Debts Expense (or Impairment Loss) xx
Allowance for Bad Debts xx
The resulting balance of allowance for bad debts is deducted from accounts or notes
receivable to arrive at its amortized cost. When an account considered to be
definitely uncollectible is written off, the entry is
Uncollectible account written off
When an account previously written off is recovered, the account should be

reinstated and the collection should be recorded. Thus, the entries for the recovery
are
Reinstatement of an account recovered

Cash xx
Collection of an account
previously written off
Under the allowance method, the write off of an uncollectible account does not change
the net amount of accounts receivable nor does it affect profit or loss.
To illustrate, assume that on April 1, 2019, ABC Manufacturing wrote off an account of
its customer, Mr. X in the amount of P25,000 which has been overdue for several years
now. Subsequently, on July 5, 2019, ABC recovered and collected the account of Mr.
X. Journal entries for the write off and subsequent recovery of the account are as
follows:
At year-end, the amount of accounts receivable that may prove to be uncollectible must
be estimated. An appropriate adjusting entry is then prepared as follows:
Bad Debts Expense xx
Estimated uncollectible recovered
In some cases, the allowance for bad debts may result in a debit balance before year-
end adjustment. This may indicate that there have been excessive write-offs during
the period and the previous estimate of the company may not be adequate. In such a
case, the company has to review the basis of estimating its uncollectible accounts and
should bring its uncollectible accounts to the appropriate balance at year-end based in
the most reasonable estimate. An error in making such previous estimates is not
considered an accounting error and changing the basis for estimating bad debts is not
considered as a change in accounting policy. Both are treated as charge in accounting
estimates, and bringing the allowance account to its appropriate balance at year-end
would be considered as an adjustment to the current year’s bad debts expense.
DEBIT BALANCE IN ALLOWANCE ACCOUNT
A debit balance in the allowance account before adjustment should not, however,
lead to a conclusion that the previous estimate of the company is always inadequate,
as the accounts that have been written off during the period may also arise from the
currents year’s sales. It is merely that the entry for the write off is prepared ahead of
the year-end entry to provide for bad debts expense. At the end of the year. After the
adjusting entry is prepared, the allowance account should be brought to a credit
balance that reasonably brings the accounts receivable to its recoverable amount.

IMPAIRMENT LOSS- EXPECTED CREDIT LOSSES (ECL)
The new IFRS 9 Financial Instruments provides additional requirements to provide

users of financial statements with more useful information about an enterprise’s
expected credit losses on financial instruments. IFRS 9 adopts a model that requires
an entity to recognize expected credit losses at all times and to update its estimate of
expected credit loss at each reporting date to reflect the changes in the credit risk of
financial instruments.
IFRS 9 requires an entity to measure its expected credit losses not necessarily based
on a loss event but based on reasonable and supportable information available without
undue cost and effort and which includes past experiences, present condition and
future expectations. The IFRS 9 model requires three stages in impairment
measurement and recognition:
a) Stage 1
Recognize in profit or loss, through an allowance account, an impairment loss
based on 12-month expected credit losses;
b) Stage 2
Recognize in profit or loss lifetime expected credit losses, if credit risk increases
significantly. Effective interest is calculated based on the gross carrying amount
of the receivables.
c) Stage 3
Assess individually the receivables when the receivables are considered credit-
impaired. In this stage, the effective interest rate is calculated based in the
receivable balance, net of any related allowance.
In stage 3, the entity shall measure the impairment loss on individual receivables as
the excess of the receivable’s carrying amount (net of allowance for uncollectible
amount) over the present value of the estimated future cash flows discounted at the
historical or original effective interest rate.
CASE A
The ABC Company’s ledger balance for Notes Receivable includes a note receivable
from Company A. Company A is undergoing bankruptcy proceedings and has
negotiated for restructuring of its note, eith face amount of P4,000,000, and accrued
interest of P480,000, based in interest rate of 12%. The note is due on this date,
December 31, 2019. the restructuring arrangement calls for P1,120,000 annual
payment with first payment due on December 31, 2020. No further interest will be
collected during the extended four-year term. Based on the ledger balance of the
company for allowance for uncollectible notes and accounts, P100,000 related to this
note.
Principal and accrued interest

(P4,000,000 + P480,000) P4,480,000
Allowance for Uncollectible Notes and Accounts (100,000)
Present value of future cash inflows
P1,120,000 x 3.0373 3,401,776
Additional Impairment loss P 978,224

ABC Company shall prepare this entry on December 31, 2019 recognize the
impairment.
Impairment Loss – Notes Receivable 978,224
Allowance for Uncollectible Notes and Account 100,000
Restructured Notes Receivable 4,480,000
Discount on Restructured Notes Receivable 1,078,224
Notes Receivable 4,000,000
Interest Receivable 480,000
The subsequent collection of the note on December 31, 2020 is recorded as follows:
Cash 1,120,000
Discount on Restructured Notes Receivable 408,213
Similar entries shall be made on December 31, 2021, 2022 and 2023. The interest
revenue that is recognized is already based on the net amount of the receivable,
after setting off the related allowance and reducing the receivable to the present
value of modified cash flows (stage 3).
Take note that the total impairment recognized on this receivable is P1,078,224,
P100,000 of which was previously recognized on stage 1 or stage 2.
The recognition of interest revenue shall be based on the following amortization

table.
CASE B
On December 31, 2019, XYZ had a note receivable from Company B with face value
of P1,000,00 and interest receivable of P120,000, based on 12% interest rate. No
impairment loss was previously recognized on this note, as XYZ did not anticipate any
credit loss during the last twelve months on this receivable. The note is already due on
December 31, 2019. Company B recently suffered an uninsured catastrophe and is
now in financial difficulty. XYZ agreed to extend the maturity date of the principal
(P1,000,000) by two years. The interest of P120,000 is to be collected on this date, but
interest during the extended period is reduced from 12% to 10%.

Carrying value P1,000,000

Present value of future cash inflows
P1,000,000 x .7972 P797,200
P100,000 x 1.6901 169,010 966,210
Impairment Loss P 33,790
XYZ shall prepare the following entries on December 31, 2019:

Cash 120,000
Impairment Loss – Receivables 33,790

Notes Receivable 1,000,000
Discount on Restructured Notes Receivable 33,790
After review of collectibility, DEF determined that P20,000 of accounts in the age
category “more than 120 days” are believed to be uncollectible and should be written
off. The 30% provision for non-collectibility shall be applied on the remaining accounts
in the same age category/ (The balance of P120,000 in the allowance for uncollectible

accounts was recognized based on stage 1,that is, 12-month credit loss expectation
of the entity at the date of initial recognition of the receivables).
DEF’s accounts receivable on its December 31, 2019 statement of financial position
shall be reported at P3,740,000 (P3,980,00 minus P240,000).
IFRS 9 states that there is rebuttable presumption that there is increase in the credit
risk for a financial asset, once it becomes overdue for more than 30 days. As can be
observed in the above example, the older is the age of the receivable, the higher s its
credit risk and the higher is the probability that it may not be collected.
Groupings based on some other similar characteristics may also be made in assessing
as to whether there is an increase in the credit risk of the receivables. Factors such as
the industry to which the customer belongs, the geographical location of the customer
and trade regulations may also be considered in assessing the credit risk.
LOAN RECEIVABLE
It is a financial asset arising from loan granted by bank or other financial institution to
a borrower or client.
Initial measurement: Fair Value + Transaction costs (Fair value is normally the
transaction price)
Direct Origination Costs are transaction costs that are directly attributable to the loan
receivable. It should be included in the initial measurement of the loan receivable.
Indirect origination costs should be treated as outright expense.
Subsequent measurement: Amortized Cost using effective interest method
Origination Fees are fees charged by the bank against the borrower for the creation
of the loan. It includes compensation for activities such as evaluating the borrower’s
financial condition, evaluating guarantees, collateral and other security, negotiating the
terms of the loan, preparing and processing documents and closing the loan
transaction.
Origination fees received from borrower are recognized as unearned interest
income and amortized over term of the loan. If the origination fees are not chargeable
against the borrower, the fees are known as direct origination costs. Direct Origination
Costs are deferred and also amortized over the term of the loan.
If the Origination fees > Direct Origination costs → Unearned interest income and
the amortization will increase interest income

If the Origination fees < Direct Origination costs → charged to “Direct Origination
Costs” and the amortization will decrease interest income
EFFECTIVE INTEREST METHOD:
Interest received = Principal X nominal rate

Interest income = Carrying amount X Effective rate
RECEIVABLE FINANCING
Companies requiring cash to finance its operational needs may find it necessary or
desirable to accelerate cash inflows from receivables by either selling its receivables
or using them as collateral for loan arrangements.
Receivable financing is the financial flexibility or capability of an entity to raise money

out of its receivables.
The transfer of receivables to another party to obtain cash may or may not require
derecognition of receivables. The transferor of the receivable shall evaluate whether
or not it has transferred substantially all the risks and rewards of ownership of the
financial asset.
Various types of arrangements may be used to secure immediate cash from

receivables even before their maturity dates. If the risks and rewards of ownership from
the receivables are not substantially transferred, the transfer is recorded as secured
borrowing; otherwise, the transaction is recorded as a derecognition of the receivable,
recognizing either gain or loss.
I. Secured Borrowing
Pledging
Assignment
Discounting of notes receivable with recourse
II. Sale of Receivables
Discounting of notes receivable without recourse
Factoring

PLEDGING / HYPOTHECATING OF RECEIVABLES
Pledging refers to the use of receivables as collateral for a loan. It is otherwise known
as general assignment of accounts receivable, since all receivables are used as
collateral for a loan. A pledge of accounts receivable involves no special accounting
problems. The only entry required in the books would record the loan obtained from
the finance company or bank by debiting Cash (and Discount on notes payable or
Interest expense, if discounted) and crediting Notes Payable for the amount of the
loan. The accounts receivable balance is not, in any manner, affected by the pledging.
If at the reporting date, there is still a financing liability that is secured by receivables,
an entity shall disclose the carrying amount of the receivables pledged as collateral for
the loan and the significant terms and conditions relating to the pledge.
To illustrate, assume that on December 1, 2019, ABC Manufacturing borrowed

P500,000 from Manila Bank by issuing a one-year note, which the bank discounted at
12%. Accounts receivable totaling P1,200,000, are pledged to secure the loan. Entries
relating to the notes payable, including year-end adjustments follow (assume the
company uses a calendar year as its accounting year.)
ASSIGNMENT OF ACCOUNTS RECEIVABLE
Assignment of accounts receivable is a more formal borrowing arrangement in which

specific receivables are identified and used as security for a loan. It is a more formal
type of pledging accounts receivable. This is also known as specific assignment of
accounts receivable. The borrower (assignor) pledges the specifically described
receivables to a lender (assignee) and signs a promissory note. The assignor retains
the credit risks and continues collection efforts. In most cases, customers are not
notified of the assignment and they make payments directly to the assignor (non-
notification basis) and the assignor remits the collection of the assignee. Assignment
is secured borrowing evidenced by a financing agreement and a promissory note both
of which the assignor signs.
Assignment may be done either on a non-notification or notification basis.

Non-notification basis → customers are not informed that their accounts have been
assigned. The customer continues to make payments to the assignor, who in turn
remits the collection to assignee.

Notification basis → customers are notified to make payments directly to the

assignee.
The assignee usually charges interest for the loan that it makes and required a service
or financing charge or commission for the assignment agreement.
In disclosing the specifically assigned accounts receivable, the assignor should report
them as part of accounts receivable with a disclosure of the amount assigned. Similar
to general assignment of accounts receivable, any significant terms and conditions
relating to the assignment should be disclosed.
To illustrate assume the following transactions for ABC Manufacturing during 2019.
ABC Manufacturing entered into an assignment arrangement with Easy Finance

Company whereby the assignee would advance 80% of all accounts assigned less a
P2,000 service charge. During the year, P400,000 of accounts receivable were
assigned; P250,000 collections were made on outstanding accounts which were
remitted to Easy Finance Company to apply first to P3,5000 interest and the balance
to principal. Sales returns and allowances on assigned accounts amounted to P5,000.
The entry at the date of the assignment debiting Accounts Receivable Assigned and
crediting Accounts Receivable does not affect the total balance of Accounts
Receivable. The entry merely discloses the amount of Account receivable that has
been assigned.
At the end of the year, accounts receivable assigned in the amount oof P145,000 is
included in the one-line caption Trade and Other-Receivables under current assets.
On the other hand. Notes Payable – Finance Company balance is reported under
current liabilities. In the notes to the financial statements, the company should disclose
its equity in assigned accounts for the net amount of P71,500 (Accounts receivable
assigned balance, P145,000 less notes payable to finance company balance
P73,500).

Assume that during the year 2020, P100,000 of the assigned accounts were collected
and that the balance due and additional interest charge of P935 were remitted to the
finance company. The entries are
Cash 100,000
Accounts Receivable Assigned 100,000
Collection of assigned accounts
Notes Payable – Finance Company 73,500
Interest Expense 935
Cash 74,435
Final payment to the bank
After the final settlement with the finance company, the balance of Accounts
Receivable Assigned shall be reverted to Accounts Receivable, with the following
entry:
Accounts receivable 45,000
Reverted to the remaining assigned
accounts to accounts receivable
In some instances, the customers are instructed to make payments to the assignee
(notification basis), and the assignee informs the assignor of the amount collected. In
such cases , the finance company applies the amount collected from customers to the
payment of loan and interest. Collection in excess of the balance of the loan and
interest shall be remitted to the assignor.
To illustrate, assume the same information for ABC Manufacturing Company, except
that the assignment is made on a notification basis. The Easy Finance Company
makes collections from the customers and applies the amount collected to interest and
principal of the loan. The following entries would be made by ABC Manufacturing
Company.
At year-end, the same accounts would be shown by ABC Manufacturing Company:

Accounts Receivable Assigned of P145,000 is reported among the entity’s accounts
receivable and Notes Payable – Finance Company of P73,5000 is reported among its

current liabilities. The notes to the financial statements would disclose the entity’s
equity in assigned accounts amounting to P71,500.
The subsequent collection of P100,000 exceeds the interest charge of P935 and loan
balance of P73,500. the excess amount of P35,565 is received from the finance
company in final settlement of the borrowing arrangement. The following are the
appropriate entries made by ABC Manufacturing Company.
Notes Payable – Finance Company 73,500

Interest Expense 935
Cash 25,565
Collection of assigned accounts

Reverted the remaining assigned
accounts to accounts receivable
DISCOUNTING OF NOTES RECEIVABLE
By discounting a note receivable, an entity is endorsing a promissory note to bank or

a financing company, the latter advancing the maturity value of the note less a charge
called discount. A company that discounts a customer’s note receivable at the bank is
in essence selling the note to the bank with recourse obligation. Because the endorsing
company still has a continuing involvement on the discounted note, the transaction
does not qualify for derecognition of receivable.
To discount the note, the payee must endorse it. Thus, legally the payee becomes
endorser and the bank becomes endorsee.
Endorsement may be:

With Recourse → endorser shall pay the endorsee if the maker dishonors the note.
This is the contingent or secondary liability of the endorser. It can be accounted as:
➔ Conditional sale of note receivable recognizing a contingent liability
Cash (net proceeds) XX
Loss on note receivable discounting (CA > net proceeds) XX
Note Receivable Discounted (principal) XX
Interest Income XX
Gain on note receivable discounting XX
Notes Receivable Discounted account is deducted from total notes
receivable when preparing BS with disclosure of contingent liability.
➔ Secured borrowing (note receivable is not derecognized but accounting

liability is recorded at an amount equal to the face amount of the note
receivable discounted). There is no gain or loss on discounting.
Cash (net proceeds) XX
Interest expense XX
Liability for note receivable discounted (principal) XX
Interest income XX
Without Recourse → endorser avoids future liability even if the maker refuses to pay
the endorsee on the date of maturity. The sale of notes receivable is absolute and
therefore there is no contingent liability.
If silent, assume endorsement with recourse.

The following terms and computations are necessary relating to discounting of notes
receivable.
I. Principal is the amount stated on the face of the note, also called the face
value.
II. Interest is the amount of interest for the entire term of note, computed as:
Principal x Interest rate x Term.
III. Maturity date is the date when the note is due and payable.
IV. Maturity value is the total amount due on the note at maturity date,
computed as principal plus interest. If the note is non-interest bearing, then
its maturity value is equal to its principal or face value.
V. Discount rate is the rate of interest used by bank in computing discount. If
the discount rate is not given, the interest rate is safely assumed as the
discount rate.
VI. Discount period is the period of time remaining on the term of the note;
meaning, the period from the date of discounting to maturity date. Discount
period equals term of the note minus the expired portion up to the date of
discounting. The discount period is the unexpired term of the note.
VII. Discount is the amount of interest earned by the bank computed as:
Maturity Value x Bank discount rate x Discount period
It is the interest deducted by bank in advance
VIII. Proceeds is the discounted value of the note received by the endorser of
the note from the bank, computed as:
Proceeds = Maturity value – discount
To illustrate, assume that on December 21, 2019, ABC Manufacturing discounted the
60-day, 15%, P800,000 note from Customer F at National Bank. The note is dated
December 1 and the bank’s discount rate is 18%. Computations and entries pertaining
to the note discounted are as follows (assume a 360-day year):
ABC Manufacturing shall prepare this entry on the date of discounting.

Dec. 21 Cash 803,600
Liability on Discounted Notes 803,600
The credit to the liability account indicates that the note is discounted with recourse,
and ABC Company is still liable to financing company for the note, in case the maker
fails to pay it on maturity date. Hence, the transfer is not treated as derecognition, as
the company guarantees to compensate the financial institution for credit losses that
may occur.
If the company adopts the calendar year as its reporting period, adjustments shall be
made at year-end to accrue the interest earned on the notes receivable and the interest
incurred on the discounted notes.

The accrued interest on the notes receivable runs from the date of the note (December
1) up to the end of the reporting period. The debit to interest expense is the amount of
discount allocated to the period from the date of discounting (December 21) up to the
end of the reporting period.
Assuming that the note matures without notice of protest, ABC Manufacturing shall
cancel both the assets (Notes Receivable and Interest Receivable) and the liability
(Liability on Discounted Notes) in its books with the following entry:
Additional interest expense and interest revenue are recognized from January 1 to
January 30 (based on the remaining number of days in the discount period).
When Customer F fails to pay on maturity date, ABC Manufacturing will be obliged to
pay the maturity value of the note plus protect fees and other bank charges. The total
amount paid by ABC on account of the discounted note is to be charged to the amount
of the maker of the note. Assuming that in the foregoing example the bank charged
protest fees and other charges of P5,000, ABC will prepare the following entries:

DISCOUNTING OF NOTES RECEIVABLE WITHOUT RECOURSE
If discounting of a note is on a without recourse basis, the endorser is relieved of the

responsibility for the note that is dishonored on maturity. The discounting is, therefor,
treated as a sale and the note would qualify for derecognition. In such a case, no
liability on discounted note is recorded by the seller, and the entries, in the previous
example would be modified as follows:
FACTORING
Factoring is the transfer of receivables without recourse, and is therefor, an outright

sale of receivables. The factor company (finance company) assumes the risk of
collection and generally handles the billing and collection function. As in any sale of
assts, a gain or loss is recognized for the difference between the proceeds received
and the net carrying amount of the receivables factored.
It is a sale of accounts receivable on a without recourse, notification basis. In factoring

arrangement, an entity sells accounts receivable to a bank or finance entity called
factor.

FORMS OF FACTORING:
1. Casual factoring →if an entity finds itself in a critical cash position, it maybe
forced to factor some or all of its accounts receivable at a substantial discount
to a bank or a finance entity to obtain the much needed cash.
2. Factoring as a continuing agreement → a finance entity purchases all of the
accounts receivable of a certain entity. In this set up, before a merchandise is
shipped to a customer, the selling entity requests the factor’s credit approval.
If it is approved, the account is sold immediately to the factor after shipment of
the goods. The factor assumes the credit and collection function.The factor
charges a commission or factoring fee of 5% to 20% for its services of credit
approval, billing, collecting and assuming uncollectible factored accounts.
If the factor retains a portion of the purchase price to cover probable sales discounts,
returns, and allowances (called factor’s holdback) such amount is charged to a
“Receivable from Factor” account. Subsequent discounts, returns and allowances
are credited to this account. The final settlement of the factor’s holdback is made after
the factored receivables have been fully collected.
To illustrate, assume that during December, ABC Manufacturing sold goods priced at
P200,000 with credit terms of n/30. These were immediately factored to a finance
company. The factoring fee was 10% of the receivables purchased. The factor’s
holdback is 5% of the purchase price. The entry to record the factoring is as follows:
When customers whose accounts were factored make returns, the transaction is
recorded as
Sales Returns and Allowances xx
Receivable from Factor xx
When all the receivables factored are collected and no returns, discounts or
allowances are allowed, final settlement with the factor is recorded as
Cash 9,000
Receivable from Factor 9,000

DISCLOSURE REQUIREMENTS:
1. An entity shall disclose the following in its financial statements (based on IFRS 7
Financial Instruments: Disclosures):
I. information that enables users of its financial statements to evaluate the
significance of receivables for its financial position and performance,
including significant terms and conditions that may affect the amount,
timing, and certainty of future cash flows;
II. the accounting policy and method adopted including the criteria for
recognition and the basis of measurement applied;
III. information about its exposure to credit risk including the amount that best
represents its maximum credit risk exposure at the end of the reporting
period, without taking account of the fair value of any collateral, in the event
of other parties failing to perform their obligations and including significant
concentrations of credit risks; and
IV. information about its exposure to interest rate risk including contractual
repricing or maturity date whichever dates are earlier and including effective
interest rates, when applicable.
2. For accounts receivable pledged or assigned and notes receivable discounted,

the entity shall disclose the following:
a) the nature of the risks and rewards of ownership to which the entity remains
exposed;
b) the carrying amount of financial assets it has pledged as collateral for liabilities
or contingent liabilities; and
c) the terms and conditions relating to its pledge.
3.When an entity holds collateral and is permitted to sell or repledge the collateral in
the absence of default by the owner of the collateral, it shall disclose:
i. the fair value of the collateral held;
ii. the fair value of any such collateral sold or repledged, and whether the entity
has an obligation to return it; and
iii. the terms and conditions associated with the use of the collateral.
4. When an entity shall disclose material items of income and expense, and gains and
losses resulting from receivables. For this purpose, the disclosure shall include at
least, the following items:
• total interest income, calculated using the effective interest method; and
• the amount of interest income accrued on impaired receivables
5. An entity shall disclose the nature and amount of any impairment loss recognized in
profit or loss (Bad Debts Expense). When receivables are impaired by credit losses
and the entity records the impairment in a separate account (allowance account) to
record individual impairments of a similar account used to record a collective
impairment rather than directly reducing the carrying amount of the asset, it shall
disclose a reconciliation of changes in that account during the period.

QUICK NOTES:
ORDINARY ANNUITY→ Periodic payments are made at the end of each payment
interval.
Trade discount/ volume/ quantity discount → to encourage customer to buy goods.

Cash discount / settlement discount → for prompt payment
Freight out → cartage out / transportation out / delivery expense
Freight in → cartage in / transportation in
Bill and hold sales → delivery is delayed at the buyer’s request, but the buyer takes
title and accepts billing.
Layaway sales → goods are delivered only when the buyer has paid final installment.

Carrying Amount (CA) / Book Value= Cost – Accumulated Depreciation

CA > Present Value/ Face Value = Impairment Loss
EIR/MIR>NIR/SIR= Unamortized Discount

IER/MIR < NIR/SIR= Unamortized Premium
PREMIUM= LEGS (Lower Effective, Greater Stated)
DISCOUNT= GELS (Greater Effective, Lower Stated)
EIR = Discount divided by Net Proceeds
Interest collection= Face amount X Nominal %

Interest Income = Present Value X Effective %
Prime rate / Prime lending rate → interest that the banks charged to their most credit
worthy customers “lowest possible rate that banks charge to its customers”
EXACT INTEREST METHOD → uses 365 days as the time denominator but uses 366
days if leap year.
ORDINARY INTEREST METHOD → uses 360 days as time denominator.
ACTUAL TIME → determined by counting everyday excluding the loan date until the
maturity date.
APPROXIMATE TIME → assuming that each month has 30 days.
Banker’s Rule → “Ordinary Interest using actual time” since it yielded the highest
interest and this shall be used whenever the problem is silent as to which time
combination to use.

PROBLEM 1:
The following transactions were completed by San Juan Company in December 2020:
Dec. 9 Sold merchandise to San Jose Store under credit terms of 2/10, n/30. The list price is
P80,000, less 10%, less 5%.
10 Sold merchandise to San Miguel Corp, P50,000, 2/10, n/30.
19 Collected the account of San Jose Store in full.
26 Sold merchandise to San Gabriel Corp., P40,000, 2/10, n/30.
The company adopts the calendar year as its accounting period.

The accounts of San Miguel Corp and San Gabriel Corp. are considered
to be collectible at December 31. San Gabriel Corp. paid its account
in full on January 5, 2021, while San Miguel Corp. paid its account in full
on January 9, 2021.
REQUIRED:
Journalize the foregoing transactions using the 3 methods of accounting for sales discounts.
Prepare also any appropriate adjusting entry at December 31.
PROBLEM 2:
The St. Jude Company completes the following transactions during the year 2020.
July 4 Writes off the account of Moret Company for P10,000 that arose from a sale in
September 2019
31 Receives a P12,000 90-day 10% note from P. Noval Company for merchandise sold.
Aug. 15 Receives P20,000 cash plus P15,000 note from Dapitan for merchandise sold. The
note is dated August 15 and bears interest at 12% and matures in 120 days.
Nov. 1 Completed a P20,000 credit card sale with a 4% fee. Cash is received immediately from
the credit card company.
Nov. 4 P. Noval Company refuses to pay the note that was due to Colayco.
Nov. 5 Completed a P90,000 credit card sale with a 5% fee. The amount due from the credit
card company was received on November 9.
Nov. 15 Received the full amount of P10,000 from Moret Company that was previously
written off on July 14.
Dec. 13 Received payment of principal plus interest from Dapitan for the August 15 note.
REQUIRED:
Prepare journal entries to record the transactions on St. Jude Company books.
PROBLEM 3:
On January 1, 2020, St. Andrew Company sold a tract of land that was acquired several years ago for
P1,800,000. St. Andrew received a three-year, non-interest-bearing note for P6,000,000 in exchange for
the land. There is no readily available market value for the land, but the current market rate of interest
for comparable notes is 15%. Present value of P1 for 3 periods at 15% is 0.6575. Present value of an
annuity of P1 for 3 periods at 15% is 2.2832.

REQUIRED:
1 What is the amount of interest revenue recognized in St. Andrew's profit and loss
for the year 2020?
2 What is the carrying value of the note at December 31, 2020?
PROBLEM 4:
On January 1, 2020, St. Peter Company sold a tract of land that was acquired several years ago for
P1,800,000. St. Peter received a three-year, non-interest bearing note for P6,000,000 in exchange for
the land. There is no readily available market value for the land, but the current market rate of interest
for comparable notes is 15%. The note is payable in equal annual installments of P2,000,000 every
December 31, starting December 31, 2020. Present value of P1 for 3 periods at 15% is 0.6575.
Present value of an annuity of P1 for 3 periods at 15% is 2.2832.
REQUIRED:
1 What is the amount of interest revenue recognized in St.Peter's profit and loss
for the year 2020 and for 2021?
2 What is the carrying value of the note at December 31, 2020?
PROBLEM 5:
San Isidro Company has a 12% note receivable dated June 30, 2018 in the original amount of
P3,000,000. Payments of P1,000,000 in principal plus accrued interest are due annually on
July 1, 2019, 2020 and 2021.
REQUIRED:
In its June 30, 2020 statement of financial position, what amount should San Isidro report as
accrued interest on notes receivable?
PROBLEM 6:
On January 1, 2020, Sta. Maria Goretti Corporation sells equipment costing P500,000, with a
carrying amount of P80,000, receiving a non-interest bearing note due on December 31, 2022
with a face amount of P100,000. There is no established market value for the equipment.
The interest rate on similar obligation is estimated at 12%.
REQUIRED:
1 Entry to record the sale of equipment on January 1, 2020. (PV of P1 at 12% for 3
periods is 0.7118).
Entries to record the amortization of the discount at the end of 2020, 2021 and
2022 using effective interest method of amortization, including collection on
account of the note on December 31, 2022

PROBLEM 7:
On April 1, 2020, the San Sebastian Company issued a P750,000, 12% note due May 31, 2020 to
PNB Bank for money borrowed. San Sebastian Company pledged P900,000 of its accounts receivable
as collateral for this loan.
REQUIRED:
Record any necessary entry on April 1, 2020 in the books of San Sebastian Company
1
as a result of the foregoing
2 Assume that San Sebastian's reporting period ends April 30. Show how the effects of
the foregoing transactions will be shown in San Sebastian's balance sheet. San
Sebastian's total accounts receivable at April 30, 2020 is P2,000,000.
.
PROBLEM 8:
San Lorenzo Corporation received from a customer a one-year, P500,000 note bearing annual interest of
8%. Five months prior to maturity, San Lorenzo discounted thr note at Asia United Bank at an effective
interest rate of 10%.
REQUIRED:
1 What were the proceeds from the note discounting?
Give the entry for the discounting, assuming the note was discounted without recourse.
PROBLEM 9:
On February 1, 2020, San Pedro Calungsod Corporation acquired a 16%, 9-month note receivable
from a customer in settlement of an overdue accounts receivable of P60,000. The principal and interest
are due at maturity. On April 1, 2020, San Pedro Calungsod discounted the note at PS Bank at 15%.
During November, PS Bank notified San Pedro Calungsod that the note was dishonored by the maker;
thus, on November 2, the bank charged San Pedro Calungsod's account for the maturity value of the note
plus a protest fee of P1,500.
REQUIRED:
Prepare journal entries on February 1, April 1 and November 2.
PROBLEM 10:
San Carlo Acutis Company finances some of its current operations by factoring its accounts receivable
to a finance company. On July 1, 2020, the company factored P2,000,000 of its accounts receivable
to San Carlos Borromeo Company. Purchase price was 85% of the receivables factored. San Carlos
Borromeo withheld 5% of the purchase price as protection against sales returns and allowances.
Sales returns recorded by San Carlo Acutis on the factored accounts receivable totaled P30,000;
the balance of the factor's holdback was settled by the finance company on August 31, 2020.
REQUIRED:

1 What was the net cash received by San Carlo Acutis from this factored accounts?
Give the entries in the books of San Carlo Acutis to record the foregoing in the
2 months of July and August 2020.
References
• Robles, N., Empleo, P. (2019). Intermediate Accounting 1. Millennium

Books, Inc.
• Valix, C., Peralta, J., and Valix, C.A. (2015). Financial Accounting
Volume 1. GIC Enterprises & Co., Inc.

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RIZAL TECHNOLOGICAL UNIVERSITY

Cities of Mandaluyong and Pasig

MODULE NO. 2: RECEIVABLES

This module is prepared for the students to understand the nature of

INTERMEDIATE ACCOUNTING PART 1 1

This module is designed for the students to understand provisions,

At the end of the discussion, the students are expected to:

INTERMEDIATE ACCOUNTING PART 1 2

For accounting purposes, receivables include the following:

Classification of receivables according to source:

• Trade Receivables. Receivables arising from sale of goods or services in the

Classification of receivables in the statement of financial position

In a properly classified statement of financial position, trade receivables are

INTERMEDIATE ACCOUNTING PART 1 3

to be converted into inventories through purchase and production, inventories into

Based on IFRS 9 Financial Instruments, an entity shall recognize a financial asset in

INTERMEDIATE ACCOUNTING PART 1 4

Accounting for accounts receivable and related revenues

Customers’ credit balances

TERMS RELATED TO FREIGHT CHARGE

INTERMEDIATE ACCOUNTING PART 1 5

TRADE DISCOUNT AND CASH DISCOUNTS

Trade discounts, also known as volume or quantity discounts, are means of

Alternatively, the invoice price may simply be computed as

INTERMEDIATE ACCOUNTING PART 1 6

INTERMEDIATE ACCOUNTING PART 1 7

Accounts Receivable 77,411

The balance of Sales Discounts Forfeited account is reported as other operating

INTERMEDIATE ACCOUNTING PART 1 8

CREDIT CARD SALES

Citibank subsequently remits to SM the corresponding amount of sales reduced by

INTERMEDIATE ACCOUNTING PART 1 9

Under such arrangement, credit car sales of MS Department Store is recorded as

ESTIMATION METHODS OF DOUBTFUL ACCOUNTS

AGING OF ACCOUNTS RECEIVABLE

PERCENT OF ACCOUNTS RECEIVABLE

Percentage of AR and percentage of sales method can be considered “collective

INTERMEDIATE ACCOUNTING PART 1 10

ACCOUNTING FOR NOTES RECEIVABLE

A note receivable is a formal claim against another that is evidenced by a written

A promissory note is an unconditional written agreement to pay to bearer or to the

a) The amount of cash given up in exchange for the note;

Interest-Bearing Notes Receivable

INTERMEDIATE ACCOUNTING PART 1 11

Illustrative Problem for Interest-Bearing Notes

To illustrative accounting for interest-bearing notes receivable, assume the following

INTERMEDIATE ACCOUNTING PART 1 12

When a note makes no provision for interest, it is said to be non-interest-bearing or

To illustrate the difference in accounting for interest-bearing and non-interest bearing

Case 1: Long-Term Interest-Bearing Note with Realistic Interest Rate

On January 1, 2019, ABC Manufacturing sells an equipment costing P800,000 and

INTERMEDIATE ACCOUNTING PART 1 13

Case 2: Long-Term Non-Interest-Bearing Note

On January 1, 2019, ABC Manufacturing sells an equipment costing P800,000 with

INTERMEDIATE ACCOUNTING PART 1 14

INTERMEDIATE ACCOUNTING PART 1 15

On December 31, 2019, the balances are as follows:

Case 3: Long-Term Non-Interest-Bearing Installment Notes Receivable