IA For Prelims Final

CHAPTER 1
Cash and
Cash Equivalents
Valix, et al. (2021). Intermediate Accounting
Definition of Cash
▪ In Layman’s point of view cash simply means money.
▪ Money is the standard medium of exchange in business

transaction.
- also refers to the currency and coins which are circular and
legal tender.
▪ Cash includes money and any other negotiable instrument

that is payable in money and acceptable by the bank for
deposit and immediate credit.
Accordingly, cash includes checks, bank drafts and
money orders because these are acceptable by the
bank for deposit or immediate encashment.
But postdated checks received cannot considered as

cash yet because these checks are unacceptable by the
bank for deposit and immediate credit.
Unrestricted Cash
 There is no specific standard dealing with cash.
 PAS1,paragraph 66,which provides that an entity shall classify

an asset as current when the asset is cash equivalents
unless it is restricted to settle a liability for more than
twelve month after the end of the reporting period.
 To be reported as cash an item must be unrestricted in use.

Cash items included in cash
a.Cash on hand- includes undeposited cash collection and
other cash items awaiting deposit such as customers checks
cashier's or manager's checks, traveler's checks, bank drafts
and money order.
b.Cash in bank- includes demand deposit or checking account

and saving deposit which are unrestricted as to withdrawal.
c. Cash funds- set aside for current purposes such as petty

cash fund, payroll fund and dividend fund.
Cash equivalents
 PAS 7, paragraph 6, defines cash equivalents as short-term and highly
liquid investments that are readily convertible into cash and so near their
maturity that they present insignificant risk of changes in value because of
changes in interest rates.
 The standard further states that the only highly liquid invesments that are
acquired three months before maturity can qualify as cash equivalents.
 Examples of cash equivalents:

a. Three-month BSP treasury bill
b. Three-year BSP treasury bill purchased three months before date maturity.
c. Three month time deposit
d. Three-month money market instrument or commercial paper.
Investment of excess cash
The control and proper use of cash is an important aspect

of cash management. Basically, the entity must maintain
sufficient cash for use in current operations.
Any cash accumulated in excess of that needed for current

operations should be invested even temporarily in some
type of revenue earning investment.
Classification of investment of excess cash
a. If the term is three months or less, such instruments are classified

as cash equivalents and therefore included in the caption “cash and
cash equivalents”
b. If the term is more than three months but within one year, such
investments are classified as short-term financial assets or
temporary investments and presented separately as current assets.
c. If the term is more than one year, such investments are classified as
non-current or long-term investments.
Measurement of cash
Cash is measured at face value.
Cash in foreign currency is measured at the current

exchange
If bank or financial institution holding the funds of an entity is

in bankruptcy or financial difficulty, cash should be written
down to estimated realizable value if the amount
recoverable is estimated to be lower than the face value.
Financial statement presentation
The caption cash and cash equivalents should be shown as the
first line item under current assets
This caption includes all cash items, such as cash on hand,

cash in bank, petty cash fund and cash equivalents which are
unrestricted in use for current operations
However, the details comprising the cash and cash equivalents

should be disclosed in the notes of financial statements.
Foreign currency
Cash in foreign currency should be translated to Philippine
pesos using the current exchange rate.
Deposits in foreign countries which are not subject to any

foreign exchange restriction included in “cash”.
Deposits in foreign bank which are subject to foreign

exchange restriction, if material, should be classified
separately among noncurrent assets and the restriction
clearly indicated.
Cash funds for a certain purpose
If cash fund is set aside for use in current operations or

for the payment of current obligation, it is current asset.
It is included as part of cash and cash equivalents.
Examples for this fund are petty cash fund, payroll fund, travel
fund, interest fund, dividend fund and tax fund,
Cash funds for a certain purpose
On the other hand, if the cash fund is set aside for non-
current purpose or payment of noncurrent obligation, it
is shown as long-term investment.
Examples of this funds are sinking fund, preference share

redemption fund, contingent fund, insurance fund and fund for
acquisition or construction of property, plant and equipment.
Classification of cash fund
The classification of cash fund as current or non current

should parallel the classification of the related liability.
Example:
A sinking fund that is set aside to pay a bond payable
shall be classified as current asset when the bond payable is
already due within one year after the end of reporting period.
However, a cash fund set aside for acquisition of noncurrent

asset should be classified as noncurrent regardless of the year
of disbursement.
Bank Overdraft
 When the cash in bank account has a credit balance, it is said to be
an overdraft. The credit balance in the cash in bank account results
from the issuance of checks in excess of the deposits.
 A bank overdraft is classified as a current liability and should not

be offset against other bank accounts with debit balances.
 For example, an entity maintains two bank accounts:

a. Cash in bank- First Bank, which is overdrawn by P10,000.
b. Cash in Bank- Second Bank, with a debit balance of P100,000.
 The net cash balance is P90,000.
The proper statement classification of the two accounts is as follows:

Currents Asset:
Cash in Bank-Second Bank 100,000
Current Liability:
Bank overdraft- First Bank 10,000
 Note that it is not necessary to adjust and open a bank overdraft

account in the ledger.
 It is to be stated that generally overdrafts are not permitted in

the Philippines.
Exception to the rule on overdraft
 When an entity maintains two or more accounts in one bank and one
account results in an overdraft, such overdraft can be offset against
the other bank account with a debit balance in order to show cash,
net of bank overdraft or bank overdraft, net of other bank account.
 An overdraft can also be offset against the other bank account if the
amount is not material.
 Under IFRS, bank overdraft bank can be offset against other bank
account when payable on demand and often fluctuates from
positive to negative as an integral part of cash management.
Compensating Balance
A compensating balance generally takes the form of minimum

checking or demand deposit account balance that must be
maintained in connection with a borrowing arrangement with a
bank.
For example, an entity borrows P5,000,000 from a bank and

agrees to maintain a 10% or P500,000 minimum compensating
balance in a demand deposit account.
Classification of compensating balance
 If the deposit is not legally restricted as to withdrawal by the

borrower because of an informal compensating balance is part of
cash.
 If the deposit is legally restricted because of a formal compensating

balance agreement, the compensating balance is classified
separately as “cash held as compensating balance'' under
current assets if the related loan is short-term.
 If the related is long-term, the compensating balance is classified

as noncurrent investment.
Undelivered or Unreleased check
An undelivered or unreleased check is one that is merely drawn
and recorded but not given to the payee before the end of
reporting period.
There is no payment when check is pending delivery to the payee
at the end of reporting period .
Accordingly, an adjusting entry is required to restore the cash

balance and set up the liability as follows:
Cash xx
Accounts payable or appropriate account xx
Postdated check delivered
A postdated check delivered is a check drawn, recorded and

already given to the payee but it bears a date subsequent to
the end of reporting period.
The original entry recording a delivered posdated check shall

also be reversed and therefore restored to the cash balance as
follows:
Cash xx
Stale check or check long outstanding
 A stale check - a check not encashed by the payee within a relatively
long period of time.
 The Negotiable Instruments Law provides that where the instrument is payable
on demand, presentation must be made within a reasonable time after issue.
 In determining what is a reasonable time, consideration should be made

regarding the nature of the instrument.
 Clearly, the law does not specify a definite period within which checks must be
presented for encashment. Reference is made to usage of trade or business
practice.
 In banking practice , a check becomes stale if not
encashed within six months from the time of issuance.
If the amount of stale check is immaterial, it is simply

accounted for as miscellaneous income as follows:
Cash xx
Miscellaneous income xx
However, if the amount is material and liability is expected

to continue, the cash is restored and the liability is again
set up.
Cash xx
An entity shows the following account balance in their financial
records as of December 31,2020:
Checking Account at Morgan Bank (P 30,000)

Checking account at Land Bank 510,000
Payroll Account- National Bank 120,000
Foreign bank account- restricted 760,000
Postage stamps 33,000
Employee’s postdated checks 40,000
I.O.U. from an officer 75,000
Traveler’s check 50,000
No-sufficient funds check 18,000
Petty cash fund (P16,000 in currency & expenses
receipts for P84,000) 100,000
Cashier’s check 40,000
Determine the correct cash balance to be reported in the statement of

financial position of the entity on December 31, 2020.
Solution:
Checking account at Land Bank P 510,000

Payroll account 120,000
Traveler’s Check 50,000
Cashier’s Check 40,000
Petty Cash 16,000_
Correct Cash balance, December 31, 2020 736,000
An entity provided the following information about the composition of its cash
on December 31, 2020:
❖ Commercial savings account of 500,000 and a commercial checking

account balance of 900,000 are held at BPI.
❖ Money market fund account held by DBP that permits an entity to write
checks in this balance, 4,500,000
❖ Travel advances of 180,000 for executive travel for the first quarter of
next year (employee to pay through salary deduction.)
❖ A separate cash fund in the amount of 1,100,000 is restricted for the
retirement of long term assets.
❖ Petty cash fund, 10,000
What is the correct amount of cash and cash equivalents an entity

should report in its December 31, 2020 statement of financial position?
Commercial- savings account P 500,000
Commercial- checking account 900,000
Money market fund (Cash equivalent) 4,500,000
Petty Cash fund 10,000
Correct Cash and Cash equivalent P5,910,000
 The travel advances should be reported as a receivable, but if

not reimbursed, this should be charged to Prepaid expense.
 Cash restricted in the amount of P1,100,000 for the retirement

of long-term debt should be classified as non-current asset as
“Cash restricted for retirement of long term debt”
Accounting for Cash Shortage
 Where the cash count shows cash which is less than the balance per book,
there is a cash shortage to be recorded as follows:
Cash short or over xx
Cash xx
 Hence, if the cashier or cash custodian is held responsible for the cash
shortage, the adjustment should be:
Due from cashier xx
 If reasonable efforts fail to disclose the cause of the shortage the

adjustment is:
Loss from the cash shortage xx
Accounting for Cash Overage
 When cash is more than the balance per book, there is cash overage to
be recorded as follows:
Cash xx
 The cash overage is treated as miscellaneous income is there is no claim

on the same.
Miscellaneous income xx
 But where the cash overage is properly fund to be the money of the
cashier, it's entry is:
Payable to Cashier xx
Imprest System
The imprest system is a system of control cash which requires
that all cash receipts should be deposited intact and all cash
disbursements should be made by means of check.
While internal control ideally requires that all payments should be

made by means of check, this is sometimes impossible.
There are occasions when the issuance of checks becomes

impractical or inconvenient such as when small amounts are paid
or things are hurriedly bought or customers are entertained.
Petty Cash Fund
The petty cash fund is money set aside to pay small expenses
which cannot be paid conveniently by means of check.
There are two methods of handling the petty cash, namely:

a. Imprest Fund System
b. Fluctuating Fund System
Imprest Fund System is the one usually followed in
handling petty cash transactions.
Accounting Procedures
a. A check is drawn to establish the fund.
Petty cash fund xx
Cash In bank xx
b. Payment of expenses out of the fund.

No formal journal entries are made.
The petty cashier generally requires a signed petty cash voucher for such payments and
simply prepares memorandum entries in the petty cash journal.
c. Replenishment of petty cash payments.
The replenishment check is usually equal to the petty cash disbursement.
It is at this time that the petty cash disbursements are recorded.

Expenses xx
Cash In Bank xx
It is to be pointed out the petty cash disbursements should be replenished only by means of
check and not from undeposited collections.
d. At the end of accounting period, it is necessary to adjust the
unreplenished expenses in order to state the correct petty cash
balance.
Expenses xx
Petty cash Fund xx
The adjustment is to be reversed at the beginning of the next

accounting period.
 The reversal is made in order that the normal replenishment procedures
may be followed by simply debiting expenses and crediting cash in bank
without distinguishing whether the expenses pertain to the current period or
prior period.
e. An increase in fund is recorded as:

Petty cash Fund xx
Cash in bank xx
f. A decrease in the fund is recorded as:

Cash in bank xx
Petty cash fund xx
Fluctuating fund System
 The system is called “ fluctuating fnd system” because the checks drawn to
replenish the fund do not necessarily equal the petty cash disbursements.
The replenishment checks are simply drawn upon the request of the petty
cashier.
 Moreover, petty cash disbursements are immediately recorded thus

resulting in a fluctuating petty cash balance per book from time to time:
A. Establishment of the fund:

Petty cash fund xx
Cash in bank xx
Fluctuating Fund System
B. Payment of expenses out of the petty cash fund:

Expenses xx
Petty cash Fund xx
Under this system, the disbursements from the petty cash fund
are immediately recorded in contradistinction with the imprest
fund system where the disbursements are recorded upon
replenishment.
Fluctuating System
C. Replenishment or increase of the fund:
Petty cash fund xx
Cash in bank xx
The replenishment check may or may not be the same as petty cash
disbursements.
D. At the end of the reporting period, no adjustment is necessary

because the petty cash expenses are recorded outright.
E. Decrease of the fund is recorded as follows:

Cash in bank xx
Petty cash fund xx
P
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2020 2020
May 2 Petty Cash Fund 10,000 May 2 Petty Cash Fund 10 000
Cash in Bank 10,000 Cash in Bank 10 000
29 Postage 1 000 29 Postage 1 000

Supplies 3 000 Supplies 3 000
Transportation 2 500 Transportation 2 500
Misc. Expense 1 500 Misc. Expense 1 500
Cash in Bank 8 000 Petty Cash Fund 8 000
AJE
June 30 Supplies 2 000 29 Petty Cash Fund 8 000
Postage 1 000 Cash in Bank 8 000
Transportation 1 000
Petty Cash Fund 4 000 June 30 Supplies 2 000
Postage 1 000
July 1 Petty Cash Fund 4 000 Transportation 1 000
Supplies 2 000 Petty Cash Fund 4 000
Postage 1 000
Transportation 1 000 July 15 Supplies 1 500
Postage 500
15 Petty Cash Fund 5 000 Transportation 500
Supplies 3 500 Misc. Expense 500
Postage 1 500 Petty Cash Fund 3 000
Transportation 1 500
Misc. Expense 500 15 Petty Cash Fund 12 000
Cash in Bank 12 000 Cash in Bank 12 000
Problem 1-1 (Solution)
#1 Adjusting entries
a. Accounts Receivable 200,000

Cash in bank 200,000
b. Cash in bank 250,000

Accounts Payable 250,000
c. Cash in bank 100,000

Accounts payable 100,000
d. Accounts Receivable 450,000

Req. #2 Total amount of cash and cash equivalents
Cash in bank P3,000,000
Customers outstanding check (200,000)
Check mailed on Jan.15 250,000
Check dated Jan.31 100,000
Collection in Jan.15 (450,000)
Adjusted Cash in bank 2,700,000
Time Deposit-30 days 1,000,000
Petty cash fund 20,000
Total cash and cash equivalents 3,720,000
Req.#1 Adjusting entries

Cash on hand 150,000
b. Expenses 10,000
Receivable from employees 5,000
Cash on hand P3,000,000

Security Bank current account 2,000,000
PNB current account 1,500,000
Bond sinking fund 2,500,000
Total cash and cash equivalents 6,885,000
Problem 1-3 (Armenia Co.#1 Adjusting entries)

b. Accounts Receivable 150,000

c. Receivable from employees 10,000

Cash short or over 5,000
d. Cash in bank 200,000

c. Cash in bank 300,000

Cash on hand P 750,000

Cash in bank 4,500,000
Saving deposit 2,000,000
Total cash and cash equivalents P7,285,000
Problem 1-8 Tacit Company
2021
Nov. 2 Petty cash fund 10,000
cash in bank 10,000
30 Postage 2,000
Supplies 5,000
Cash in bank 17,000
Dec.31 Postage 3,000

Supplies 4,000
Special Deposit 2,000
Problem 1-8 Answer
2022
Jan.1 Petty cash fund 9,000
Postage 3,000
Supplies 4,000
Special Deposit 2,000
Jan. 2 No entry (already reversed)
31 Postage 5,000
Supplies 6,000
Cash short or over 1,000
Cash in bank 19,000
CHAPTER 3
PROOF OF CASH
Valix, et al
Two-date bank reconciliation
A bank reconciliation is so-called “two-date” because it

literally involves two dates.
The procedures followed for a one-date reconciliation

are the same for a two-date reconciliation.
Book balance -
1 beginning and ending
Bank balance -
Deposits in transit -
INFORMATION
Outstanding checks -
Computation of book balance
Balance per book - beginning of month xx
1 Add: Book debits during the month

Total
Less: Book credits during the month
xx
xx
xx
Balance per book - end of month xx
Book debits - are cash receipts or all items debited to the cash in bank account.
Book credits - are cash disbursements or all items credited to the cash in bank
account.
In a T-account form, the cash in bank may appear as
follows:
Cash in Bank
Balance - beginning xx Book credits xx

Book debits xx Balance - ending xx
Computation of bank balance
Balance per bank - beginning of month xx
2
Add: Bank credits during the month xx
Total xx
Less: Bank debits during the month xx
Balance per bank - end of month xx
• Bank credits - all items credited to the account of the depositor
which include deposits acknowledged by bank and credit
memos.
• In the absence of any statement to the contrary, bank credits
are assumed to be deposits acknowledged by bank.
Bank debits - refer to all items debited to the account of the
depositor which include checks paid by bank and debit memos.
In the absence of any statement to the contrary, bank debits are

assumed to be checks paid by bank.
In a T-account form, the depositor’s account,
Company X, will appear as follows:
Company X
Bank debits xx Balance - beginning xx

Balance-ending xx Bank credits xx
Computation of deposit in transit
Deposits in transit - beginning of month xx
3
Add: Cash receipts deposited during the month. xx
Total deposits to be acknowledged by bank xx
Less: Deposits acknowledged by bank during month xx
Deposits in transit - end of month xx
Computation of outstanding checks
Outstanding checks - beginning of month xx
4
Add: Checks drawn by depositor during the month xx
Total checks to be paid by bank xx
Less: Checks paid by bank during the month xx
Outstanding checks - end of month xx
Cash in bank per ledger
ILLUSTRATION Balance, January 31 50,000
Book debits for February, including January CM for
200,000
note collected of P15,000
Book credits for February, including NSF check of
P10,000 and January outstanding check of P5,000 180,000
and service charge of P1000 for January
Bank statement for February

Balance, January 31 84,000
Bank credits for February, including CM for nite collected of
170,000
P20,000 and January deposit in transit of P400,000
Bank debits for February, including NSF check of P10,000 and
130,000
January outstanding check of P65,000
The bank reconciliation for the month of January can easily be
prepared because all the necessary data are available:
Balance per book, January 31 50,000 84,000

Balance per bank, January 31
Note collected by bank in 40,000
15,000 Deposit in transit for January
Jan.
Total 65,000
Total 124,000
NSF check for Jan. (5,000)
Outstanding check for January (65,000)
Service charge for January (1,000)
Adjusted bank balance 59,000
Adjusted book balance 59,000
The bank reconciliation for the month of February requires computation of
balance per book, balance per bank, deposits in transit and outstanding
checks.
Computation of book balance
Balance per book - January 31 50,000
Add: Book debits during February 200,000
Total 250,000
Less: Book credits during February 180,000
Balance per book - February 28 70,000
Computation of bank balance

Balance per bank - Jan. 31 84,000
Add: Bank credits during February 170,000
Total 254,000
Less: Bank debits during February 130,000
Balance per bank - Februray 28 124,000
Computation of deposits in transit
Deposits in transit - January 31 40,000

Add: Cash receipts deposited during February:
Book debits 200,000
Less: January CM note collected 15,000 185,000
Total 225,000
Less: Deposits acknowledged by bank in February:
Bank credits 170,000
Less: February CM for note collected 20,000 150,000
Deposits in transit - February28 75,000
• January CM of P15,000 is deducted from the book debits of
P200,000 because this item is a cash receipt not representing deposit for
the month of February to arrive at the cash receipts deposited.
• In the absence of any statement to the contrary, book debits are

assumed to be cash receipts deposited.
• February CM of P20,000 for note collected is deducted from the

bank credits because this is not a deposit to determine the deposits
acknowledged by bank.
• Bank credits are assumed to be deposits acknowledged by bank in the

absence of any statement to the contrary.
Computation of outstanding checks
Outstanding checks - January 31 65,000

Add: Checks drawn by depositor during February:
Book credits 180,000
Less: January DMs 6,000 174,000
Total 239,000
Less: Checks paid by bank during February:
Bank debits 130,000
Less: February NSF 10,000 120,000
Outstanding checks - February 28 119,000
• January DMs P6,000 are deducted from the
book credits, because they are cash
disbursements not representing checks to arrive
at the checks drawn by the depositor.
• But as a rule all book credits in the absence of

any statement to the contrary are assumed to
be checks issued.
• The February DM for NSF of P10,000 is

deducted from the bank debits because this is
not a bank disbursement representing a check
paid to arrive at the checks paid by the bank.
Company X
Bank Reconciliation
February 28
Balance per book 70,000

Note collected by bank in February 20,000
Total 90,000
NSF check for February (10,000)
Balance per bank 124,000

Deposits in transit for February 75,000
Total 199,000
Outstanding checks for February (119,000)
Proof of cash
- an expanded reconciliation in that it includes proof
of receipts and disbursements.
- this may be useful in discovering possible
discrepancies in handling cash particularly when cash
receipts have been recorded but have not been
deposited.
3 forms of proof of cash:
➢ Adjusted balance method
➢ Book to bank method
➢ Bank to book method
In all the three forms, a four-column worksheet is necessary, although under the
adjusted balance method, an 8-column worksheet may be required.
Summary of data used in 2-date bank reconciliation
January 31 February 28
Balance per book 50,000 70,000
Balance per bank 84,000 124,000
Book debits 200,000
Book credits 180,000
Bank debits 130,000
Bank credits 170,000
Deposits in transit 40,000 75,000
Outstanding checks 65,000 119,000
NSF Check 5,000 10,000
Service charge 1,000
Note collected by bank 15,000 20,000
The book debits and credits, and the bank debits and credits for January are not
listed anymore because they are not necessary.
The proof of cash pertains to the receipts and disbursements for the current month
of February.
COMPANY X
Adjusted balance PROOF OF CASH
method For the month of February
January 31 Receipts Disbursements February 28
Balance per book 50,000 200,000 180,000 70,000
Note collected:
January 15,000 (15,000)
February 20,000 20,000
NSF check:
January (5,000) (5,000)
February 10,000 (10,000)
Service charge:
January (1,000) (1,000)
Adjusted book balance 59,000 205,000 184,000 80,000
Balance per bank 84,000 170,000 130,000 124,000

Deposits in transit:
January 40,000 (40,000)
February 75,000 75,000
Outstanding checks:
Outstanding checks:
January (65,000) (65,000)
February 119,000 (119,000)
Adjusted bank balance 59,000 205,000 184,000 80,000
Book to bank method
Company X
Proof of cash
For the month of February
Jan. 31 Receipts Disbursements Feb 28
Balance per book 50,000 200,000 180,000 70,000
Note collected:
January 15,000 (15,000)
February 20,000 20,000
NSF Check:
January (5,000) (5,000)
February 10,000 (10,000)
Service charge:
January (1,000) (1,000)
Deposit in transit:
January (40,000) 40,000
February (75,000) (75,000)
Outstanding checks:
January 65,000 65,000
February (119,000) 119,000
Balance per bank 84,000 170,000 130,000 124,000
Bank to book method
COMPANY X
PROOF OF CASH
For the month of February
Jan. 31 Receipts Disbursements February 28
Balance per bank 84,000 170,000 130,000 124,000
Deposits in transit:
January 40,000 (40,000)
February 75,000 75,000
Outstanding checks:
January (65,000) (65,000)
February 119,000 (119,000)
Note collected:
January (15,000) 15,000
February (20,000) (20,000)
NSF Check:
January 5,000 5,000
February (10,000) 10,000
Service charge:
January 1,000 1,000
Balance per book 50,000 200,000 180,000 70,000
Problem 3-1
Sassy company provided the following data for the month of July:
Cash in bank
Balance June 30 1,000,000
Book debits for July including June CM for note collected, P300,000 4,000,000
Book credits for July including June NSF of P100,000 and service charge of 3,600,000
P4,000
Bank statement for July

Balance June 30 1,650,000
Bank debits for July including service charge of P1,000 and June outstanding 2,500,000
checks of P854,000
Bank credits for July including CM for bank loan of P500,000 and June deposit 3,500,000
in transit of P400,000
Required:
Prepare bank reconciliation on June 30 and July 31, and adjusting entries on July 31.
Bank reconciliation - June 30
Book balance 1,000,000
Add: Credit memo for note 300,000
collected
Total 1,300,000
Less: NSF check 100,000
Service Charge 4,000 104,000
Adjusted book balance 1,196,000
Bank Balance 1,650,000

Add: Deposit in transit 400,000
Total 2,050,000
Less: Outstanding checks 854,000
Adjusted bank balance 1,196,000
Bank reconciliation - July 31
Add: Credit memo for bank loan 500,000
Total 1,900,000
Less: Service charge 1,000
Bank balance 2,650,000

Add: Deposit in transit 1,100,000
Total 3,750,000
Less: Outstanding checks 1,851,000
Adjusting Entries, July 31

1. Cash in bank 500,000
Bank loan payable 500,000
2. Bank service charge 1,000

Cash in bank 1,000
Computation of deposit in transit - July 31
Deposit in transit - June 30 400,000

Add: Deposits during July:
Book debits 4,000,000
Less: June credit memo for note collected 300,000 3,700,000
Total 4,100,000
Less: Deposits credited by bank during July:
Bank credits 3,500,000
Less: July credit memo for bank loan 500,000 3,000,000
Deposit in transit - July 31 1,100,000

Computation of outstanding checks - July 31
Outstanding checks - June 30 854,000

Add: checks drawn by company during July
Book credits 3,600,000

Less: June debit memos for
NSF check 100,000
Service charge 4,000 104,000 3,496,000
Total 4,350,000
Less: checks paid by bank during July:
Bank debits 2,500,000

Less: July service charge 1,000 2,499,000
Outstanding checks, July 31 1,851,000
PROBLEM 3-5
Efficient Corporation
Proof of Cash
For the Month of April
March 31 Receipts Disbursements April 30
Book balance 200,000 800,000 720,000 280,000

Note collected by bank
March 60,000 (60,000)
April 100,000 100,000
NSF check
March (20,000) (20,000)
April 30,000 (30,000)
Service Charge
March (8,000) ( 8,000)
April 2,000 (2,000)
Adjusted Book Balance 232,000 840,000 724,000 348,000
March 31 Receipts Disbursements April 30
Bank Balance 330,000 700,000 530,000 500,000
Deposit in transit
March 80,000 (80,000)
April 220,000 220,000
Outstanding checks
March (178,000) (178,000)
April 372,000 (372,000)
Adjusted Bank Balance 232,000 840,000 724,000 348,000
Problem 3-2
Beehive Company provided the following information:
Balance per book October 31 600,000
Receipts per book for November (collection from customer, 2,200,000
P100,000 recorded as P10,000)
Disbursements per book for November (check for P300,000 in 1,800,000
payment of account recorded as P30,000)
Balance per bank statement November 30 930,000
Deposit in transit October 31 300,000
Outstanding checks November 30 400,000
Bank receipts for November including an erroneous credit of 2,500,000
P100,000 which should have been credited to Beeline Company
Bank disbursements for November including check of Beeline 1,970,000
Company P200,000
Required:
Prepare bank reconciliation on October 31 and November 30, and adjusting
entries on November 30.
Reconciliation - October 31
Bank balance 400,000
Total 700,000
Reconciliation - November 30
Add: Understatement of collection from customer 90,000
Total 1,090,000
Less: Understatement of check disbursement 270,000
Bank balance 930,000

Check of Beeline Company charged in error 200,000 390,000
Total 1,320,000
Deposit of Beeline Company erroneously credited 100,000 500,000
Adjusting entries - November 30
1. Cash in bank 90,000
Accounts receivable 90,000
2. Accounts payable 270,000

Computation of outstanding checks - October 31
Outstanding checks - October 31 (squeeze) 100,000
Add: checks issued by depositor:
Book disbursement 1,800,000
Understatement of check paid 270,000 2,070,000
Total 2,170,000
Less: Checks paid bank:
Bank disbursements 1,970,000
Check of Beeline Company charged in error (200,000) 1,770,000
Outstanding checks - November 30 400,000

Computation of deposit in transit - November 30
Deposit in transit - October 31 300,000
Add: Cash receipts deposited during November:
Book receipts 2,200,000
Understatement of collection from customer 90,000 2,290,000
Total 2,590,000
Less: Deposits credited by bank during November:
Bank receipts 2,500,000
Deposit of Beeline Company erroneously credited (100,000) 2,400,000
Deposit in transit - November 30 190,000

Problem 3-3
Fabulous Company provided the following data concerning cash on July 31:
Checks drawn Bank statement

No. 101 600,000 Balance, July 31 2,700,000
No. 102 700,000 Charges:
No. 103 300,000 Checks paid 4,000,000
No. 104 400,000 Service charge 20,000
No. 105 450,000 Credits:
No. 106 600,000 Deposits 3,500,000
No. 107 650,000 Note collected 1,500,000
No. 108 500,000
Balance of cash per book on July 1, P1,270,000. Cash receipts
per cash book for the month July P3,400,000.
Checks paid by bank include all checks issued during the
month of July except No. 107 and No. 108.
On July 31 cash received but not deposited in bank, P400,000.
Required:
a. Prepare bank reconciliation on July 1 and July 31.
b. Prepare adjusting entries on July 31.
a. Reconciliation on July 1

Total 2,220,000
Reconciliation on July 31
Book balance 470,000
Add: Note collected by bank 1,500,000
Total 1,970,000
Less: Bank service charge 20,000

Total 3,100,000
Less: Outstanding checks
Check #107 650,000
108 500,000 1,150,000
b. Adjusting entries on July 31
1. Cash in bank 1,500,000

Note receivable 1,500,000
2. Bank service charge 20,000

Cash in bank 20,000
Computation of deposit in transit - July 1

Deposit in transit - July 1 (squeeze) 500,000
Cash receipts per book 3,400,000
Total 3,900,000
less: Deposits credited by bank 3,500,000
Deposits in transit - July 31 400,000
Computation of Outstanding checks - July 1

Outstanding checks - July 1 (squeeze) 950,000
Checks drawn by depositor 4,200,000
Total 5,150,000
Less: Checks paid by bank 4,000,000
Outstanding checks - July 31 1,150,000
Bigotry Company
Proof of Cash
August 31
PROBLEM 3-6
(Adjusted Balance July 31 Receipts Disbursements August 31
Method)
Book balance *1,200,000 4,400,000 3,600,000 2,000,000
Note collected
-July 200,000 (200,000)
-August 300,000 300,000
NSF check
-July (100,000) (100,000)
-August 50,000 (50,000)
Error on aug collection 180,000 180,000
Error on aug payment 540,000 (540,000)
Adjusted Book Balance 1,300,000 4,680,000 4,090,000 1,890,000

ADJUSTED BALANCE METHOD
July 31 Receipts Disbursements August 31
Bank Balance *800,000 5,000,000 3,940,000 1,860,000

Deposit in transit
-July 600,000 (600,000)
-August 480,000 480,000
Outstanding check
-July (100,000) (100,000)
-August 650,000 (650,000)
Error on deposit (200,000) (200,000)
Aug. ck erroneously charged to

(400,000) 400,000
Bigotry
Adjusted Bank Balance 1,300,000 4,680,000 4,090,000 1,890,000

Adjusting entries
Cash in Bank 300,000

Notes Receivable 300,000
Accounts Receivable 50,000

Cash in Bank 50,000
Cash in Bank (200,000 – 20,000) 180,000

Accounts payable (600,000 – 60,000) 540,000

Cash in Bank 540,000
3-6 (Book to Bank Method) July 31 Receipts Disbursements August 31
Book balance *1,200,000 4,400,000 3,600,000 2,000,000
Note collected-july 200,000 (200,000)
-august 300,000 300,000
NSF check -july (100,000) (100,000)
-august 50,000 (50,000)
Error on aug collection 180,000 180,000
Error on aug payment 540,000 (540,000)
Deposit in transit -july ( 600,000) 600,000
-august (480,000) (480,000)
Outstanding check -july 100,000 100,000
-august (650,000) 650,000
Error on deposit 200,000 200,000
Aug. ck erroneously charged to Bigotry 400,000 ( 400,000)
Bank Balance *800,000 5,000,000 3,940,000 1,860,000
PROBLEM 3-10
Outstanding checks, Oct 31 230,000
Checks issued, Nov (620,000 – 10,000) 610,000
Total 840,000
Checks paid by bank (550,000 - 25,000) (525,000)
Outstanding checks, November 30 315,000
Answer: C
end...
Receivables are financial assets that represent a contractual right
to receive cash or another financial asset from another entity.
For retailers or manufacturers, receivables are classified into
trade receivables and nontrade receivables.
Trade and Nontrade Receivables
Trade receivables refer to claims arising from sale of merchandise
or services in the ordinary course of business.
Trade receivables include accounts receivable and notes receivable.
Accounts receivable are open accounts arising from the sale of
goods and services in the ordinary course of business and not
supported by promissory notes.
Other names of accounts receivable are customer’s accounts, trade
debtors, and trade accounts receivable.
Notes receivable are those supported by formal promises to pay in
the form of notes.
Nontrade receivables represent claims arising from sources other
than the sale of merchandise or services in the ordinary course of
business.
Loans receivable
For banks and other financial institutions, receivables result primarily
from loans to customers.
The loans are made to heterogeneous customers and the
repayment periods are frequently longer or over several years.
Classification
Trade receivables which are expected to be realized in cash within
the normal operating cycle of one year, whichever is longer, are
classified as current assets.
Nontrade receivables which are expected to be realized in cash
within one year, the length of the operating cycle
notwithstanding, are classified as current assets.
If collectible beyond one year, nontrade receivables are classified
as noncurrent assets.
The classifications are in accordance with PAS 1, Presentation of
Financial Statements, paragraph 66, which states:
“An entity shall classify an asset as current when the entity
expects to realize the asset or intends to sell or consume it in the
entity’s normal operating cycle, or when the entity expects to
realize the asset within twelve months after the reporting
period.”
Presentation
Trade receivables and nontrade 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.
However, the details of the total trade and other receivables shall
be disclosed in the notes to financial statements.
For example, the disclosure may appear as follows:
Accounts receivable 5,000,000

Allowance for doubtful accounts (200,000)
Notes receivable 1,000,000
Accrued interest on notes receivable 150,000
Advances to officers and employees 100,000
Dividends receivable 250,000
Total trade and other receivables 6,300,000
a. Advances to or receivables from shareholders, directors,
officers or employees. If collectible in one year, such advances
or receivables should be classified as current assets.
Otherwise, such advances or receivables are classified as
noncurrent assets.
b. Advances to affiliates are usually treated as long-term
investments.
c. Advances to supplier for the acquisition of merchandise are
current assets.
d. Subscriptions receivable are current assets if collectible within
one year. Otherwise, subscriptions receivable should be shown
preferably as a deduction from subscribed share capital.
e. Creditor’s accounts may have debit balances as a result of overpayment or
returns and allowances. These are classified as current assets.
If the debit balances are not material, an offset may be made against the
creditor’s accounts with credit balances and only the net accounts payable
may be presented.
f. Special deposits on contract bids normally are classified as noncurrent
assets because such deposits are likely to remain outstanding for a
considerable long period of time.
However, the deposits that are collectible currently should be classified as
current assets.
g. Accrued income such as dividend receivable, accrued rent receivable,
accrued royalties receivable and accrued interest receivable on bond
investment are usually classified as current assets.
h. Claims receivable such as claims against common carriers for losses or
damages, claim for rebates and tax refunds, claim from insurance entity, are
normally classified as current assets.
Customer’s credit balances 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 and are
not offset against the debit balances in other customer’s accounts,
except when the same is not material in which case only the net
accounts receivable may be presented.
For example, the accounts receivable controlling account reports
a balance of P500,000. Examination of the subsidiary ledgers
reveals the following details in the customer’s accounts:
Customer A
Sales 800,000 Collection 400,000
Debit balances 400,000
800,000 800,000
Customer B
Sales 600,000 Collections 450,000
Debit balances 150,000
600,000 600,000
Customer C
Sales 500,000 Collections 450,000
Credit balance 50,000 Returns 100,000
550,000 550,000
The accounts receivable should be presented as current asset at
P550,000 representing the accounts of A and B.
The credit balance in the account of C is classified as current liability
and not offset against the debit balances in the accounts of A and B.
No adjustment is necessary to formally recognize the customers’
credit balances because ultimately these are canceled for sales and
cash settlement.
But an adjustment may be made only for worksheet purposes,
meaning, not formally journalized and posted to the ledger, as
follows:
Customers’ credit balances 50,000
PFRS 9, paragraph 5.1.1, provides that a financial asset shall be
recognized initially at fair value plus transaction costs that are
directly attributable to the acquisition.
The fair value of a financial asset is usually the transaction
price, meaning, the fair value of the consideration given.
For short-term receivables, the fair value is equal to the face
amount or original invoice amount.
Cash flows relating to short-term receivables are not discounted
because the effect of discounting is usually immaterial.
Accordingly, accounts receivable shall be measured initially at face
amount or original invoice amount.
In accordance with PFRS 9, paragraph 5.2.1, after initial
recognition, accounts receivable shall be measured at amortized
cost.
The amortized cost is actually the net realizable value of
accounts receivable.
The term amortized cost has more relevance in long-term note
receivable.
Thus, the term net realizable value is preferably used in relation to
The net realizable value of accounts receivable is the amount of cash
expected to be collected or the estimated receivable amount.
The initial amount recognized for accounts receivable shall be
reduced by adjustments which in the ordinary course of business
will reduce the amount recoverable from the customer.
This is based on the established basic principle that assets shall not be
carried at above their recoverable amount.
Accordingly, in estimating the net realizable value 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
In order to give proper accounting recognition to freight charge
in relation to accounts receivable, the following terms should be
understood – FOB destination, FOB shipping point, freight collect
and freight prepaid.
The term FOB destination means that ownership of the goods
purchased is vested in the buyer upon receipt thereof.
Accordingly, the seller shall be responsible for the freight charge
up to the point of destination.
The term FOB shipping point means that ownership of the goods
purchased is vested in the buyer upon shipment thereof.
Thus, it is incumbent upon the buyer to pay for the
transportation charge from the point shipment to the
point of destination.
The term freight collect means that freight charge on the
goods shipped is not yet paid. The common carrier shall
collect the same from the buyer. Thus, under this, the
freight charge is actually paid by the buyer.
The term freight prepaid means that freight charge on the
goods shipped is already paid by the seller.
Sometimes, goods are sold FOB destination but shipped freight
collect with the understanding that the buyer will pay for the
freight charge and deduct the same when remittance is made
by him.
On the part of the seller, the freight charge is recorded by
debiting freight out and crediting allowance for freight charge.
For example, an entity has a P100,000 account receivable at
the end of accounting period.
The terms are 2/10, n/30, FOB destination and freight collect.
The customer paid freight charge of P5,000.
1. To record the sale.
Freight out 5,000
Sales 100,000
Allowance for freight charges 5,000
2. To record the collection within the discount period.
Cash 93,000
Sales discount 2,000
The measurement of accounts receivable shall also recognize
the probability that some customers will return goods that are
unsatisfactory or will make other claims requiring reduction in
the amount due as in the case of shipment shortages and
defects.
For example, an amount of P50,000 of the total accounts
receivable at year-end represents selling price of goods that
will probably be returned. The journal entry to recognize the
probable return is:
Sales return 50,000
Allowance for sales return 50,000
Entities usually offer cash discounts to credit customers. A cash
discount is a reduction from an invoice price by reason of
prompt payment.
A cash discount is known as sales discount on the part of the
seller and a purchase discount on the part of the buyer.
A cash discount may be expressed as 5/10, n/30. This means
that the customer is entitled to a 5% discount if payment is made
in 10 days from the invoice date.
If the customer fails to pay within the 10-day discount period,
the gross amount of the invoice price must be paid within 30
days from the invoice date.
Methods of recording credit sales
Gross method
▪ The accounts receivable and sales are recorded at gross
amount of the invoice. This is the common and widely
used method because it is simple to apply.
Net method
▪ The accounts receivable and sales are recorded at net
amount of the invoice, meaning the invoice price minus
the cash discount.
1. Sale of merchandise for P100,000, terms 5/10, n/30.
Sales 100,000
2. Assume collection is made within the discount period.
Cash 95,000
3. Assume collection is made beyond the discount period.
Cash 100,000
1. Sale of merchandise for P100,000, terms 5/10, n/30.
Sales 95,000
2. Assume collection is made within the discount period.
Cash 95,000
3. Assume collection is made beyond the discount period.
Cash 100,000
Sales discount forfeited 5,000
The sales discount forfeited account is classified as other income.
If customers are granted cash discounts for prompt payment, the,
conceptually estimates of cash discounts on open accounts at the end
of the period based on past experiences shall be made.
For example, of the accounts receivable of P1,000,000 at the end of
the period, it is reliably estimated that discounts to be taken will
amount to P50,000.
The adjustment to record the expected sales discount is:
Allowance for sales discount 50,000
The adjustment may be reversed at the beginning of the next period
in order that discounts can then be charged normally to sales
discount account.
Business entities sell on credit rather than only for cash to
increase total sales and thereby increase income.
However, an entity that sells on credit assumes the risk that
some costumers will not pay their accounts.
When an account becomes uncollectible, the entity has sustained
a bad debt loss. This loss is simply one of the costs of doing business
on credit.
Two methods are followed in accounting for this bad debt loss,
namely:
1. Allowance method
2. Direct writeoff method
The allowance method requires recognition of a bad debt loss if
the accounts are doubtful of collection. The journal entry to
recognize the doubtful accounts is:
Doubtful accounts xx
Allowance for doubtful accounts xx
The “allowance for doubtful accounts” is deduction from
If the doubtful accounts are subsequently found to be worthless
or uncollectible, the accounts are written off as follows:
Accounts Receivable xx
Generally accepted accounting principles require the use of
the allowance method because it conforms with the matching
principle.
Moreover, accounts receivable would be properly measured at
net realizable value.
Recoveries of accounts written off
If a collection is made on account previously written off as
uncollectible, the customary procedures is first to recharge the
customer’s account with the amount collected and possibly with
the entire amount previously charged off it is now expected
that collection will be received in full.
The collection is then recorded normally by debiting cash and
crediting accounts receivable.
The recharging of the customer’s account is usually followed
because it is an evidence of the attempt of the customer to
reestablish his credit with the entity.
What account should be credited when the customer’s account is
recharged?
The generally accepted approach is to simply reverse the original
entry of writeoff regardless of whether the recovery is during
the year of writeoff or subsequent thereto.
1. Accounts of P30,000 are considered doubtful of collections.
Doubtful accounts 30,000
Allowance for doubtful accounts 30,000
2. The accounts are subsequently discovered to be worthless or
uncollectible.
3. The same account that are previously written off are
unexpectedly recovered or collected.
Cash 30,000
The direct writeoff method requires recognition of a bad debt loss
only when the accounts proved to be worthless or uncollectible.
Worthless accounts are recorded by debiting bad debts and crediting
accounts receivable. If the accounts only doubtful of collection, no
adjustment is necessary.
This approach is often used by small business because it is simple to
apply.
As a matter of fact the Bureau of Internal Revenue recognizes only this
method for income tax purposes.
However, the direct writeoff method violates the matching principle
because the bad debt loss is often recognized in later accounting
period than the period in which the sales revenue was recognized.
The direct writeoff method is not permitted under IFRS.
1. Accounts of P30,000 are considered doubtful of collection.
No entry is necessary.
2. The accounts proved to be worthless.
Bad debts 30,000
3. The same account that are previously written off as worthless
are recovered or collected.
Bad debts 30,000
Cash 30,000
If the recovery is subsequent to the year of writeoff and the direct writeoff
method is used, the recovery may simply be credited to other income.
1. Distribution cost
If the granting of credit and collection of accounts are
under the charge of the sales manager, doubtful accounts
shall be considered as distribution cost.
2. Administrative expense
If the granting of credit and collection of accounts are
under the charge of an officer other than sales manager,
doubtful accounts shall be considered as administrative
expense.
In the absence of any contrary statement, doubtful
accounts shall be classified as administrative expense.
Problem 4-1
Dreamer Company reported the “Receivables” account
with a debit balance of P2,000,000 at year-end.
The allowance for doubtful accounts had a credit balance
of P50,000 on same date.
Subsidiary details revealed the following:
Trade accounts receivable 775,000
Trade notes receivable 100,000
Installments receivable, normally due 1 year to two years 300,000
Customer’s accounts reporting credit balances arising from sales 30,000
return
Advance payments for purchase of merchandise 150,000
Customer’s accounts reporting credit balances arising from 20,000
advance payments
Cash advance to subsidiary 400,000
Claim from insurance entity 15,000
Subscriptions receivable due in 60 days 300,000
Accrued interest receivable 10,000
2,000,000
Required:
a. Prepare one compound entry to reclassify the
receivables account.
b. Compute the amount to be presented as “trade and
other receivables” under current assets.
c. Indicate the classification and presentation of the
other items excluded from “trade and other
receivables”.
a. Accounts receivable 775,000
Notes receivable 100,000
Installments receivable 300,000
Advances to suppliers 150,000
Advances to subsidiary 400,000
Claim receivable 15,000
Subscriptions receivable 300,000
Customer’s credit balances 30,000
Advances from customers 20,000
Receivables 2,000,000
b.
Allowance for doubtful accounts (50,000)
Installments receivable 300,000
Subscriptions receivable 300,000
c. The advances to subsidiary should be classified as noncurrent and
presented as long-term investment.
d. The customers’ credit balances and advances from customers
should be classifies as current liabilities and included as part of “trade
and other payables”.
Problem 4-2
Credible Company provided the following T-account summarizing the
transactions affecting the accounts receivable for the current year.
Accounts Receivable
Jan. 1 Balance 600,00 Collections from customers 5,300,000
Charges sales 6,000,000 Writeoff 35,000
Shareholders’ subscriptions 200,000 Merchandise returns 40,000
Deposit on contract 120,000 Allowances to customer for 25,000
shipping damages
Claims against common 100,000 Collections on carrier 40,000
carrier for damages claims
IOUs from employees 10,000 Collection on subscriptions 50,000
Cash advance to affiliates 100,000
Advances to supplier 50,000
Required:
a. Compute the correct amount of accounts receivable.
b. Prepare one compound entry to adjust the accounts
receivable.
c. Compute the amount to be presented as “trade and
other receivables” under current assets.
d. Indicate the classification and presentation of the
other items.
a. Accounts receivables – 1/1 600,000
Charge Sales 6,000,000
Total 6,600,000
Less: Collections from 5,300,000
customers
Writeoff 35,000
Merchandise returns 40,000
Allowances to customers 25,000 5,400,000
Accounts receivable – 12/31 1,200,000
b. Subscription receivable 150,000
Deposit on contract 120,000
Advances to affiliates 100,000
Advances to employees 10,000
c. Accounts receivable 1,2000,000
Advances to employees 10,000
d. The subscription receivable should be deducted from
subscribed share capital.
The deposit on contract should be classified as noncurrent
and presented as other noncurrent assets.
e. The advances to affiliates should be classified as noncurrent
and presented as long-term investment.
Problem 4-3
Affectionate Company sol merchandise on account for P500,000.
The terms are 3/10, n/30. The related freight charge amounted to
P10,000. The account was collected within the discount period.
Required:
Prepare journal entries to record the transactions under the
following freight terms:
1. FOB destination and freight collect
2. FOB destination and freight prepaid
3. FOB shipping point and freight collect
4. FOB shipping point and freight prepaid
a. FOB destination and freight collect
Freight out 10,000
Sales 500,000
Cash 475,000
b. FOB destination and freight prepaid
Freight out 10,000
Sales 500,000
Cash 10,000
Cash 485,000
c. FOB shipping point and freight
collect
Sales 500,000
Cash 485,000
d. FOB shipping point and freight prepaid
Sales 500,000
Cash 10,000
Cash 495,000
Problem 4-4
Fiancee Company records sales returns during the year as a credit to accounts
receivable.
However, at the end of the accounting period, the entity estimates the probable sales
return and records the same by means of an allowance account.
The following transaction occurred in summary form:
Sale of merchandise on account, 2/10, n 30 4,000,000
Collection within the discount period 1,470,000
Collection beyond the discount period 1,000,000
Sales return granted 100,000
Sales return estimated at the end of the year 20,000
Required:
Prepare journal entries to record the transactions.
Sales 4,000,000
Cash 1,470,000
Cash 1,000,000
Sales return 100,000
Sales return 20,000
Problem 4-5
On June 15, 2020, Romela Company sold 100 air conditioning
units. The sale price for each unit is P45,000.
All of sales are subject to terms 2/10, n/30. The entity used the
gross method of accounting for accounts receivable.
Required:
1. Prepare journal entry to record the sale.
2. Prepare journal entry to record receipt of the payment
assuming the correct amount was received on June 25, 2020.
3. Prepare the journal entry to record receipt of the payment
assuming the correct amount was received on July 10, 2020.
Sales revenue 4,500,000
Cash (4.5M x 98%) 4,410,000

Cash 4,500,000
Problem 4-6
On February 14, 2020, Prime Company sold 50 air conditioning
units. The sale price for each unit is P50,000.
All of the sales are subject to terms 2/10, n/30. The entity used
the net method of accounting for accounts receivable.
Required:
1. Prepare the journal to record the sale.
2. Prepare the journal entry to record receipt of the payment
assuming the correct amount was received on February 24,
2020.
3. Prepare the journal entry to record receipt of the payment,
assuming the correct amount was received on March 10, 2020.
Sales 2,450,000
Cash 2,450,000
Cash 2,500,000
Sales discount forfeited 50,000
Problem 4-7
Raven Company started business in March 2020. Sales for the first
year totaled P4,000,000. The entity priced its merchandise to yield
a 40% gross profit based on sales.
Industry statistics suggest the 10% of the merchandise sold to
customers will be returned.
The entity estimated sales returns based on the industry average.
During the year, customers returned goods with sale price
P300,000.
Required:
Prepare journal entries to record sales, sales returns and the year-
end adjusting entry for estimated sales returns.
Sales revenue 4,000,000


Estimated sales returns(10%x4,000,000) 400,000
Actual returns 300,000
Balance 100,000
Problem 4-14 (AROMA)
List price 5,000,000
Trade discount (20% x 5M (1,000,000)
4,000,000
2nd Trade discount (10% x 4M (400,000)
3,600,000
3rd trade discount (5% x 3,600,000 (180,000)
Invoice price, at gross 3,420,000
Sales return, at gross (500,000)
Gross Amount, Receivable 2,920,000
Cash discount (4% x2,920,000) (116,800)
Accounts receivable, net 2,803,200

Freight charge (100,000)
Net realizable value (C ) 2,703,200

CHAPTER 5
ESTIMATION OF
DOUBTFUL
ACCOUNTS
VALIX, ET AL.
Method of estimating doubtful accounts
There are three methods of estimating doubtful accounts, namely:
1. Aging the accounts receivable or “statement of

financial position approach”
2. Percent of accounts receivable or “statement of
financial position approach”
3. Percent of sales or “income statement approach”
Aging of accounts receivable
The aging of accounts receivable involves an analysis where the
accounts are classified into not due or past due.
a. Not due e. 91 to 120 days past due
b. 1 to 30 days past due f. 121 to 180 days past due
c. 31 to 60 days past due g. 181 to 365 days past due
d. 61 to 90 days past due h. More than 1 year past due
The allowance is then determined by multiplying the total of each classification by the rate
or percent of loss experienced by the entity for each category.
This method has the advantage of presenting fairly the accounts receivable in the
statement of financial position at net realizable value.
Illustration
The following data are summarized in aging the accounts receivable at

the end of the period: (a) (b) (a x b)
Balance Experience rate Required allowance
Not due 500,000 1% 5,000
1 to 30 days past due 300,000 2% 6,000
31 to 60 days past due 200,000 4% 8,000
61 to 90 days past due 100,000 7% 7,000
91 to 120 days past due 50,000 10% 5,000

181 to 365 days past 30,000 30% 9,000
due
More than one year 20,000 50% 10,000

1,200,000 50,000
------------- ----------
The amount computed by aging of accounts receivable
represents the required allowance for doubtful accounts at the
end of the period.
Thus, if the allowance for doubtful accounts has a credit
balance of P10,000 before adjustment, the doubtful accounts
expense is determined as follows:
Required allowance 50,000

Less: Allowance balance before adjustment
10,000
Doubtful accounts expense 40,000

---------
To record doubtful accounts expense

When is an account past due?
The credit terms will determine whether an account is past due.
For example, if the credit terms were 2/10, n/30, and the
account is 45 days old, it is considered to be 15 days past due.
Therefore, the phrase “past due” refers to the period beyond

maximum credit term. In the example, the term or credit period
is 30 days.
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. The approach is also
simple to apply.
However, the application of this approach violates the principle

of matching bad debt loss against the sales revenue.
Moreover, the loss experience rate may be difficult to obtain and

may not be reliable.
Illustration
The balance of accounts receivable is P2,000,000 and the
credit balance in the allowance for doubtful accounts is P10,000.
Doubtful accounts are estimated at 3% of accounts receivable.
Journal Entry

Required allowance (3% x 2,000,000) 60,000

Less: Credit balance in allowances 10,000
Percent of sales
The amount of sales for the year is multiplied by a certain rate to
get the doubtful accounts expense. The rate may be applied on
credit sales or total sales.
Theoretically, the rate to be used is computed by dividing the bad

debt losses in prior years by the charge sales of prior years.
The rate thus obtained is multiplied by the current year’s charge

sales to arrive at the doubtful accounts expense.
Percent of sales
In such a case, the rate obtained is multiplied by the current year’s
total sales to get the doubtful accounts expense.
This procedure of determining the rate has the advantage of

eliminating the extra work of making record of cash sales and credit
sales.
However, this approach may prove unsatisfactory when there is a

considerable fluctuation in the proportion of cash and credit sales
periodically.
Argument for percent of sales method
When the “percent of sales” method is used in computing

doubtful accounts, proper matching of cost against revenue is
achieved.
This is so because the bad debt loss is directly related to sales and
reported in the year of sale.
Thus, this method is an income statement approach because it

favors the income statement.
Argument against percent
of sales method
The main argument of this method is that the accounts receivable
may not be shown at estimated realizable value because the
allowance for doubtful accounts may prove excessive or inadequate.
Thus, it becomes necessary that from time to time the accounts

should be “aged” to ascertain the probable loss.
As a consequence, the rate applied on sales should be revised

accordingly.
Illustration
The following accounts are gathered from

the ledger.
Sales 5,050,000
Sales Return 50,000
If doubtful accounts are estimated at 1% of net sales, the doubtful accounts
expense is P50,000 (1% x P5,000,000) and recorded as follows:
Argument against percent
of sales method
If this method is used, the resulting amount of the computation is
already the amount of the doubtful accounts expense and not the
required allowance, in contradistinction with the aging method and
the percent of accounts receivable method.
The allowance balance before adjustment is ignored in determining

the doubtful accounts expense to be recorded.
However, the allowance for doubtful accounts should have an adjusted

balance of P70,000, the beginning allowance of P20,000 plus the
adjustment of P50,000
Correction in allowance for
doubtful accounts
As point out earlier, the percent of sales method of estimating doubtful accounts has
the disadvantage of the allowance for doubtful accounts being inadequate or
excessive.
Aging the account is then necessary to test reasonableness of the allowance.
Where the allowance is inadequate or excessive, a question arises as to the proper

treatment of the discrepancy, whether to consider it as an error or a component of
profit or loss.
The correction is to be reported in the income statement either as an addition to or

subtraction from doubtful accounts expense.
The reason is that the correction is the natural result of a change in estimate. Changes
in estimate are treated currently and prospectively, if necessary.
doubtful accounts
Accordingly, an inadequate allowance is adjusted as follows:
Allowances for doubtful accounts xx
An excessive allowance is recorded as follows:

When the allowance is excessive, there is a corollary problem when the

discrepancy is more than the debit balance in the doubtful accounts
expense account.
doubtful accounts
For example, if the amount of correction due to excessive allowance is P30,000
and the doubtful accounts expense account has a debit balance of P20,000,
following the above procedure will result to a credit balance in the doubtful
accounts expense account of P10,000. Such balance is obviously abnormal.
It is believed that is such a case, the P10,000 difference shall not be treated as a
prior period error but included in the determination of the income of the income
of the current period.
Journal entry
Miscellaneous income 10,000
Debit balance in allowance account
Is this possible? How? What does it indicate?
The allowance for doubtful accounts normally has a credit balance.
However, in certain instances, it may have a debit balance because it may be the policy
of the entity to adjust the allowance at the end of the period and record accounts
written off during the year.
For example, on January 1, the allowance account before adjustment has a credit
balance of P30,000 and during the year an account of P50,000 is written off and
recorded as follows:

Thus, on December 31, the allowance account has debit balance of P20,000 before
adjustment.
The debit balance does not indicate that the allowance is inadequate because the accounts
written off the year and charged to the allowance may have arisen from current year sales.
Thus, the charge to the allowance account simply predates the recording of doubtful
accounts.
At the end of the period when adjustments are made, the debit balance should be
considered.
To continue the example—if on December 31, the required allowance is
P40,000, the adjustment should be:

Required allowance 40,000

Add: Debit balance in allowance 20,000
Note that after the adjustment for the doubtful accounts, the allowance
account has credit of P40,000, which is the required allowance.
PROBLEM 5-1
Marvelous company reported the following information before adjustments at year-end:

Sales 5,000,000
Sales return and allowances 30,000
5-1
a. Doubtful accounts 75,000
Credit sales ( 5,000,000 x 75%) 3,750,000

Doubtful accounts (3,750,000 x 2%) 75,000
b. Doubtful accounts (5,000,000 x 1%) 50,000

5-1
c. Doubtful accounts 60,000
Required Allowance 80,000
Less: credit balance of allowance 20,000
Doubtful account expense 60,000
d. Doubtful accounts 30,000

Required Allowance (500,000 x 10%) 50,000

Less: credit balance of allowance 20,000
Doubtful account expense 30,000
5-2
At the beginning off current year, Template Company showed the following account balances:
The following summary transactions occurred during the current year:
1. Sales on account, 2/30, n/30 7,000,000
2. Collections from customers within the discount period 2,450,000
3. Collections from customers beyond the discount period 3,900,000
4. Account receivable written off as worthless 30,000
5. Recovery of accounts previously written off not included in the
above collections 10,000
6. Credit memo for sales return 70,000
5-2 1. Account receivable 7,000,000
Sales 7,000,000
a.
2. Cash 2,450,000
Sales Discount 50,000
Account receivable (2,450,000/98%) 2,500,000
3. Cash 3,900,000
Account receivable 3,900,000
4. Allowance for doubtful accounts 30,000
5. Accounts Receivable 10,000
Cash 10,000
6. Sales return 70,000
b) Doubtful accounts 40,000
Rate =40,000/ 1,000,000 = 4%
Allowance for doubtful accounts , 12/31 (4% x 1,500,000) 60,000

Allowance for DA -before adjustment (20,000)
Adjustment 40,000
Accounts Receivable 12/31 1,500,000

Allowance for DA ( 60,000)
Net realizable Value 1,440,000
PROBLEM 5-3 At the beginning off current year, Jocose Company reported the following:
Additional information for the current year.
1. Cash sales of the entity amount to 800,000 and represent 10% of gross sale
2. Ninety percent of the credit sales customers do not take advantage of the 5/10, n/30 terms.
3. Customers who did not take advantage of the discount paid P5,940,000.
4. It is expected that cash discounts of P10,000 will be taken on accounts receivable at December
31, 2020.
5. Sales returns amounted to P80,000. All returns were from charge sales
6. During the year accounts totaling P60,000 were written off as uncollectible.
Recoveries during the year amounted to P10,000. this amount is not included in the
collections.
7. The allowance for doubtful accounts is adjusted so that it represents a certain percentage of the
outstanding accounts receivable at year-end.
5-3
1.Cash 800,000
a.
Accounts receivable (8M x 90%) 7,200,000
Sales (800,000/10%) 8,000,000
2.Cash (720,000 x 95%) 684,000
Sales discount (5% x 720,000) 36,000
Accounts receivable (10% x 7,200,000) 720,000
3.Cash 5,940,000
4.Sales discount 10,000
5.Sales return 80,000
5-3
a. 6.Allowance for doubtful accounts 60,000
Cash 10,000
7.Doubtful accounts 70,000
Required allowance – Dec 31 (2,400,000 x 5% ) 120,000

100,000
Less: Allowance before adjustment 𝑅𝐴𝑇𝐸 = = 5% 50,000
2,000,000

5-3
b.
Accounts receivable – Dec 31 2,400,000

Less: Allowance for doubtful account 120,000
Net Realizable Value 2,270,000
PROBLEM 5-10 (ORE COMPANY)- page 159
Allowance for doubtful accounts, Jan 1 280,000
Accounts written off as uncollectible (230,000)
Recovery of accounts written off 50,000
Doubtful accounts (squeeze figure) (D) 100,000

Allowance for doubtful accounts, Dec 31 200,000
(2,700,000 – 2,500,000)
PROBLEM 5-11 (ROANNE COMPANY)
Bad debt expense 800,000
Allowance for bad debts expense 800,000
Allowance for bad debts 900,000
What was the decrease in working capital? 800,000 B

CHAPTER 6
NOTES
RECEIVABLE
VALIX, ET AL.
NOTES RECEIVABLE
• Notes receivable are claims supported by formal promises to
pay usually in the form of notes.
• A negotiable promissory note is an unconditional promise in

writing made by one person to another, signed by the maker,
engaging to pay on demand or at a fixed determinable future
time a sum certain in money to order or to bearer.
parties: (1) maker (2) payee
• The note may be payable on demand or at a definite future date.
• Standing alone, the term notes receivable represents only claims

arising from sale of merchandise or service in the ordinary
course of business.
• Thus, notes received from officers, employees, shareholders,

and affiliates shall be designated separately.
Dishonored Notes
• When a promissory note matures and is not paid, it is said to
be dishonored.
• Dishonored notes receivable should be removed from the notes

receivable account and transferred to accounts receivable
(should include the face amount, interest and other charges)
• Such approached is defended on the ground that the overdue

note has lost part of its status as a negotiable instrument and
really represents only an ordinary claim against the maker.
Initial measurement of
notes receivable
• Notes receivable shall be measured initially at present value.
• The present value is the sum of all future cash flows discounted
using the prevailing market rate of interest for similar notes.
• The prevailing market rate of interest is actually the effective

interest rate.
• However, short-term notes receivable shall be measured at face
value.
• Cash flows relating to short-term notes receivable are not

discounted because the effect of discounting is usually not
material
Interest-bearing notes
receivable
• The initial measurement for long-term notes will depend on

whether the notes are interest-bearing or noninterest-bearing.
• Interest-bearing long-term notes are measured at face value

which is actually the present value upon issuance.
Noninterest-bearing notes receivable
• Noninterest-bearing long-term notes are measured at present
value which is the discounted value of the future cash flows
using the effective interest rate.
• Actually, the term “non-interesting-bearing” is a misnomer
because all notes implicitly contain interest,
• It is simply a case of the “interest being included in the face
amount” rather than being stated as a separate rate.
Subsequent measurement
• Subsequent to initial recognition, long-term notes receivable
shall be measured at amortized cost using the effective interest
method.
• The amortized cost measurement is in accordance with PFRS 9,

paragraph 5.2.1
Meaning of amortized cost
The amortized cost is the amount at which the note receivable is
measured initially:
A.) Minus principal repayment
B.) Plus or minus cumulative amortization of any differences between

the initial carrying amount and the principal maturity amount.
C.) Minus reduction for impairment or uncollectibility.

• For long-term noninterest-bearing notes receivable, the
amortized cost is the present value plus amortization of the
discount, or the face value minus the unamortized unearned
interest income.
• Accordingly, only long term notes receivable will be discussed
in conjunction with the present value concept under the
following situations:
a.) Interest bearing note
b.) Noninterest bearing note
Illustration- Interest bearing note
An entity owned a tract of land costing P800,000 and sold the land for
P1,000,000,
The entity received a 3-year note for P1,000,000 plus interest of 12%
compounded annually.
When interest is “compounded”, in the mathematical parlance this means

that any accrued interest receivable also earns interest.
The selling price of P1,000,000 is reasonably assumed to be the present

value of the note because the note is interest bearing.
Journal Entries
First Year
Note Receivable 1,000,000
Land 800,000
Gain on sale of land 200,000

Interest income (12% X 1,000,000) 120,000
Second Year
Interest Income 134,400
Face Value 1,000,000

Interest accrued for first year 120,000
Total 1,120,000
Interest for second year (12% X 1,120,000) 134,400
Cash 1,404,928
Face Value 1,000,000

Interest accrued:
First year 120,000
Second year 134,400 254,400
Total 1,254,400
Interest for third year (12% X 1,254,400) 150,528
Cash Received 1,404,928
An entity manufactures and sells machinery. On January 1, 2021, the
entity sold machinery costing P280,000 for P400,000.
The buyer signed a noninterest bearing note for P400,000, payable in

four equal installments every December 31.
The cash sale price of the machinery is P350,000
Face value of note 400,000

Present value- cash sale price 350,000
Unearned interest income 50,000
Cash sale price 350,000

Cost of Machinery 280,000
Gross Income 70,000
Journal entries for 2021
• To record the sale:

Note Receivable 400,000
Sales 350,000
• To record the first installment collection:
Cash 100,000
• To recognize the unearned interest as income over the
term of the note:
(a) (b) (C)
Note Receivable Interest
Fraction Income
2021 400,000 4/10 20,000
2022 300,000 3/10 15,000
2023 200,000 2/10 10,000
2024 100,000 1/10 5,000
1,000,000 50,000
• The first installment is received on December 31, 2021.
Thus, for 2021 the note payable outstanding is P400,000 and decreased by
P100,000 each year.
• The fractions are developed from the note receivable balance every year.
• The fractions developed are multiplied by the total unearned interest of
P50,000 to get the yearly interest income.
Thus, for 2021, 4/10 X P50,000 equals 20,000 and so on.
If a statement of financial position is prepared on December 31, 2021, the

current portion of the note receivable is classified as current asset.
Note Receivable- current portion 100,000
Unearned interest income (15,000)
Carrying amount or amortized cost 85,000
Total unearned interest income 50,000

Realized in 2021 (20,000)
Balance-December 31, 2021 30,000
Realizable in 2022-current portion 15,000

Realizable beyond 2022-noncurrent portion 15,000
Total 30,000
Presentation
• The noncurrent portion of the note receivable is classified as
noncurrent asset.
Note Receivable-noncurrent portion 200,000

Unearned interest Income (15,000)
Carrying amount or amortized cost 185,000
ILLUSTRATION 3 -Noniterest bearing note
On January 1, 2021, an entity sold an equipment with a cost of P250,000

for P400,000.
The buyer paid a down of P100,000 and signed a noninterest bearing note
for P300,000 payable in equal annual installment of P100,000 every
December 31.
The prevailing interest rate for a note of this type is 10%. The present value
of an ordinary annuity of 1 of three periods at 10% is 2.4869.
The present value of the note is computed by multiplying the annual

installment of P100,000 by the present value factor of 2.4869 or P248,690.
The unearned interest income and gain on sale of equipment are
computed as follows:
Face value of note 300,000

Present value of note (100,000x2.4869) 248,690
Present value of note 248,690

Cash received- down payment 100,000
Sale Price 348,690
Cost of equipment 250,000
Gain on sale of equipment 98,690
1. To record the sale of equipment:
Cash 100,000
Equipment 250,000
Gain on sale of Equipment 98,690
2. To record the first installment collection:
Cash 100,000
3. To record the interest income for 2021:
In this case the computation of the interest income is made using
the effective interest method.
Date Annual Interest Principal Present
collection income value
Jan. 1, 2021 248,690

Dec. 31,2021 100,000 24,869 75,131 173,559
Dec. 31,2022 100,000 17,356 82,644 90,915
Dec. 31,2023 100,000 9,085 90,915 -
• The interest income is computed by multiplying the present value
by 10%.
Thus, for 2021, 10% X P248,690 equals P24,869.
• The principal payment is equal to annual collection minus interest
income.
Thus, for 2021, P100,000 minus P24,869 equals P75,131.
• The present value is equal to the preceding balance minus the
annual principal payment.
Thus, on December, 31, 2021, P248,690 minus P75,131 equals
P173,559.
Illustration 3- Noninterest bearing note
On January 1, 2021, an entity sold an equipment costing P600,000 with
accumulated depreciation of P250,000.
The entity received as consideration P100,000 cash and a P400,000

noninterest bearing note due on January 1, 2024.
The prevailing rate of interest for a note of this type is 10%. The present
value of 1 at 10% for 3 years is 0.7513.
Observe that the note is collectible on a lump sum basis after 3 years.
Face of note 400,000
Present value (400,000 X .7513) 300,520
The unearned interest income is sometimes described as “discount on

note receivable”
Present value of note 300,520

Cash received 100,000
Sale Price 400,520
Carrying amount of equipment (600,000-250,000) 350,000
2021
Jan. 1 Cash 100,000
Accumulated Depreciation 250,000
Equipment 600,000
Dec.31 Unearned interest income 30,052

Interest income 30,052
Date Interest Unearned Present Value
Income interest
Jan. 1, 2021 99,480 300,520
Dec. 31, 2021 30,052 69,428 330,572
Dec. 31, 2022 33,057 36,371 363,629
Dec. 31, 2023 36,371 - 400,000
• The effective interest method is used.

• The interest income is computed by multiplying the present value by 10%
Thus, for 2019, P330,520 X 10% equals P30,052
• The unearned interest income is arrived at by deducting the interest
income from preceding balance.
Thus, on December 31,2021, P99,480 minus P30,520 equals P69,428
• The present value is arrived at by adding the interest income to the
preceding present value balance.
Thus, on December 31,2021, P300,520 plus P30,052 equals P300,572
Or face value of note minus unearned interest income equals present value
Thus, on December 31,2021, P400,000 minus P69,428 equals P330,572.
2022
Dec. 31 Unearned interest income 33,057
2023
Dec. 31 Unearned interest income 36,371
2024
Jan. 1 Cash 400,000
PROBLEMS
Problem 6-1 (ACP)
Feasible Company sold to another entity a tract of land costing
P5,000,000 for P7,000,000 on January 1, 2021.
The buyer paid P1,000,000 down and signed a two-year promissory

note for the remainder of the purchase price plus 12% interest
compounded annually. The note matures on January 1, 2023.
Required:
Prepare journal entries for 2021, 2022 and 2023.
2021
Jan.1 Cash 1,000,000
Land 5,000,000
Gain on sale of land 2,000,000
Dec. 31 Accrued interest receivable 720,000

Interest income (12% X 6,000,000) 720,000
2022
Dec.31 Accrued interest receivable 806,400
Interest income(12% X 6,720,000) 806,400
2023
Jan.1 Cash 7,526,400
Notes Receivable 6,000,000
Accrued interest receivable 1,526,400
Bygone Company manufactures and sells computers. On January 1, 2021,
the entity sold a computer costing P400,000 for P600,000
The buyer signed a noninterest bearing note for P600,000 payable in three
equal installments every December 31. The cash selling price of the
computer is P540,000
Required:
Prepare journal entries for the current year
Problem 6-2
Jan. 1 Notes receivable 600,000
Sales 540,000
Dec. 31 Cash 200,000

Notes Receivable 200,000
31 Unearned interest income 30,000

Year Notes Receivable Fraction Interest income
2021 600,000 6/12 30,000

2022 400,000 4/12 20,000
2023 200,000 2/12 10,000
Total 1,200,000 60,000
Innovative Company manufactures and sells electrical generators. On
January 1, 2021, the entity sold an electrical general costing P700,000
for P1,000,000.
The buyer paid P100,000 down and signed a P900,000 noninterest

bearing note payable in three equal installments every December 31
The prevailing interest rate for a note of this type is 12%. The present
value of an ordinary annuity of 1 for three periods is 2.4018.
Required:
Prepare journal entries for current year
Face value 900,000
Present value (300,000 X 2.4018) 720,540
Present value 720,540

Cash received 100,000
Sales price 820,540
Cost of generator 700,000
Gross income 120,540
Solution
Jan. 1 Cash 100,000
Note receivable 900,000
Sales 820,540
Dec. 31 Cash 300,000

Note receivable 300,000
31 Unearned interest income 86,465

Date Collection Interest Principal Present value
Jan. 1, 2021 720,540
Dec. 31, 2021 300,000 86,465 213,535 507,005
Dec. 31, 2022 300,000 60,841 239,159 267,846
Dec. 31, 2023 300,000 32,154 267,846 -

LOAN RECEIVABLE
CHAPTER 7
Source: Valix, et al. (2021) Intermediate Accounting 1

Loan Receivable
A loan receivable is a financial asset
arising from a loan granted by a bank or other
financial institution to a borrower or client.
The term of the loan may be short-term but

in most cases, the repayment periods cover
several years.
Initial measurement of loan receivable
➢At initial recognition, an entity shall measure a loan
receivable at fair value plus transaction costs that are
directly attributable to the acquisition of the financial asset.
➢The fair value of the loan receivable at initial recognition is

normally the transaction price, meaning, the amount of the
loan granted.
➢Transaction costs that are directly attributable to the loan
receivable include direct origination costs.
* Direct origination costs should be included in the initial

measurement of the loan receivable.
However, indirect origination costs should be treated

as outright expense.
Subsequent measurement
of loan receivable
PFRS 9, paragraph 4.1.2, provides that if the business
model in managing financial asset is to collect contractual
cash flows on specified dates and interest, the financial
asset shall be measured at amortized cost.
Accordingly, a loan receivable is measured at amortized

cost using the effective interest method.
Measuring of amortized cost
The amortized cost is the amount at which the loan receivable is
measured initially:
a. Minus principal repayment
b. Plus or minus cumulative amortization of any
difference between the initial carrying amount of the principal
maturity amount
c. Minus reduction for impairment or uncollectibility
If the initial amount recognized is lower than the principal

amount, the amortization of the difference is added to the
carrying amount.
If the initial amount recognized is higher than the principal

amount, the amortization of the difference is deducted from the
carrying amount.
Origination Fees
Lending activities usually precede the actual disbursement
of funds and generally include efforts to identify and attract
potential borrowers and to originate a loan.
The fees charged by the bank against the borrower for

the creation of the loan are known as “origination fees.”
Origination fees include compensation for the following
activities:
a. Evaluating the borrower’s financial condition

b. Evaluating guarantees, collateral and other security
c. Negotiating the terms of the loan
d. Preparing and processing the documents related to the
loan
e. Closing and approving the loan transaction.
Accounting for origination fees
The origination fees received from borrower are recognized
as unearned interest income and amortized over the term
of the loan.
If the origination fees are not chargeable against the

borrower, the fees are known as “direct origination costs.”
The direct origination costs are deferred and also

amortized over the term of the loan.
Preferably, the direct origination costs are offset directly

against any unearned origination fees received.
• If the origination fees received exceed the direct origination
costs, the difference is unearned interest income and the
amortization cost will increase interest income.
OF > DOC = Difference (Unearned interest income)
• If the direct origination costs exceed the origination fees

received, the difference is charged to “direct originations costs”
and the amortization will decrease interest income.
DOC > OF = Difference (Direct origination costs)
Accordingly, the origination fees received and the direct

origination costs are included in the measurement of the loan
receivable.
Global Bank granted a loan to a borrower on
January 1, 2021. The interest on the loan is 12% payable
annually starting December 31, 2021. The loan matures in
three years on December 31, 2023.
Principal amount 5,000,000

Origination fees received from borrower 331,800
Direct origination costs incurred 100,000
Initial Carrying amount of the loan

Origination fees received ( 331,800)
Direct origination costs 100,000
Initial carrying amount of loan 4,768,200
Journal entries on January 1, 2021

1. To record the loan:
Loan Receivable 5,000,000
Cash 5,000,000
2. To record the origination fees received from the
borrower:
Cash 331,800
Unearned Interest Income 331,800
3. To record the direct origination costs incurred by the
bank:
Cash 100,000
Thus, the unearned interest income has credit balance of

P231,800 to be amortized over the term of the loan using
the effective interest method.
Because of the origination fees received and the direct
origination costs, a new effective rate must be computed
Since the initial carrying amount of the loan receivable of

P4,768,200 is lower than the principal amount, it means
there is a discount and therefore the effective rate must be
higher than the nominal rate of 12%.
After considering the origination fee received from the

borrower and the direct origination cost, the effective
interest rate is determined to be 14%.
Date Interest Interest Amortization Carrying
Received Income Amount
Jan. 1, 2021 4,768,200
Dec. 31, 2021 600,000 667,548 67,548 4,835,748
Dec. 31, 2022 600,000 677,005 77,005 4,912,753
Dec. 31, 2023 600,000 687,247 87,247 5,000,000

Effective interest method
Interest received = Principal times nominal rate
Interest income = Carrying amount times effective rate
December 31, 2021

Interest received (5,000,000 x 12%) 600,000
Interest income (4,768,200 x 14%) 667,548
Amortization 67,548
Carrying amount – 1/1/2021 4,768,200
Carrying amount – 12/31/2021 4,835,748

December 31, 2022
Interest received 600,000

Interest income (4,835,748 X 14%) 677,005
Amortization 77,005
Carrying amount – 12/31/2021 4,835,748
Carrying amount – 12/31/2022 4,912,753

December 31, 2023
Interest received 600,000

Interest income 687,247*
Amortization 87,247
Carrying amount – 12/31/2022 4,912,753
Carrying amount – 12/31/2023 5,000,000
* P4,912,753 x 14% equals P678,785. There is a difference

of P538 due to rounding of present value factors.
Journal entries on December 31, 2021
Cash 600,000

Statement presentation - December 31, 2021

Unearned Interest Income (231,800-67,548) ( 164,252)
Carrying amount – 12/31/2021 4,835,748
The carrying amount is actually the amortized cost.

Cash 600,000

Cash 600,000

Cash 5,000,000
Impairment of loan
PFRS 9, paragraph 5.5.1, provides that an entity shall
recognize a loss allowance for expected credit losses on
financial asset measured at amortized cost.
Paragraph 5.5.3 provides that an entity shall measure the loss

allowance for a financial instrument at an amount equal to the
lifetime expected credit losses of the credit risk on that
financial instrument has increased significantly since initial
recognition.
Credit losses are the present value of all cash shortfalls.
Expected credit losses are an estimate of credit losses over

the life of the financial instruments.
Measurement of impairment
When measuring expected credit losses, an entity should
consider:
a. The probability-weighted outcome
The estimate should reflect the possibility that a
credit loss occurs and the possibility that no credit loss
occurs.
b. The time value of money
The expected credit losses should be discounted.
c. Reasonable and supportable information that is
available without undue cost or effort.
PFRS 9 does not prescribe particular method of
measuring expected credit losses.
An entity may use various sources of data both internal and

entity-specific and external in measuring expected credit
losses.
The amount of impairment loss can be measured by the

difference between the carrying amount and the present
value of estimated future cash flows discounted the original
effective rate.
* The carrying amount of the loan receivable shall be

reduced either directly or through the use of an allowance
account.
Measuring of credit risk
Credit risk is the risk that one party to a financial
instrument will cause a financial loss for the other party by
failing to discharge an obligation.
The risk contemplated is the risk that the issuer will fail to
perform a particular obligation.
The risk does not necessarily relate to the credit worthiness

of the issuer.
For example, if an entity issued a collateralized liability and
non-collateralized liability that are otherwise identical, the
credit risk of the two liabilities will be different.
The credit risk of the collateralized liability is surely less

than the credit of the non-collateralized liability.
* The credit risk for a collateralized liability may be zero.

International Bank loaned P5,000,000 to Bankard Company on
January 1, 2019.
The terms of the loan require principal payment of P1,000,000

each year for 5 years plus interest at 10%.
The first principal and interest payment is due on December 31,

2019. Bankard Company made the required payments on
December 31, 2019 and December 31, 2020.
However during 2021, Bankard Company began to experience

financial difficulties and was unable to make the required
principal and interest payment on December 31, 2021.
On December 31, 2021, International Bank assessed the
collectibility of the loan and has determined that the remaining
principal payments will be collected but the collection of the
interest is unlikely.
The loan receivable has carrying amount of P3,300,000

including the accrued interest of P300,000 on December 31,
2021. International Bank projected the cash flows from loan on
December 31, 2021.
Date of Cash Flow Amount Projected
December 31, 2022 500,000
December 31, 2023 1,000,000
December 31, 2024 1,500,000
Using the original effective rate of 10%, the present value of 1 is

.9091 for one period, .8264 for two periods and .7513 for three
periods.
Present value of cash flows
December 31, 2022 ( 500,000 x.9091) 454,550

December 31, 2023 (1,000,000 x.8264) 826,400
December 31, 2024 (1,500,000 x.7513) 1,126,950
Total present value of cash flow 2,407,900
Computation of impairment loss

The impairment loss is the difference between the carrying
amount of the loan and the present value of the cash flows.
Carrying amount of loan 3,300,000

Present value of cash flows 2,407,900
Impairment loss 892,100

Journal entry on December 31, 2021
Loan impairment loss 892,100
Allowance for loan impairment 592,100
The accrued interest receivable is credit directly because

the collection of interest is unlikely.
Statement presentation on December 31, 2021

Allowance for loan impairment ( 592,100)
Carrying amount 2,407,900

1. To record the cash collection:
Cash 500,000
Loan receivable 500,000
2. To record the interest income using the effective interest

method:
The interest income for 2022 is computed by multiplying the

carrying amount of the loan by the effective rate.
Thus, P2,407,900 times 10% equals P240,790.
Note that the recognition of interest income is charged against

the allowance for loan impairment account.
1. To record the cash collection:
Cash 1,000,000
Loan receivable 1,000,000
2. To record the interest income:

Loan Receivable – December 31, 2022 2,500,000

Allowance for loan impairment
(592,100 – 240,790) ( 351,310)
Carrying amount – December 31, 2022 2,148,690

1. To record the final cash collection:
Cash 1,500,000
2. To record the interest income:

Loan Receivable – December 31, 2023 1,500,000

(351,310 – 214,869) ( 136,441)
Carrying amount – December 31, 2023 1,363,559
Interest Income for 2024 (10% x 1,363,559) 136,356
*There is a difference of P85 between P136,441 and P136,356 due to

rounding of present value factors.
Urban Bank granted a loan of P3,000,000 to a borrower on
January 1, 2021. The terms of the loan were payment in full on
December 31, 2026 plus annual interest payment at 8% ever
December 31. The first interest payment was made on
December 31,2021.
On December 31, 2021 due to financial difficulties, the borrower

informed Urban Bank that it probably would miss the interest
payments for the next two years.
After that, the borrower expects to resume the annual interest

payment but the principal would be paid on December 31, 2027
or one year late with interest paid for that additional year.
Schedule of payments from the borrower
December 31,2022 No interest payment 0

December 31,2023 No interest payment 0
December 31,2024 Interest payment (8%x3,000,000) 240,000
December 31,2025 Interest payment 240,000
Principal payment 3,000,000
Using the original effective interest rate of 8%, the present value
of 1 is .794 for three periods, .735 for four periods, .631 for five
periods, and also .630 for six periods.
Computation
The present value of the future interest and principal payments can
then be computed as follows:
December 31,2023 (240,000 x .794) 190,560

December 31,2024 (240,000 x .735) 176,400
December 31,2025 (240,000 x .681) 163,440
December 31,2026 (3,240,000 x .630) 2,041,200
Total present value of loan 2,571,600
Carrying amount of loan equal to principal only

because there is no accrued interest on
December 31, 2020 3,000,000
Present value of loan 2,571,600
Impairment loss 428,400
Journal entries
2021
Jan. 1 Loan Receivable 3,000,000
Cash 3,000,000
Dec.31 Cash 240,000
31 Loan impairment loss 428,400
2022
Dec.31 Allowance for loan impairment 205,728
Interest income (8%x 2,571,600) 205,728
2023
Dec.31 Allowance for loan impairment 222,672*
(428,400 – 205,728)
Loan receivable – December 31,2022 3,000,000
(428,400 – 205,728) ( 222,672)
Carrying amount – December 31,2022 2,777,328
*8% times P2,777,328 equals P222,186 or a difference of

P486 due to rounding of present value factors.
Note that the allowance for loan impairment is amortized

only over two years, 2022 and 2023, because it is during
these years that the borrower made a default.
2024
Dec. 31 Cash 240,000
2025
Dec.31 Cash 240,000
2026
Dec.31 Cash 240,000
2027
Dec.31 Cash 3,240,000
Nasty Bank granted a loan to a borrower on January 1, 2021. The
interest on the loan is 10% payable annually starting December 31,
2021. The loan matures in three years on December 31, 2023.

Direct Origination cost incurred 150,000
Origination fee received from the borrower 342,100
After considering the origination fee received from the borrower

and the direct origination cost incurred, the effective rate on the
loan is 12%.
Required:
Prepare journal entries for 2021, 2022 and 2023.
2021
Cash 4,000,000
Cash 342,100
Cash 150,000
Dec.31 Cash 400,000
Received Income amount
01/01/2021 3,807,900
12/31/2021 400,000 456,948 56,948 3,864,848
12/31/2022 400,000 463,782 63,782 3,928,630
12/31/2023 400,000 471,370* 71,370 4,000,000
*12% x 3,928,630 equals 471,435 or a difference of P65 due to

rounding.
2022
Dec.31 Cash 400,000
2023
Dec.31 Cash 400,000
31 Cash 4,000,000
Pauper Bank granted a loan to a borrower on January 1, 2021.
The interest on the loan is 8% payable annually starting December
31, 2021. The loan matures in three years on December 31, 2023.

Origination fee received from the borrower 100,000
After considering the origination fee charged to the borrower and

the direct origination cost incurred, the effective rate on the loan is
6%.
Required:
1. Prepare journal entries for 2021, 2022 and 2023.
2. Present loan receivable on December 31,2021.
Requirement 1
2021
Cash 3,000,000
Direct Origination Cost 260,300
Cash 260,300
Cash 100,000
Direct origination cost 100,000
Dec.31 Cash 240,000
Direct Origination cost 50,382
Received Income amount
(8%) (6%)
01/01/2020 3,160,300
12/31/2020 240,000 189,618 50,382 3,109,918
12/31/2021 240,000 186,595 53,405 3,056,513
12/31/2022 240,000 183,487 56,513 3,000,000
2022
Dec.31 Cash 240,000
2023
Dec.31 Cash 240,000
Cash 3,000,000
Requirement 2
Non-current asset: (12/31/21)
Carrying amount 3,109,918
On January 1, 2021, Empress Bank granted a loan to a borrower.
The interest on the loan is 10% payable annually on December
31,2021. The loan matures in three years on December 31,2023.

Origination fee charged against the borrower 200,000
After considering the origination fee charged against the borrower

and the direct origination cost incurred, the effective rate on the loan
is 8%.
Required:
1. Determine the carrying amount of the loan on January 1,2021.
2. Prepare a table of amortization of the direct origination cost.
3. Prepare journal entries for 2021, 2022 and 2023.
Requirement 1
Origination fee charged against borrower ( 200,000)
Carrying amount – January, 2021 5,257,500
Requirement 2
received income amount
(10%) (8%)
01/01/2021 5,257,500
12/31/2021 500,000 420,600 79,400 5,178,100
12/31/2022 500,000 414,248 85,752 5,092,348
12/31/2023 500,000 407,652 92,348 5,000,000
Requirement 3
2021
Cash 5,000,000
1 Direct origination cost 457,500
Cash 457,500
1 Cash 200,000
Dec.31 Cash 500,000
31 Interest income 79,400
2022
Dec.31 Cash 500,000
2023
Dec.31 Cash 500,000
31 Cash 5,000,000
Problem 7-5 (Solvent Company)
Loan Receivable, 12/31/2021 6,000,000

Accrued Interest (6,000,000 x 8%) 480,000
Total 6,480,000
Present Value of loan
2021 (1,000,000 x 0.93) 930,000
2022 (2,000,000 x 0.86) 1,720,000
2023 (3,000,000 x 0.79) 2,370,000 5,020,000
Impairment loss 1,460,000
Journal entries:
2021
12/31 Impairment loss 1,460,000
Accrued Interest Receivable 480,000
2022
12/31 Cash 1,000,000

Interest income (8% x 5,020,000) 401,600
2023
12/31Cash 2,000,000
12/31 Allowance for loan impairment 353,728

Interest income (8% x 4,421,600) 353,728
Loan Receivable.12/31/22 5,000,000
Allowance for loan impairment (578,400)
Carrying amount, 12/31/22 4,421,600
Inteest income (4,421,600 x 8%) 353,728

Three-stage impairment approach
Stage 1 – This stage covers debt instruments that have not
declined significantly in credit quality since initial recognition or
that have low credit risk.
Under this scenario, a 12-month expected credit risk is
recognized.
Stage 2 – This stage covers debt instruments that have

declined significantly in credit quality since initial recognition
but do not have objective evidence of impairment.
Under this scenario, a lifetime expected credit loss is
recognized.
There is rebuttable presumption that there is a
significant increase in credit risk if the contractual payments
are more than 30 days past due.
Stage 3 – This stage covers debt instruments that have
objective evidence of impairment at the reporting date.
Under this scenario, a lifetime expected credit loss is
recognized
12-month expected credit loss

A 12-month expected credit loss is defined as the portion of the
lifetime expected credit loss from default events that are possible
within 12 months after the reporting period.
Lifetime expected credit loss

Lifetime expected credit loss is defined as the expected credit
loss that results from all default events over the expected life of
the instrument.
Lifetime expected credit loss shall always be recognized for

trade receivables through aging, percentage of accounts
receivable and percentage of sales.
Interest income
a. Under stages 1 and 2, interest income is computed
based on the gross carrying amount or face amount.
b. Under stage 3, interest income is computed based on

the net carrying amount which is equal to the gross
carrying amount or face amount minus allowance for credit
loss.
CHAPTER 8
RECEIVABLE FINANCING
Pledge, assignment and factoring
VALIX ET AL. (2021). INTERMEDIATE ACCOUNTING 1

Concept of receivable financing
• Receivable financing is the financial flexibility or capability of an entity to
raise money out of its receivables.
• During a general business decline, an entity may find itself in tight cash
position because sales decrease and customers are not paying accounts
on time.
• But the entity's current accounts and notes payable must continue to be
paid if its credit standing is not to suffer.
• The entity then would be in a financial distress as collections of receivable

are delayed but cash payments for obligations must be maintained.
Concept of receivable financing
• Under these circumstances, if the situation becomes very critical, the entity
may be forced to look for cash by financing its receivables.
Forms of receivable financing

1. Pledge of accounts receivable
2. Assignment of accounts receivable
3. Factoring of accounts receivable
4. Discounting of notes receivable
Pledge of accounts receivable
• When loans are obtained from the bank or any lending institution, the
accounts receivable may be pledged as collateral security for the payment of
the loan.
• Normally, the borrowing entity makes the collections of the pledged accounts
but may be required to turn over the collections to the bank in satisfaction for
the loan.
• No complex problems are involved in this form of financing except the

accounting for loan.
• The loan is recorded by debiting cash and discount on note payable if loan is
discounted, and crediting note payable.
Pledge of accounts receivable
• The subsequent payment of the loan is recorded by debiting note
payable and crediting cash.
• With respect to the pledged accounts, no entry would be

necessary. It is sufficient that disclosure thereof is made in a note
to financial statements.
ILLUSTRATION
On November 1, 2021, an entity borrowed P1,000,000 from Philippine National
Bank and issued a promissory note for the same.
The term of the loan is one year and discounted at 12%. The entity pledged
accounts receivable of P2,000,000 to secure the loan.
On November 1, 2021, the journal entry to record the loan is:
Cash 880,000
Discount on note payable 120,000
Note payable - bank 1,000,000
ILLUSTRATION
If the loan is discounted, in the banking parlance this means that the interest
for the term of the loan is deducted in advance.
Face value of loan

1,000,000
Interest deducted in advance (1,000,000 x 12%) (120,000)
Net proceeds
Statement presentation
On December 31, 2021, using the straight line method, the discount on note
payable is amortized as interest expense for two months from November 1 to
December 31.
Interest expense (120,000 x 2/12) 20,000

On December 31, 2021 the note payable-bank and the discount on note payable
are presented as follows:
Current liabilities:
Discount on note payable ( 100,000)
Carrying amount 900,000
A note to financial statements may appear as follows:
“The note payable to bank matures on November 1, 2022 and is secured by accounts receivable
with face value of P2,000,000.”
On November 1, 2022, the payment of the bank loan is recorded.

Cash 1,000,000
And the discount on note payable is finally amortized.
Interest expense 100,000

Assignment of accounts receivable
• Assignment of accounts receivable means that a borrower called the
assignor transfers rights in some accounts receivable to a lender called
assignee in consideration for a loan.
• The assignment is a more formal type of pledging of accounts

receivable. Assignment is secured borrowing evidenced by a financing
agreement and a promissory note both of which the assignor signs.
• However, pledging is general because all accounts receivable serve as

collateral security for the loan.
• On the other hand, assignment is specific because specific accounts

receivable serve as collateral security for the loan.
Assignment of accounts receivable
• Assignment may be done either on a
(1) nonnotification or
(2) notification basis.
Non-notification basis
- customers are not
informed that their
accounts have been
assigned.
- the customers
continue to make
payments to the
assignor, who in turn
remits the collections
to the assignee. Source: Phil. Accounting Wiz Tutorials
Notification basis
- customers are
notified to make their
payments directly to
the assignee.
Source: Phil. Accounting Wiz Tutorials

ILLUSTRATION - NONNOTIFICATION BASIS
April
1 An entity assigned P700,000 of accounts receivable to a bank under
a nonnotification arrangement. The bank advances 80% less a service
charge of P5,000.
The entity signed a promissory note that provides for interest of 1%

per month on the unpaid loan balance.
To separate the assigned accounts:

Accounts receivable - assigned 700,000
April
1 To record the loan:
Cash (560,000 - 5,000) 555,000
Note Payable - bank 560,000
5 Issued credit memo for sales return to a customer whose

account was assigned, P20,000.
Sales return 20,000

April
10 Collected P300,000 of the assigned accounts less 2% discount.
Cash 294,000
Sales discount (2% x 300,000) 6,000
30 Remitted the total collections to the bank plus interest for one month.
Note payable - bank 294,000

Interest expense (1% x 560,000) 5,600
Cash 299,600
May
7 Assigned accounts of P15,000 proved worthless.
20 Collected P300,000 of the assigned accounts.
Cash 300,000
30 Remitted the total amount due the bank to pay off the loan balance
plus interest for one month.
Note payable - bank (560,000 - 294,000) 266,000

Interest expense (1% x 266,000) 2,660
Cash 268,660
May
30 To transfer the remaining balance of assigned accounts to accounts
receivable:
Total accounts receivable - assigned 700,000
Less: Collections (294,000 + 300,000) 594,000

Sales return 20,000
Worthless accounts 15,000 635,000
Balance 65,000
ILLUSTRATION - NOTIFICATION BASIS
July
1 An entity assigned P1,000,000 of accounts receivable to a bank under a
notification arrangement. The bank loans 80% less 4% service charge on the
gross amount assigned.
The entity signed a promissory note that provides for 1% interest per
month on the unpaid loan balance.
July 1 Accounts receivable – assigned 1,000,000

Cash (800,000 - 40,000) 760,000

Service charge (4% x 1,000,000) 40,000
July
31 Received notice from bank that P600,000 of the assigned accounts
were collected less 2% discount. A check was sent to the bank for the
interest due.

Sales discount (2% x 600,000) 12,000
Interest expense (1% x 800,000 ) 8,000

Cash 8,000
August
31 Received notice from the bank that P300,000 of the assigned
accounts were collected. Final settlement was made by the bank for the
excess collections together with the uncollected assigned accounts of
P100,000.
Cash 85, 880

Interest expense 2, 120

Computation
Loan from bank 800,000

Less: July collection by bank 588,000
Balance due to bank 212,000
August collection by bank 300,000

Less: Loan balance 212,000
Excess collection 88,000
Less: Interest (1% x 212,000) _ 2,120
Remittance from bank 85,880
An entity provided the following accounts at year-end:
Accounts receivable - unassigned 4,000,000
Accounts receivable - assigned 1,000,000
Note payable - bank (related to assignment) 400,000
Accounts receivable - unassigned 4,000,000

Total 5,000,000
Allowance for doubtful accounts ( 100,000)
Net realizable value 4,900,000
The net realizable value of P4,900,000 is included in the caption “trade and
other receivables”.
Equity in assigned accounts
Moreover, the entity shall disclose its equity in the assigned

accounts determined as follows:

Note payable - bank ( 400,000)
Equity in assigned accounts 600,000
• Factoring is a sale of accounts
Factoring receivable on a without recourse,
notification basis.
• entity sells accounts receivable to a

bank or finance entity called a factor.
• a gain or loss is recognized for the

difference between the proceeds
received and the net carrying amount of
the receivables factored.
• an entity actually transfers ownership of the

accounts receivable to the factor.
• factor assumes responsibility for uncollectible

factored accounts.
Factoring
• Because of the nature of the transaction, the customers whose
accounts are factored are notified and required to pay directly to the
factor.
• The factor has then the responsibility of keeping the receivable records
and collecting the accounts.
FACTORING MAY TAKE THE FORM OF THE FOLLOWING:

a. Casual factoring
b. Factoring as a continuing agreement.
Casual factoring
• If an entity finds itself in a critical cash position, it may be forced to
factor some or all of its accounts receivable at a substantial discount to
a bank or finance entity to obtain the much needed cash.
For example, an entity factored P100,000 of accounts receivable with an

allowance for doubtful accounts of P5,000 for P80,000.
Journal entry to record the sale
Cash 80,000
Loss on factoring 15,000
Factoring as a continuing agreement
• Factoring may involve a continuing arrangement where a finance entity purchases
all of the accounts receivable of a certain entity.
• In this setup, 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 then assumes the credit function as well as the collection function.
• For compensation, typically 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.
Factoring as a continuing agreement
• The factor may withhold a predetermined amount as a protection against
customer returns and allowances and other special adjustments.
• This amount withheld is known as the “factor's holdback”.
• The factor's holdback is actually a receivable from factor and classified as

current asset.
• Final settlement of the factor's holdback is made after the factored

receivables have been fully collected.
ILLUSTRATION
An entity factored accounts receivable of P500,000 with credit terms of 2/10,
n/30 immediately after shipment of the goods to the customer.
The factor charged a 5% commission based on the gross amount of the

receivables factored.
In addition, the factor withheld 20% of the amount of the receivables factored to
cover sales return and allowances.
Journal entry to record the factoring

Cash 365,000
Commission 25,000
Receivable from factor 100,000
Account receivable 500,000
ILLUSTRATION
Computation
Gross amount 500,000

Less: Sales discount (2% x 500,000) 10,000
Commission (5% x 500,000) 25,000
Factor's holdback (20% x 500,000) 100,000 135,000
Cash received from factoring 365,000
If the customer is subsequently allowed a credit of P50,000 for damaged

merchandise, the journal entry is:
Sales return and allowance 50,000

ILLUSTRATION
When all the receivables factored are collected by the factor with no
further returns and allowances, the final settlement with the factor is
recorded as follows:
Cash (100,000 49,000) 51,000

• A credit card is a plastic card which enables the holder
to obtain credit up to a predetermined limit from the
issuer of the card for the purchase of goods and
services.
Credit card
• The credit card has enabled retailers and other
businesses to continue to sell goods and services
where the customers obtain possession of the goods
immediately but do not have to pay for the goods for
about one month.
• The major credit cards in the Philippines are Diners

Club, American Express, VISA and MasterCard.
Credit card
• These entities are generally responsible for approving the credit of customers
and collecting the receivables for a service fee from 1% to 5% of the credit
card sales.
• Generally, if customer buys goods and uses a credit card, the credit card
receipt must be forwarded by the retailer to the card issuer who will then pay
the retailer the appropriate amount minus the credit service charge.
• Two entries necessary, one entry at the time of sale, and another entry when
payment is received from the card issuer.
ILLUSTRATION
Credit card sales to customers using Diners Club amount to P200,000 for a certain period.
The credit card receipts are forwarded to Diners Club and payment is subsequently received
from Diners Club minus a 3% service charge.
1. To record the credit card sales:
Accounts receivable - Diners Club 200,000

Sales 200,000
2. To record the payment from Diners Club:
Cash 194,000
Credit card service charge (200,000 x 3%) 6,000
Accounts receivable - Diners Club 200,000
ANOTHER ILLUSTRATION
There are some credit cards that allow the retailer business to deposit the credit
card receipts directly to a current account.
The bank accepts the credit card receipts and immediately increases the current
account of the retailer for the amount of credit card sales minus the credit card
service charge.
This arrangement is in effect a form of factoring of accounts receivable because

the credit card sales are treated as cash sales by the retailers.
ANOTHER ILLUSTRATION
For example, credit card sales amounted to P200,000 with 5%
service charge or P10,000.
The journal entry to record the credit card sales under this form of
arrangement is:
Cash 190,000
Credit card service charge 10,000
Sales 200,000
PROBLEM 8-1
Pittance Company provided the following information in connection with a bank loan.
March 1 Pittance Company borrowed P2,000,000 from bank on a

six-month note carrying an interest of 12% per annum.
Accounts of P3,000,000 are pledged to secure the loan.
April 1 Pledged accounts of P1,000,000 are collected minus 2%

discount.
June 1 The remaining pledged accounts are collected.
Sept. 1 The bank loan is repaid plus interest.

PROBLEM 8-1 (PLEDGING)
March 1 Cash 2,000,000
Note payable-bank 2,000,000
April 1 Cash (1,000,000 - 20,000) 980,000

Sales discount (1,000,000 x 2%) 20,000
June 1 Cash 2,000,000

Sept. 1 Note payable-bank 2,000,000

Interest expense
(2,000,000 x 12%x 6/12) 120,000
Cash 2,120,000
PROBLEM 8-4
Docile Company assigned certain accounts receivable to a bank for a loan on
the following basis: 75% cash advance, 4% service charge on gross accounts
assigned, 2% interest per month is to be charged, and the bank makes the
collections. The entity signed a promissory note for the loan.
July 1 Received remittance upon the specific assignment of P1,500,000 in
accounts to the bank.
Aug 1 Received notice from bank that P800,000 of the assigned accounts were
collected. A check was sent to the bank for one month interest charge.
Sept.1 Received notice from bank that assigned accounts of P500,000 were
collected in full and the remaining accounts of P200,000 were being
returned. Accordingly, a check was received from bank in settlement of the
assignment contact. In making the settlement, the bank deducted the interest
charge for the corresponding period.
PROBLEM 8-4 (NOTIFICATION BASIS)
July 1 Accounts receivable - assigned 1,500,000
Cash (1,125,000 - 60,000) 1,065,000

Service charge (1,500,000 x 4%) 60,000
Note payable - bank (1,500,000 x 75%) 1,125,000
Aug 1 Note payable - bank 800,000

Interest expense (1,125,000 x 2%) 22,500

Cash 22,500
PROBLEM 8-4 (NOTIFICATION BASIS)
Sept. 1 Cash 168,500
Interest expense(325,000x2%) 6,500
Note payable-bank(1,125,000-800,000) 325,000
Accounts receivable - assigne 500,000

PROBLEM 8-5
Grateful Company provided the following transactions:
July 1 The entity assigned P500,000 of accounts receivable to its bank on a
nonnotification basis in consideration for a loan. On this date, the bank
advanced P400,000 less a service charge of 2% of the total accounts assigned,
and the entity signed a promissory note bearing interest of 1% per month on
the unpaid loan balance at the beginning of the month.
Aug. 1 Collected P330,000 on assigned accounts. The entity remitted this
amount to the bank in payment first for the interest and the balance to
the principal.
Sept.1 Collected the remaining balance of assigned accounts. The entity paid off
the remaining loan balance.
PROBLEM 8-5
(NONNOTIFICATION BASIS)
July 1 Accounts receivable - assigned 500,000
Cash 390,000
Aug 1 Cash 330,000
Cash 330,000
PROBLEM 8-5 (NONNOTIFICATION BASIS)
Sept. 1 Cash(500,000-330,000) 170,000
Interest expense(74,000x1%) 740

Note payable - bank(400,000-326,000) 74,000
Cash 74,740
PROBLEM 8-9
Generous Company provided the following information with respect to factoring of
July 1 Factored P800,000 of accounts receivable without recourse with a bank on

notification basis.
The bank charged a factoring fee of 5% of the amount of accounts

receivable factored and withheld 10% of the accounts receivable factored to
cover sales return and allowances.
Jul 15 Received notice from the bank that factored accounts are fully collected less
sales return and allowances of P20,000.
Jul 31 Received a check from the bank as a final settlement of the factoring contract.
PROBLEM 8-9 (FACTORING)
July
1 Cash 680,000
15 Sales return and allowances 20,000

31 Cash 60,000
CHAPTER 9
RECEIVABLE FINANCING
Discounting of note receivable
Source: Valix, et al. 2021. Intermediate Accounting 1

Concept of Discounting
As a form of receivable financing, discounting specifically
pertains to note receivable.
o In promissory note, original parties are the maker and payee.
o Maker – the one who is liable
o Payee – the one entitled to payment on the date of maturity
When a note is negotiable, the payee may obtain cash before

maturity date by discounting the note at a bank or other financing
company.
o To discount the note, the payee must endorse it.
o Payee becomes an endorser while bank becomes an endorsee.

Endorsement
o It is the transfer of right to a negotiable instrument by simply
signing at the back of the instrument.
o It may be with recourse which means that the endorser shall
pay the endorsee if the maker dishonors the note.
✓ In legal parlance, endorsement is the secondary liability of the
endorser.
✓ In accounting parlance, endorsement is the contingent liability
of the endorser.
o Endorsement may be without recourse which means that the
endorser avoids future liability even if the maker refuses to pay
the endorsee on the date of maturity.
o In the absence of any evidence to the contrary, endorsement is
assumed to be with recourse.
Terms (Discounting of Note)
Net Proceeds – the discounted value of the note received by the
endorser from the endorsee. It is equal to maturity value minus
discount.
Maturity Value – the amount due on the note at the date of
maturity. Principal plus interest equals the maturity value.
Maturity Date – date on which the note should be paid.
Principal – the amount appearing on the face of the note. Also
referred as face value.
Interest – amount of interest for the full term of the note. It is
computed as principal x rate x time.
Interest Rate – rate appearing on the face of the note.
Terms (Discounting of Note)
Time – period within which interest shall accrue. For discounting
purposes, it is the period from the date of the note to maturity
date. Time is the entire period or “full term” of the note.
Discount – amount of interest deducted by the bank in advance.
It is equal to maturity value x discount rate x discount period.
Discount rate – rate used by the bank in computing the discount.
Note: Discount Rate and Interest Rate are different from each
other. If no discount rate is given, the interest rate is safely
assumed as the discount rate.
Discount period – period of time from date of discounting to
maturity date. It is simply computed, 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.
On January 1, 2021, an entity received a one-
year P500,000 note bearing an annual
interest of 8%. The note was discounted on
April 1, 2021 at a rate of 10%
Jan. 1, 2021 April 1, 2021

Dec 31, 2021
date date
maturity date
of the note of discounting
discount period= 9 months
term of the note= 12 months or one year

Illustration – discounting without recourse
A P1,000,000, 180-day , 12% note dated July 1 was received from
a customer and discounted without recourse on August 30 at
15% discount rate.
Computation
Maturity Value = Principal + Interest

Principal 1,000,000
Interest (1,000,000 x 12% x 180/360) 60,000
Maturity Value 1,060,000
Observe that the interest must be for the “full term” of the note
determining the maturity value.
Discount = maturity value x discount rate x period
Discount (1,060,000 x 15% x 120/360) 53,000
The discount period is the remaining term of the note on the date of
discounting.
Term of note 180 days
Less: Days expired from July 1 to August 30 60 days
Discount period-remaining term 120 days
In counting, exclude the first day but include the last day.
Net proceeds from discounting

Maturity value 1,060,000
Discount (53,000)
Net proceeds 1,007,000
Carrying amount of the note receivable
Principal 1,000,000
Accrued interest receivable(1,000,000 x 12% x 60/360) 20,000
Carrying amount of note receivable 1,020,000
The accrued interest receivable is interest earned from July 1 to

the date of discounting on August 30, or 60 days.
Gain or Loss on note discounting

Net Proceeds 1,007,000
Loss on note discounting (13,000)
Accounting for note receivable discounting
The accounting for note receivable discounting depends on
whether the discounting is with or without recourse.
In the illustration, the discounting is without recourse, so the sale

of the note receivable is absolute and therefore there is no
contingent liability.
Journal Entry
Cash 1,007,000
Loss on note receivable discounting 13,000
Illustration – discounting with recourse
A P2,400,000, 6-month, 12% note dated February 1 is received
from a customer by an entity and discounted by First Bank on
March 1 at 15%.
Principal 2,400,000
Interest (2,400,000 x 12% x 6/12) 144,000
Maturity Value 2,544,000
Discount (2,544,000 x 15% x 5/12) (159,000)
Term of note 6 months

Less: Age of note (Feb 1 to March 1 ) 1 months
Discount Period 5 months
Principal 2,400,000
Accrued Interest Receivable(2,400,000 x 12% x 1/12) 24,000

Loss on note receivable discounting (39,000)
If the discounting is with recourse, the transaction is accounted

for as either of the following.
a. Conditional sale of note receivable recognizing a contingent
liability
b. Secured borrowing
Conditional Sale
If the discounting is treated as a conditional sale of note
receivable, the journal entry to record the transaction on March 1
is as follows:
Cash 2,385,000
Loss on note receivable discounting 39,000
Note receivable discounted 2,400,000
The note receivable discounted account is deducted from the total

notes receivable when preparing the statement of financial
position with disclosure of the contingent liability.
Note is paid by maker on maturity
On August 1, date of maturity, the note is paid by the maker to the
First Bank. The contingent liability is extinguished as follows:
Note is dishonored by maker

The note is dishonored by the maker on August 1, and the entity
pays the First Bank the maturity value of the note, P2,544,000,
plus protest fee and other bank charges of P6,000.
The total payment is charged to accounts receivable.

Journal Entries
1. To record the payment to First Bank:
Accounts Receivable 2,550,000
Cash 2,550,000
2. To cancel the contingent liability:

Secured Borrowing
If the discounting is treated as a secure borrowing, the note
receivable is not derecognized but instead an accounting liability
is recorded at an amount equal to the face amount of the note
receivable discounted.
Journal entry
Cash 2,385,000
Liability for note receivable discounted 2,400,000
There is no objection if the interest expense is “netted” against the
interest income or a net interest expense of P15,000 because the
discounting transaction is a borrowing.
There is no gain or loss on discounting if the note receivable
discounting is accounted for as secured borrowing.
Note is paid by maker on maturity

If the note is paid by the maker to the First Bank, the liability for
note receivable discounted and note receivable are derecognized.
Note is dishonored by maker

The note is dishonored by the maker on August 1, and the entity
pays the First Bank the maturity value of the note, P2,544,000
plus protest fee and other bank charges of P6,000.
Journal Entries
1. To record the payment to First Bank:
Cash 2,550,000
2. To derecognize the liability for note receivable discounted and
note receivable:
Conditional sale or secured borrowing
PFRS 9, paragraph 3.2.3, provides that an entity shall
derecognize a financial asset when either on of the following
criteria is met:
a. The contractual rights to the cash flows of the financial
asset have expired.
b. The financial asset has been transferred and the
transfer qualifies for derecognition based on the extent of
transfer of risks and rewards of ownership.
Problem 9-1
Walleye Company provided the following transactions:
Jan. 1 The entity sold merchandise for P500,000 accepting

a note of P500,000 for six months with interest to be
paid at maturity at 12%.
March 1 The entity discounted the note without resource at

the local bank at 15%.
July 1 The customer paid the bank in full.

Problem 9-1
Jan. 1 Notes receivable 500,000
Sales 500,000
Mach 1 Cash 503,000
Loss on NR discounting 6,500
Principal 500,000 Principal 500,000

Interest(500,000x12%x6/12) 30,000 Accrued Interest Receivable 10,000
Maturity Value 530,000 (500,000 x 12% x 2/12)
Discount(530,000x15%x4/12) (26,500) Carrying amount of NR 510,000
Net Proceeds 503,500
Net Proceeds 503,500
Carrying amount of NR 510,000
Loss on NR discounting (6,500)
July 1 NO ENTRY
Problem 9-2
Morale Company provided the following transactions:
March 14 Sale of merchandise, P2,050,000 to a customer,

FOB destination 2/10, n/30.
April 7 Receipt of a 60-day, 12% note dated April 5 from
the customer. The face of the note was the amount
of the invoice minus freight charge of P50,000 paid by
the customer in connection with the March 14 sale.
20 The note of the customer was discounted with the
bank at 15%.
June 4 Receipt of notification from bank that the customer
dishonored the note. Accordingly, the entity paid the bank
the amount due including protest fee and other charges
of P10,000.
July 4 Receipt of cash from the customer for the full amount of
indebtedness plus interest on the original face value.
Problem 9-2
March 14 Accounts receivable 2,050,000
Sales 2,050,000
April 7 Notes receivable 2,000,000
Freight out 50,000
April 20 Cash 2,001,750
Loss on NR discounting 8,250
Notes receivable discounted 2,000,000
Principal 2,000,000 Principal 2,000,000

Interest 40,000 Accrued Interest Receivable 10,000
(2,000,000x12%x60/360) (2,000,000x12%x15/360)
Maturity Value 2,040,000 Carrying amount of NR 2,010,000
Discount (38,250)
(2,040,000x15%x45/360) Net proceeds 2,001,750
Net Proceeds 2,001,750 Carrying amount of NR (2,010,000)
Loss on NR discounting (8,250)
June 4 Accounts receivable
(2,040,000+10,000) 2,050,000
Cash 2,050,000
Notes receivable discounted 2,000,000

July 4 Cash 2,070,000

(2,000,000x12%x30/360)
Problem 9-5
On August 31, 2021, Sunflower Company discounted
with recourse a customer’s note at the bank at discount
rate of 15%.
The note was received from the customer on August 1,

2021, term 90 days, had a face value of P5,000,000,
and carried an interest rate of 12%. The customer paid
the note to the bank on October 30, 2021, the date of
maturity.
Required:
Prepare journal entries to the discounting of note receivable,
assuming the discounting is accounted for as a secured
borrowing.
Problem 9-5
1. Cash 5,021,250
Principal 5,000,000 Principal 5,000,000
Interest 150,000 Accrued Interest Receivable 50,000
(5,000,000x12%x90/360) (5,000,000x12%x30/360)
Maturity Value 5,150,000 Carrying amount of NR 5,050,000
Discount (128,750)
(5,150,000x15%x60/360)
Net proceeds 5,021,250
Net Proceeds 5,021,250 Carrying amount of NR (5,050,000)
Loss on discounting (28,750)
2. Liability for note receivable discounted 5,000,000

CHAPTER 10
INVENTORIES
Valix, et al.
ctto
Inventories are assets held for sale in the ordinary course of
business, in the process of production for such sale or in the form of
materials or supplies to be consumed in the production process or in
the rendering of services.
Inventories encompass goods purchased and held for resale, for

example:
a. Merchandise purchased by a retailer and held for resale.
b. Land and other property held for resale by a subdivision entity and
real estate developer.
Inventories also encompass finished goods produced, goods in

process and materials and supplies awaiting use in the production
process.
Classes of Inventories
Inventories are broadly classified into two, namely inventories of
trading concern and inventories of manufacturing concern.
A trading concern is one that buys and sells goods in the same
form purchased.
The term “merchandise inventory” is generally applied to goods

held by a trading concern.
A manufacturing concern is one that buys goods which are altered

or converted into another form before they are made available for
sale.
The inventories of a manufacturing concern are:
a. Finished Goods
b. Goods in process
c. Raw materials
d. Factory or manufacturing supplies
Definitions
• Finished goods are completed products which are ready for sale
• Finished goods have been assigned their full share of manufacturing costs.
• Goods in process or work in process are partially completed products which

require further process or work before they can be sold.
• Raw materials are goods that are to be used in the production process.
No work or process has been done on them as yet by the entity inventorying
them.
• Factory or manufacturing supplies are similar to raw materials but their

relationship to the end product is indirect.
Goods includible in the inventory
• As a rule, all goods to which the entity has title shall be included in
the inventory, regardless of location.
• The phrase “passing of title” is a legal language which means “the

point of time at which ownership changes.”
Legal test
 Is the entity the owner of the goods to be inventoried?
 If the answer is in the affirmative, the goods shall be included in the
inventory.
 If the answer is in the negative, the goods shall be excluded from the
inventory.
Applying the legal test, the following items are includible in inventory:
a. Goods owned and on hand
b. Goods in transit and sold FOB destination
c. Goods in transit and purchased FOB shipping point
d. Goods out on consignment
e. Goods in the hands of salesmen or agents
f. Goods held by customers on approval or on trial.
Exception to the legal test
Installment contracts may provide for retention of title by the seller until the
selling price is fully collected.
Following the legal test, the goods sold on installment basis are still the property
of the seller and therefore normally includible in his inventory.
However, in such case, it is an accepted accounting procedure to record the

installment sale as a regular sale involving deferred income on the part of the
seller and as a regular purchase on the part of the buyer.
Thus, the goods sold on installment are included in the inventory of the buyer
and excluded from that of the seller, the legal test to the contrary
notwithstanding.
This is a clear example of economic substance prevailing over legal form.

Who is the owner of goods in transit?
This will depend on the terms, whether FOB destination or FOB
shipping point. FOB means free on board.
Under FOB destination, ownership of goods purchased is

transferred only upon receipt of goods by the buyer at the point
of destination.
Thus, under FOB destination, the goods in transit are still the
property of the seller.
Accordingly, the seller shall legally be responsible for freight

charges and other expenses up to the point of destination.
Who is the owner of goods in transit?
 On the other hand, if the term is FOB shipping point,

ownership is transferred upon shipment of the goods
and therefore, the goods in transit are the property of
the buyer.
 Accordingly, the buyer shall legally be responsible for
freight charges and other expenses from the point of
shipment to the point of destination.
ctto
Freight terms
Freight collect – This means that the freight charge on the goods
shipped is not yet paid. The common carrier shall collect the same from
the buyer. Thus, under this, the freight charge is actually paid by the
buyer.
Freight prepaid – This means that the freight charge on the goods
shipped is already paid by the seller.
The terms “FOB destination” and “FOB shipping point” determine

ownership of the goods in transit and the party who is supposed to pay
the freight charge and other expenses from the point of shipment to
the point of destination.
The terms “freight collect” and “freight prepaid” determine the party
who actually paid the freight charge but not the party who is
supposed to legally pay the freight charge.
Maritime shipping terms
FAS or Free alongside – A seller who ships FAS must bear all expenses and risk
involved in delivering the goods to the dock next to or alongside the vessel on
which the goods are to be shipped.
The buyer bears the cost of loading and shipment and thus, title passes to the
buyer when the carrier takes possession of the goods.
CIF or Cost, insurance and freight – Under this shipping contract, the buyer
agrees to pay in a lump sum the cost of the goods and freight charge only.
The shipping contract may be modified as CF which means that the buyer
agrees to pay in a lump sum the cost of the goods and freight charge only.
In either case, the seller must pay for the cost of loading. Thus, title and risk of
loss shall pass to the buyer upon delivery of the goods to the carrier.
Ex-ship – A seller who delivers the goods ex-ship bears all expenses and risk of
loss until the goods are unloaded at which time title and risk of loss shall pass to
the buyer.
Consigned goods
A consignment is a method of marketing goods in which the
owner called the consignor transfers physical possessions of
certain goods to an agent called consignee who sells them on
the owner’s behalf.
Consigned goods shall be included in the consignor’s inventory

and excluded from the consignee’s inventory.
Freight and other handling charges on goods out on

consignment are part of the cost of goods consigned.
When consigned goods are sold by the consignee, a report is

made to the consignor together with a cash remittance for the
amount of sales minus commission and other expenses
chargeable to the consignor.
For example, a consignee sells consigned goods for P100,000. This amount is
remitted to the consignor less commission of P15,000 and advertising P2,000.
The consignor simply records the cash remittance from the consignee as
follows:
Cash 83,000
Commission 15,000
Advertising 2,000
Sales 100,000
Incidentally, consigned goods are recorded by the consignor by means of a

memorandum entry.
Inventories are generally classified as current assets.
The inventories shall be presented as one line item in

the statement of financial position but the details of the
inventories shall be disclosed in the notes to financial
statements.
For example, the note shall disclose the composition of

the inventories of a manufacturing entity as finished
goods, goods in process, raw materials and
manufacturing supplies.
Accounting for inventories
Two system are offered in accounting for inventories,
namely
1. periodic system
2. perpetual system
periodic system
The periodic system calls for the physical counting of
goods on hand at the end of the accounting period to
determine quantities.
The quantities are then multiplied by the corresponding

unit costs to get the inventory value for balance sheet
purposes. This approach gives actual or physical
inventories.
The periodic inventory procedure is generally used when

the individual inventory items have small peso investment,
such as groceries, hardware and auto parts.
perpetual system
The perpetual system requires the maintenance
of records called stock cards that usually offer a
running summary of the inventory inflow and
outflow.
Stock cards are kept to reflect and control both
units and costs
A physical count of the units on hand should be
made at least once a year
commonly used where the inventory items
treated individually represent a relatively large
peso investment (cars, jewelry)
Illustration – Periodic system
1. Purchase of merchandise on account, P300,000.
Purchases 300,000
2. Payment of freight on the purchase, P20,000.
Freight in 20,000
Cash 20,000
3. Return of merchandise purchased to supplier, P30,000.

Purchase return 30,000
4. Sale of merchandise on account, P400,000, at 40% gross

Sales 400,000
5. Return of merchandise sold from customer, P25,000.
Sales return 25,000

6. Adjustment of ending inventory, P65,000.
Merchandise inventory-end 65,000

Income summary 65,000
Illustration – Perpetual system
1. Purchase of merchandise on account, P300,000.
Merchandise inventory 300,000
2. Payment of freight on the purchase, P20,000.
Cash 20,000
3. Return of merchandise purchased to supplier, P30,000.
4. Sale of merchandise on account, P400,000 at gross profit of 40%. The cost of
merchandise sold is 60% or P240,000.
Sales 400,000
Cost of goods sold 240,000
Under the perpetual system, the cost of merchandise sold is immediately
recorded because this is clearly determinable from the stock card.
5. Return of merchandise sold from customer, P25,000. The cost of the

merchandise returned is 60% or P15,000.
Sales of return 25,000


Cost of goods sold 15,000
6. Adjustment of ending inventory.
As a rule, the ending merchandise inventory is not adjusted. The balance of the
merchandise inventory account represents the ending inventory.
Inventory shortage or overage
In the illustration, the merchandise inventory account has debit
balance of P65,000.
If at the end of the accounting period, a physical count indicates

a different amount, and adjustment is necessary to recognize any
inventory shortage or average.
For example, if the physical count shows inventory on hand of

P55,000, the following adjustment is necessary:
Inventory shortage 10,0000

Merchandise inventory (65,000-55,000) 10,000
Inventory Shortage - treatment
The inventory shortage is usually closed to cost of

goods sold because this is often the result of
normal shrinkage and breakage in inventory.
However, abnormal and material shortage shall

be separately classified and presented as other
expense.
Trade discounts and cash discounts
Trade discounts are deductions from the list or catalog
price in order to arrive at the invoice price which is the
amount actually charged to the buyer.
Thus, trade discounts are not recorded.
The purpose of trade discounts is to encourage trading

or increase sales. Trade discounts also suggest to the
buyer the price at which the goods may be resold.
Cash Discounts
Cash discounts are deductions from the invoice price

when payment is made within the discount period. The
purpose of cash discount is to encourage prompt
payment.
Cash discount are recorded as purchase discount by the

buyer and sales discount by the seller
Purchase discount is deducted from purchases to arrive at

net purchase and sales discount is deducted from sales to
arrive at net sales revenue.
Illustration
The list price of a merchandise purchased is P500,000 less 20% and 10%, with
credit terms of 5/10, n/30.
This means that trade discounts are 20% and 10%, and the cash discount is 5% if
payment is made in 10 days.
The full amount of the invoice is paid if the payment is made after 10 days and
within the credit period of 30 days.
List price 500,000

First trade discount (20% x 500,000) (100,000)
400,000
Second trade discount (10% x 400,000) (40,000)
Invoice price 360,000
Cash discount (5% x 360,000) (18,000)
Payment within the discount period 342,000
The journal entry to record the purchase is:
Purchases 360,000
Note that the trade discounts are not recorded. The

journal entry to record the payment of the invoice within
the discount period is:

Cash 342,000
Purchase discounts 18,000
Methods of recording purchases
1. Gross method – Purchases and accounts payable are recorded

at gross.
2. Net method – Purchases and accounts payable are recorded
at net.
Illustration – Gross method
1. Purchase on account, P200,000, 2/10, n/30.
Purchases 200,000
2. Assume payment is made within the discount period.

Cash 196,000
Purchase discount 4,000
3. Assume payment is made beyond the discount period.

Cash 200,000
Illustration – Net method
1. Purchase on account, P200,000, 2/10, n/30.
Purchases 196,000
2. Assume payment is made within the discount period.

Cash 196,000
3. Assume payment is made beyond the discount period.

Purchase discount lost (other expense) 4,000
Cash 200,000
4. Assume it is the end of accounting period, no payment is made and the

discount period has expired.
Purchase discount lost 4,000

Gross method vs. net method
The cost measured under the net method represents the cash equivalent price
on the date of payment and therefore the theoretically correct historical cost.
However, in practice most entities record purchases at gross invoice amount.
Technically, the gross method violates the matching principle because

discounts are recorded only when taken or when cash is paid rather than when
purchases that give rise to the discounts are made.
Moreover, this procedure does not allocate discounts taken between goods
sold and goods on hand.
Despite its theoretical shortcomings, the gross method is supported on practical

grounds.
The gross method is more convenient than the net method from a
bookkeeping standpoint.
Moreover, if applied consistently over time, it usually produces no material

errors in the financial statements.
Cost of inventories
The cost of inventories shall comprise:
a. Cost of purchase
b. Cost of conversion
c. Other cost incurred in bringing the inventories to their present
location and condition.
Cost of purchase
The cost of purchase of inventories comprises the purchase price,
import duties and irrecoverable taxes, freight, handling and other costs
directly attributable to the acquisition of finished goods, materials and
services.
Trade discounts, rebates and other similar items are deducted in

determining the cost of purchase.
The cost of purchase shall not include foreign exchange differences

which arise directly from the recent acquisition of inventories involving a
foreign currency.
Moreover, when inventories are purchased with deferred settlement

terms, the difference between the purchase price for normal credit
terms and the amount paid is recognized as interest expense over the
period of financing.
Cost of conversion
The cost of conversion of inventories includes cost directly related to the units
of production such as direct labor.
It also includes a systematic allocation of fixed and variable production

overhead that is incurred in converting materials into finished goods.
Fixed production overhead is the indirect cost of production that remains

relatively constant regardless of the volume of production.
Examples are depreciation and maintenance of factory building and

equipment, and the cost of factory management and administration.
Variable production overhead is the indirect cost of production that varies

directly with the volume of production.
Examples are indirect labor and indirect materials.

Allocation of fixed production overhead
The allocation of fixed production overhead to the cost of
conversion is based on the normal capacity of the production
facilities.
Normal capacity is the production expected to be achieved on

average over a number of periods or seasons under normal
circumstances taking into account the loss of capacity resulting
from planned maintenance.
The amount of fixed overhead allocated to each unit of

production is not increased as consequence of low production or
idle plant.
Unallocated fixed overhead is recognized as expense in the

period in which it is incurred.
Allocation of variable production overhead
Variable production overhead is allocated to each unit

of production on the basis of the actual use of the
production facilities.
Allocation of variable production overhead
A production process may result in more than one product

being produced simultaneously.
This is the case, for example when joint products are produced
or where there is a main product and by-product.
When the costs of conversion are not separately identifiable,

they are allocated between the products on a rational and
consistent basis, for example, on the basis of the relative sales
value of each product.
Most by-products by their nature are not material.
By-products are measured at net realizable value and this

value is deducted from the cost of the main product.
Other cost
Other cost is included in the cost of inventories only to
the extent that it is incurred in bringing the inventories to
their present location and condition.
For example, it may be appropriate to include the cost

of designing product for specific customers in the cost of
inventories.
The following costs are excluded from the cost of
inventories and recognized as expense in the period when
incurred:
a. Abnormal amounts of wasted materials, labor and other

production costs.
b. Storage costs, unless these costs are necessary in the

production process prior to a further production stage.
Thus, storage costs on goods in process are capitalized but

storage costs on finished goods are expensed.
c. Administrative overheads that do not contribute to bringing

inventories to their present location and condition.
d. Distribution or selling costs.

Cost of inventories of a service provider
The cost of inventories of a service provider consists primarily of

the labor and other costs of personnel directly engaged in
providing the service, including supervisory personnel and
attributable overhead.
Labor and other costs relating to sales and general administrative

personnel are not included but are recognized as expense in the
period in which they incurred.
Problem 10-1
Amiable Company provided the following data at year-end:
Items counted in the bodega 4,000,000

Items included in the count specifically segregated
per sales contract 100,000
Items in receiving department, returned by customer,
in good condition 50,000
Items in ordered and in the received department,
invoice not received 400,000
Items ordered, invoice received but goods not
received. Freight is paid by seller. 300,000*
Items shipped today, invoice mailed, FOB shipping point 250,000*
Items shipped today, invoice mailed, FOB destination 150,000
Items currently being used for window display 200,000
Items on counter for sale 800,000
Items in receiving department, refused by us because
of damage 180,000*
Items included in count, damaged and unsalable 50,000
Items in the shipping department 250,000
Required:
Compute the correct amount of inventory.
Problem 10-1 (SOLUTION)
Items counted in the bodega 4,000,000

Items included in the count specifically segregated
per sales contract (100,000)
Items in receiving department, returned by customer,
in good condition 50,000
Items in ordered and in the received department,
invoice not received 400,000
Items shipped today, invoice mailed, FOB destination 150,000
Items currently being used for window display 200,000
Items on counter for sale 800,000
Items included in count, damaged and unsalable (50,000)
Items in the shipping department 250,000
5,700,000
PROBLEM 10-2 (p304)
Materials 1,400,000
Goods in process 650,000
Finished goods in factory 2,000,000
Finished goods-company owned retail store 500,000
(750,000/150%)
Finished goods-consignee 240,000
(400,000 x 60%)
Finished goods in transit 250,000
Finished goods on approval 100,000
Materials in transit 360,000
(330,000+30,000)
CORRECT INVENTORY 5,500,000
PROBLEM 10-3 (p304)
Finished goods 2,000,000

Finished goods by salesmen 100,000
Goods in process (720,000/80%) 900,000
Materials 1,000,000
Materials returned to supplier for replacement 100,000
Factory supplies (110,000+60,000) 170,000

Correct inventory 4,270,000
Problem 10-7
Fall Company began operations in the current year. The entity used perpetual
inventory system.
1. During the year, Fall Company purchased merchandise having a gross

invoice cost of P1,000,000. All purchases were made under the terms 2/10,
n/30, FOB destination.
2. Fall Company paid freight charge of P50,000.
3. During the year, Fall Company paid for 80% of the merchandise within the
discount period.
4. The remaining 20% was paid beyond the discount period.
5. Fall Company sold 70% of the merchandise it acquired for cash of
P1,200,000. the other 30% remained in inventory at year-end.
Required:
Prepare journal entries to record the transactions using gross method and net
method.
Problem 10-7 (SOLUTION)
Gross method
1. Merchandise inventory 1,000,000

Accounts payable 1,000,0000

Cash 50,000

Cash 784,000
Cost of sales 16,000

Cash 150,000
5. Cash 1,200,000
Sales 1,200,000

(1,000,000 x 70%)
Net method
1. Merchandise inventory 980,000

Cash 50,000

Cash 784,000
(800,000 x 98%)

Purchase discount lost 4,000
Cash 150,000
5. Cash 1,200,000
Sales 1,200,000

(980,000 x 70%)
Problem 10-8
Myriad Company revealed the following purchase transactions occurred during the last few
days of the fiscal year, which ends December 31, and in the first few days after the date.
1. An invoice for P50,000, FOB shipping point, was received and recorded on December 27.
The shipment was received in satisfactory condition on January 2. The merchandise was not
included in the inventory.
1. An invoice for P75,000, FOB destination, was received and recorded on December 28. The
shipment was received in satisfactory condition on January 3. The merchandise was not
included in the inventory.
2. An invoice for P30,000, FOB shipping point, was received and recorded on January 4. The
invoice shows that the goods had been shipped on December 28 and the receiving report
indicates that the goods had been received on January 4. The merchandise was excluded
from inventory.
3. An invoice for P90,000, FOB shipping point, was received on December 15. The receiving
report indicates that the goods were received on December 18 but across the face of the
report is the notation “merchandise not of the same quality as ordered – returned for credit,
December 19”. The merchandise was included in inventory.
4. An invoice for P140,000, FOB destination, was received and recorded on January 4. The
receiving report indicates that the goods were received on December 29. The merchandise
was included in inventory.
Required:
Prepare the adjustments on December 31. Books are still open.
Problem 10-8
An invoice for P50,000, FOB shipping point, was received and recorded on December 27. The
shipment was received in satisfactory condition on January 2. The merchandise was not included in
the inventory.
Inventory 50,000
2. An invoice for P75,000, FOB destination, was received and recorded on December 28. The
shipment was received in satisfactory condition on January 3. The merchandise was not included in
the inventory.

Purchases 75,000
3. An invoice for P30,000, FOB shipping point, was received and recorded on January 4. The invoice
shows that the goods had been shipped on December 28 and the receiving report indicates that the
goods had been received on January 4. The merchandise was excluded from inventory.
3. Purchases 30,000
Inventory 30,000
4. An invoice for P90,000, FOB shipping point, was received on December 15. The
receiving report indicates that the goods were received on December 18 but across the
face of the report is the notation “merchandise not of the same quality as ordered –
returned for credit, December 19”. The merchandise was included in inventory.

Inventory 90,000
5. An invoice for P140,000, FOB destination, was received and recorded on January 4. The
receiving report indicates that the goods were received on December 29. The
merchandise was included in inventory.
Purchases 140,000
10/5/2020 Chapters 1-3: Intermediate Accounting I - Althea U. DENUEVO
Chapters 1-3
Due Sep 11 at 11pm Points 20 Questions 10
Available until Sep 11 at 11:59pm Time Limit 120 Minutes
Instruc ons
10 Questions (2 points each)
Time limit - 120 minutes
This quiz was locked Sep 11 at 11:59pm.
A empt History
Attempt Time Score
LATEST Attempt 1 115 minutes 10 out of 20
Score for this quiz: 10 out of 20

Submitted Sep 11 at 9:35pm
This attempt took 115 minutes.
Question 1 2 / 2 pts
The following accounts were found in the books of Jill Company on

December 31?
Dividend fund 1,500,000
Payroll fund 600,000
Insurance fund 1,800,000
Sinking fund 2,500,000
https://cpu.instructure.com/courses/1335/quizzes/4380?module_item_id=29915 1/11
Tax fund 1,000,000
Travel fund 300,000
How much of these funds are to be included in cash?
5,300,000
2,000,000
6,000,000
Correct!
3,500,000
1. The cashand cash equivalents balance of Pure Company consists of

the following on December 31, 2020:
Cash on hand ( including customer postdated check of

250,000
P5,000)
Current Account -Philippine Bank 400,000
Current Account -China Bank (100,000)
Petty cash, (including unreplenished vouchers of

25,000
P15,000)
Sinking fund 300,000
Plant expansion fund 450,000
NSF check of customer 15,000
120-day time deposit 400,000
Money market instrument – purchased Dec. 31, 2020 500,000
and will mature on March 31, 2021
On December 31, how much is the correct balance of cash and cash
equivalents?
1,170,000
orrect Answer 1,155,000
1,555,000
ou Answered 1,575,000
1. Jump Company provided the following information on December 31,

2020:
BPI current account 1 (50,000)
BPI current account 2 1,200,000
LBP current account 900,000
BSP treasury bill – 60 days 400,000
BPI time deposit, 100 days 800,000
The cash on hand includes a postal money order of P20,000

The petty cash fund includes an employee check for P5,000 dated
January 31, 2021
A check for P100,000 was drawn against LBP current account, dated
and recorded on December 30, 2020, but was not delivered until
January 5, 2021.
How much is the amount of cash on December 31, 2020?
2,570,000
Correct!
2,370,000
2,820,000
2,770,000
1. True Company reported petty cash fund which comprised the

following:
Coins and currency 3,400
Paid vouchers:
Transportation 600
Gasoline 400
Office Supplies 500
Due from employees 1,000
Check returned by bank marked ‘NSF’ 1,500
Check drawn by the entity to the order of petty

2,500
cash custodian
What is the correct amount of petty cash fund for statement presentation
purposes?
Correct!
5,900
6,500
9,900
6,900
1. The following transactions affect the Petty cash fund of Bright

Company:
2020
November 2 Established a petty cash fund of P15,000.
November 18 The fund was replenished. The petty cash items include
Currency and coin.... 4,000
Postage........ 2,000
Supplies........ 5,000
Transportation.... 1,000
Miscellaneous expense... 3,000
December 31 The fund was not replenished. The fund is composed of the
following:
Currency and coins ....... 6,000
Postage ........ 1,000
Supplies ......... 4,000
Transportation ........ 1,500
Postdated employee’s check ..... 2,500
Assuming that the company uses the Imprest Fund System, how much is
the balance of Petty cash on December 31?
orrect Answer 9,000
ou Answered 15,000
11,000
The following data pertain to the cash transactions and bank account of
Real Company for the month of July 2020:
Cash balance per bank statement 32

Cash balance per bank statement 3,2
Debit memo for July service charge 5,0
Deposit in Transit 45
Outstanding checks including certified check of P150,000 85
Proceeds of bank loan not recorded in ledger 50
Proceeds from customer's note, face P400,000 collected by bank,
collection fee of P15,000 charged by bank, interest is P50,000 43
A customer's check was returned by bank marked NSF 50
How much is the adjusted cash balance?
2,120,000
4,130,000
The following information pertains to Mainit Company as of December 31,

2020:
Cash balance per bank statement 8,500,000

Outstanding checks 700,000
Note collected by bank 300,000
Bank service charge 40,000
Undeposited collections 2,600,000
Error made by the company in recording a check that

cleared the bank in December (check was correctly
drawn for 200,000, but recorded as
20,000
How much is the cash balance per ledger?
8,180,000
10,400,000
1. Cash data related to Maalam Company for the month of July of the
current year are shown below:
Balance per book 1,565,000
Deposit in transit 200,000
Checks outstanding 355,000
Bank service charge 2,500
A customer’s check for 100,000 collection 10,000

was recorded in the books as
How much is the cash balance per bank statement?
1,627,500
1,447,500
1. Oval Company prepared the following bank reconciliation on March

31:
Balance per bank statement, March 31 4,650,000
Deposit in transit 1,000,000
Total 5,650,000
Outstanding checks (1,250,000)
Balance per book, March 31 4,400,000
Data per bank statement for the month of April are as follows:
Deposits…………………………..6,000,000
Disbursements………………… 5,000,000
All reconciliation items on March 31 cleared through the bank in April.
Outstanding checks on April 30 totaled P750,000 and deposits in transit

amounted to P1,500,000.
What is the amount of cash receipts per book on April?
7,500,000
5,000,000
Lira Company prepared the following bank reconciliation on June 30:
Balance per bank 9,800,000
Outstanding checks 1,400,000
There were total deposits of P6,500,000 and charges for disbursements

of P9,000,000 FOR July per bank statement. All reconciliation items on
June 30 cleared the bank on July 31.
Checks outstanding amounted to P1,000,000 and deposits in transit

totaled P1,200,000 on July 31
What is the amount of cash disbursements per book in July?
9,000,000
8,400,000
Correct!
8,600,000
7,600,000
Quiz Score: 10 out of 20

This quiz score has been manually adjusted by +2.0 points.
10/5/2020 Chapters 4 -7: Intermediate Accounting I - Althea U. DENUEVO
Chapters 4 -7
Due Sep 18 at 12:30pm Points 30 Questions 20
Available until Sep 18 at 12:32pm Time Limit 110 Minutes
Instruc ons
Quiz on Chapters 4-7
Theory - 10 items
Problems - 10 items x 2
Total Score = 30
Time limit = 110 minutes
This quiz was locked Sep 18 at 12:32pm.
A empt History
Attempt Time Score
LATEST Attempt 1 109 minutes 13 out of 30

Submitted Sep 18 at 11:20am
This attempt took 109 minutes.
Advances from customers are included in the line item
Long-term investment
ou Answered Trade and other receivables
Inventory
orrect Answer Trade and other payables
Statement 1. If the origination fees are chargeable against the borrower,

the fees are known as direct origination costs.
Statement 2. The origination fees received from the borrower are

recognized as unearned interest income & amortized over the term of the
loan.
Statement 2 is false
orrect Answer
Statement 1 is false
ou Answered Both Statements are true
Both statements are false
Which accounting principle primarily supports the use of allowance for

doubtful accounts?
Conservatism
Correct! Matching principle
Continuity principle
Full disclosure principle
When the allowance method is used, the entry to record the writeoff of a
specific account would
Increase both accounts receivable and the allowance
Correct!
Decrease both accounts receivable and the allowance
Increase accounts receivable and decrease the allowance
Decrease accounts receivable and increase allowance
A method of estimating uncollectible accounts that emphasizes asset

valuation rather than income measurement is the allowance method
based on
Gross sales
Direct writeoff
Credit sales less returns and allowances.
Correct!
Aging the accounts receivable
Accounting for the interest on a noninterest bearing note receivable is an

example of what aspect of accounting theory?
Form over substance
Correct!
Substance over form
Relevance
Verifiability
An entity uses the allowance method to recognized doubtful accounts

expense. What is the effect of a collection of an account previously
written off?
Increase in allowance for doubtful accounts and decrease in doubtful

accounts expense.
No effect on both allowance for doubtful accounts and doubtful accounts

expense
Correct!
Increase in allowance for doubtful accounts and no effect on doubtful
accounts expense
No effect on allowance for doubtful accounts and decrease in doubtful

accounts expense
Advances from subsidiary should be classified as
Correct!
Noncurrent asset
Equity
Current asset
Current Liability
The amortization of direct origination costs would result to
Decrease in unearned interest income
Increase in interest income
Correct!
Decrease in interest income
Increase in direct origination costs
Indirect origination costs should be
Added to the carrying amount of loan receivable
Deducted from the carrying amount of loan receivable
orrect Answer Recognized as an outright expense
ou Answered Ignored, and not reported in the financial statements
The following data were provided by Happy Company on December 31,

2020:
Claims against common carriers 44,000
Trading securities 190,000
Advances to subsidiary 260,000
Advances from customers 140,000
Allowance for sales returns 6,000
Accrued expense 10,000
Accounts receivables 100,000
Customers’ credit balance 26,000
How much is the total trade and other receivables on December 31,
2020?
518,000
orrect Answer 258,000
658,000
ou Answered 510,000
Strong Company’s trial balance on December 31, 2019 included the

following accounts:
Debit
Credit
Allowance for doubtful accounts, 20,000
Sales
9,700,000
Sales returns 130,000
The entity estimated that the uncollectible accounts is 4% of net sales.
How much is the allowance for doubtful accounts on December 31, 2019?
220,000
388,000
ou Answered 382,800
The following data were provided by Fine Company on December 31,

2019:
Freight out 3,000
Creditors’ accounts with debit balance 60,000
Advances to affiliates 265,000
Sales returns and allowances 20,000
Allowance for sales sales returns 6,000
Special deposits on contract bids 84,000
Accrued rent income 15,000
Subscription Receivable, 90 days 250,000
Compute for the amount of trade and other receivables on December 31,
2019.
ou Answered 515,000
774,000
494,000
orrect Answer
509,000
Dream Company had a P2,000,000 balance in accounts receivable on

January 1. The balance in allowance for bad debts on January 1 was
P390,000. Sales for the year totaled P8,950,000. 90% of gross sales were
credit sales. Bad debt expense is estimated to be 3% of credit sales.
Writeoffs of uncollectible accounts for the year were P540,000. The debit
balance in accounts receivable on December 31, 2020was P1,725,000.
All receivables are trade receivables.
2. What is the amount of cash collected from the customers?
Correct!
7,790,000
8,865,000
7,400,000
8,870 000
Warm Company had an unadjusted credit balance of P100,000 in its

allowance for uncollectible accounts. An analysis of trade receivables at
the end of the period revealed the following:
Age Amount Estimated uncollectible
0 – 30 days 6,000,000 3%
31 - 60 days 400,000 8%
Over 60days 200,000 130,000
During the year, the company wrote off P30,000 in accounts receivable. It
recovered P10,000 that had been written off in prior years & subsequently
collected.
How much is the allowance for doubtful accounts at the end of the period?
362,000
262,000
322,000
Correct! 342,000
2. The following data were taken from the records of Storm Corporation
on December 31, 2020:
Sales on account 3,000,000
Cash sales 900,000
Notes received to settle accounts 400,000
Provision for doubtful accounts 60,000
Accounts determined to be worthless 25,000
Merchandise returned by credit customers 15,000
Collection received to settle accounts 1,400,000
Discount taken by credit customers 20,000
How much is the net realizable value of accounts receivable on December

31, 2020?
1,080,000
980,000
Pork Company manufactures and sells office equipment. On December

31, 2019, the entity sold an equipment costing P740,000 for 800,000. The
buyer signed a non-interest bearing note for P800,000, payable in 4equal
installments every December 31. The cash sales price of the equipment is
P750,000.
How much is Unearned interest income, 12/31/2020?
orrect Answer
30,000
ou Answered 50,000
36,000
60,000
On December 31, 2014, Joy Company sold a furniture, receiving a

consideration of P2,400,000 non-interest bearing note due in 3 years. It
had a cost of P1,900,000 with an accumulated depreciation of P900,000
at the time of sale. The present value factors at 12% were as follows:
PV of ordinary annuity of 1 at 12% for 3 periods 2.40
PV of 1 at 12% for 3 periods 0.71
How much is the GAIN on sale of furniture?
920,000
ou Answered 696,000
2. Mega Bank granted a loan to a borrower on January 1, 2019. The

interest on the loan is 8% payable annually starting December 31,
2019. The loan matures in 3 years on December 2021. Data related to
the loan are:
Principal 3,000,000
Origination fees 100,000
Indirect origination costs 50,000
After considering the origination fees charged to the borrower & the direct
origination cost incurred, the effective rate on the loan is 6%.
What is the carrying amount of the loan receivable on December 31,

2019?
3,000,000
3,210,682
2. Round Bank loaned Square Company P8,500,000 on January 1,

2013. The terms of the loan were payment in full on January 1,
2018plus annual interest payment at 11%. The interest payment was
made as scheduled on January 1, 2014. However due to financial
setbacks. Square was unable to make its 2015 interest payment.
Round Bank considers the loan impaired & projects the cash flows
from the loan as of December 31, 2015. Assume that the bank
accrued interest at December 31, 2014, but did not continue to accrue
interest for 2015 due to impairment of loan. The projected cash flows
are:
Date of cash flow Amount projected as of Dec. 31, 2015
Dec. 31, 2016 500,000
Dec. 31, 2017 1,500,000
Dec. 31, 2018 2,500,000
Dec. 31, 2019 4,000,000
The present value of 1 at 11% is as follows:
For 1 period 0.90
For 2 periods 0.81
For 3 periods 0.73
For 4 periods 0.66
How much is the loan impairment loss?
2,814,600
Quiz Score: 13 out of 30

This quiz score has been manually adjusted by +2.0 points.
Acctg 2109
IA1-2022-Quiz#1 - Cash and
! Cash Equivalents - Problems
"
and Theories
IA1-2022-Quiz#1 - Cash
and Cash Equivalents -
Problems and Theories
Due Aug 31 at 7pm Points 50
Ques!ons 34
Available Aug 31 at 5pm - Aug 31 at 7pm 2
hours
Time Limit 80 Minutes
This quiz was locked Aug 31 at 7pm.
A!empt History
A"empt Time Score
LATEST A!empt 1 80 minutes 30 out of 50

Submi!ed Aug 31 at 6:26pm
This a!empt took 80 minutes.
Ques!on 1 1 / 1 pts
Classify the given account below by clicking your

answer among the choices provided.
Sinking fund cash
Cash & Cash Equivalent
Trade & Other Receivables
Other non-current assets
Noncurrent liability
Current liability
! Long term investments
Ques!on 2 1 / 1 pts

Foreign currency – unrestricted
! Cash & Cash Equivalent
Current liability
Long term investments
Ques!on 3 1 / 1 pts

Bank overdra#
! Current liability
Ques!on 4 1 / 1 pts

Savings account with a closed bank
Current liability
! Other non-current assets
Ques!on 5 1 / 1 pts

Employees’ IOUs
Current liability
! Trade & Other Receivables
Ques!on 6 1 / 1 pts

Cer"ficate of deposit
Current liability
Ques!on 7 1 / 1 pts

Bonds payable
Current liability
! Noncurrent liability
Ques!on 8 1 / 1 pts

Money order
Current liability
Ques!on 9 1 / 1 pts
Check drawn that are postdated should be reverted

back to cash even if the checks are already delivered
to the payees.
! True
False
Ques!on 10 1 / 1 pts
Compensa"ng balances that are legally restricted as

to withdrawal by the borrower are excluded from
cash.
! True
False
An en"ty acquired debts securi"es 2 years ago. At

the repor"ng date, the debts securi"es have a
remaining term of 2 months. The en"ty can present
the debt securi"es as cash equivalents.
True
! False
Money, whether restricted or not, is presented as

cash.
True
! False
For best internal control, the du"es of cash custody,

cash disbursements authoriza"on and cash recording
should be delegated to one and same personnel.
True
! False
An investment in debts securi"es that is acquired 3

months or less before maturity date is presented as
cash equivalent.
! True
False
An en"ty’s pe!y cash fund (PCF) has an imprest

balance of P300. At the end of the period, the PCF
consists of P60 coins and currencies. To replenish
the PCF, the en"ty should write a check amoun"ng
to P240.
! True
False
If the cash fund is set aside for noncurrent purpose or

payment of noncurrent obliga"on, it is shown as
long-term investment.
! True
False
When a company has cash available in another

account in the same bank at which an overdra# has
occurred, the company will
Classify the bank overdra# as compensa"ng

balance.
Report the same in the notes to financial statement
! Offset the overdra# against cash account.
Report the bank overdra# amount as account

payable.
Which of the following should not be included in

cash?
Postdated checks drawn and delivered to payees
Checks drawn but not yet delivered to the payees
! Postdated checks received from customers
Cash collec"ons not deposited at year-end
A debts security can qualify as a cash equivalent if
It has an original maturity of 3 months or less.
All of the other choices
It has a remaining maturity of 3 months or less as

at the repor"ng date.
!
It is acquired 3 months or less before its maturity
date.
In most situa"ons, the pe!y cash fund is reimbursed

just prior to the year-end and an adjus"ng entry is
made to avoid
The understatement of cash with the appropriate

statement of expenses.
The misstatement of revenues
!
The overstatement of cash and the understatement
of expenses.
The understatement of cash and overstatement of

expenses.
All of the following may be included under the

heading of “cash” except
Bank dra#
! Money market funds
Current account balance
Savings account balance
Which of the following is incorrect about a

compensa"ng balance?
Which is not legally restricted as to withdrawal is

classified as cash and cash equivalent.
Which is legally restricted and related to a long-

term loan is classified as noncurrent asset.
! Must be included in cash and cash equivalent.
Which is legally restricted and related to short-

term loan is classified separately as current asset.
Which of the following may be properly presented as

“Cash and Cash Equivalents” in the December 31,
2022 statement of financial posi"on?
Shares of stocks to be sold on the first week of

January 2023; a purchase commitment is already
obtained.
Treasury bills acquired on December 1, 2022 and

mature on March 31, 2023.
Customer’s check dated January 1, 2023 and

mailed to the bank for deposit on December 31,
2022.
!
Redeemable preference shares acquired three
months prior to the redemp"on date.
A cash short and over account
Is a contra account to cash.
Is not generally accepted
Is credited when the pe!y cash fund proves out

short.
!
Is credited when the pe!y cash fund proves out
over.
An en"ty’s records on December 31, 2022 show the

following:
Cash on hand P 192,000
Cash in bank – current account 672,000
Cash in bank – peso savings deposit 3,840,000
Cash in bank – dollar savings deposit

$ 64,000
(restricted)
Treasury bill (purchased 11/1/2022,

1,536,000
maturing 2/28/2023)
Treasury shares (purchased

12/31/2022. For reissuance on 960,000
2/28/2023)
Acctg 2109
IA1-2022-Quiz#2-Bank
! Recon and proof of Cash -
"
IA1-2022-Quiz#2-Bank
Recon and proof of Cash -
Due Sep 12 at 9:10am Points 40
Ques!ons 25
Available Sep 12 at 7:50am - Sep 12 at 2pm
6 hours and 10 minutes
This quiz was locked Sep 12 at 2pm.
A!empt History
A"empt Time Score

Submi!ed Sep 12 at 9:10am
Ques!on 1 1 / 1 pts
In preparing bank reconcilia"on, outstanding checks

will cause the cash balance per bank to be greater
than the balance reported by the book, all other
things being equal.
! True
False
Ques!on 2 1 / 1 pts
In a proof of cash, if the December 31 balance is P60

while the December cash receipts and disbursements
are P30 and 54, respec"vely, the November 30 cash
balance must be P36.
True
! False
Ques!on 3 0 / 1 pts
In preparing a bank reconcilia"on, depositor’s note

charged to account is added to the book balance to
arrive at adjusted cash balance.
ered True
swer False
Ques!on 4 1 / 1 pts
In preparing a monthly bank reconcilia"on, deposit in

transit is added to the balance per bank statement to
arrive at the correct cash balance.
! True
False
Ques!on 5 1 / 1 pts
The bank statement is a report that is prepared for

the purpose of bringing the balances of cash per
records and per bank statement into an agreement.
True
! False
Ques!on 6 1 / 1 pts
Bank memorandums not recorded by the depositor

require reconciling entries in the depositor’s book of
accounts.
! True
False
Ques!on 7 1 / 1 pts
The adjus"ng entries for a bank reconcilia"on may

include a credit to accounts receivable for an NSF
customer check.
True
! False
Ques!on 8 1 / 1 pts
The debit memos from the previous month are

extended to the cash disbursements column of a
proof of cash as a deduc"on.
! True
False
Ques!on 9 1 / 1 pts
A bank decreased a depositor’s account. To no"fy

the depositor, the bank will issue a credit memo.
True
! False
What is the reconciling entry in the depositor’s books

to record outstanding checks?
(Dr.) Accounts Receivable; (Cr.) Cash
ered (Dr.) Accounts Payable; (Cr.) Cash
(Dr.) Cash; (Cr.) Accounts Payable
swer None
These are deposits made but not yet credited by the

bank to the depositor’s bank account.
Credit memos
! Deposit in transit
Outstanding checks
Debit memos
Which of the following may be used to compute for

the adjusted balance of cash?
ered
Balance per books + Credit memo – Debit memo –
Overstatement of cash disbursements
Balance per books + Credit memo – Debit memo –

Understatement of cash collec"ons
swer
Balance per books + Credit memo – Debit memo +
Overstatement of cash disbursements
Balance per books + Credit memo – Debit memo +

Overstatement of cash collec"ons
When preparing a proof of cash, a credit memo from

the previous month is
Extended to the bank receipts column as a

deduc"on
Extended to the book receipts column as an

addi"on.
!
Extended to the book receipts column as a
deduc"on.
Not extended in any of the book columns
Which will not require an adjus"ng entry on the

depositor’s books?
!
Deposit of another en"ty is credited by the bank to
the account of the depositor.
Collec"on from customer deposited in the amount

of P10,000 but recorded by the depositor only as
P1,000.
Check in payment of account payable amoun"ng

to P5,000 is recorded by the depositor as P500.
Bank service charge
If the cash balance shown on an en"ty’s accoun"ng

records is less than the correct cash balance neither
the en"ty nor the bank has made any errors, there
must be
Deposit in transit
Bank charges not yet recorded by the en"ty
!
Deposits credited by the bank but not yet recorded
by the en"ty.
Outstanding checks
When preparing a proof of cash, an overstated book

debit in the previous month is
extended to the book receipts column as an

deduc"on .
!
extended to the book disbursements column as a
deduc"on.
not included in the proof of cash if the error is

already corrected in the current month.
extended to the books receipts column as an

addi"on.
Which of the following must be added from the bank

statement balance in preparing a bank reconcilia"on
which ends with undjusted book balance?
credit memos
cer"fied check
outstanding check
! bank service charge
Which of the following may be used to compute for

the adjusted balance of cash?
Balance per bank statement + Deposit in transit –

Outstanding checks + Erroneous credit to the
account made by the bank.

Outstanding checks – Erroneous debit to the
swer
Outstanding checks, net of cer"fied checks –
Erroneous credit to the account made by the bank.
ered
Outstanding checks – Erroneous credit to the
The following informa"on was included in the bank

reconcilia"on of the en"ty on September 30, 2022:
Total recorded company receipts for

850,000
September
Credit memo for August recorded in

60,000
September
Erroneous receipt by the company

during September,
40,000
no correc"on was made un"l the
following month
Credit memo for September not yet

90,000
recorded
Erroneous bank disbursement in

September corrected
18,000
by bank in September
Total receipts per bank in September 900,000
Deposit in transit – August 31, 2022 71,000
Book receipt for P90,000 in Sept.

9,000
recorded by the company as
What amount should be recorded as deposit in transit

on September 30, 2022?
ered 70,000
81,000
swer 110,000
100,000
The books of an en"ty disclosed a cash balance of

P68,757 on June 30. The bank statement as of June
30 showed a balance of P54,780. Addi"onal
informa"on that might be useful in reconciling the
two balances follows:
1. Check number 748 drawn for P3,000 was

originally recorded on the books as P4,500.
2. A customer’s note dated March 25 was
discounted on April 12. The note was dishonored
on June 29 (maturity date). The bank charged the
en"ty’s account for P14,265, including a protest
fee of P42.
3. The deposit on June 24 was recorded on the
books as P2,895 but it was actually a deposit of
P2,700.
4. Outstanding checks totaled P9,885 as of June 30.
5. There were bank service charges for June of P210
not yet recorded on the books.
6. The en"ty’s account had been charged on June
26 for customer’s NSF check for P1,296.
7. An en"ty properly deposited P600 on June 3 but
it was not recorded by the bank.
8. Receipts on June 30 for P13,425 was recorded by
the bank on July 2.
9. A bank memo stated that a customer’s note for
P4,500 and interest of P165 had been collected
on June 27, and the bank charged a P36
collec"on fee.
How much is the adjusted balance of cash as of June

30?
ered 41,230
swer 58,920
62,890
34,890
In an audit of an en"ty on December 31, 2022, the

following data are gathered:
Bank charges 8,000
Outstanding checks 760,000
December check of an en"ty for

P200,000 in payment of salaries
charged by the bank as 20 ,000
Customer note collected by bank,

(including interest of P48,000)
1,248,000
Customer check returned NSF 200,000
Depositor’s note charged to account 800,000
What is the cash balance per bank statement?
! 3,400,000
3,040,000
3,480,000
3,440,000
In reconciling the cash in bank of an en"ty with the

bank statement balance for the month of November
2022, the following are summarized:
Book debits for November, including

October CM for note collected, P1,120,000
P84,000
Book credits for November,

including NSF of P28,000, and 868,000
service charge of P1,120 for
October
Bank credits for November including

CM for November for bank loan of
980,000
P140,000 and October deposit in
transit of P112,000
Bank debits for November including

October outstanding checks of
840,000
P239,120 and November service
charge of P480
How much is the outstanding checks for November?
! 238,480
267,400
238,280
28,000
An en"ty had the following bank reconcilia"on on

June 30, 2020:
Balance per bank statement, June

1,200,000
30
Total 1,360,000

Acctg 2109
IA1-2022 - Quiz#3 - Accounts
! Receivable to Loans "
Receivable - Problems and
Theories
IA1-2022 - Quiz#3 -
Accounts Receivable to
Loans Receivable -
Due Sep 19 at 9:40am Points 50
Ques!ons 31
Available Sep 19 at 8am - Sep 19 at 9:40am
1 hour and 40 minutes
This quiz was locked Sep 19 at 9:40am.
A!empt History
A"empt Time Score

Submi!ed Sep 19 at 9:40am
Ques!on 1 1 / 1 pts
If the ini"al amount of loan receivable recognized is

lower than the principal amount, the amor"za"on of
the difference is added to the carrying amount.
! True
False
Ques!on 2 0 / 1 pts
The main purpose of giving cash discounts is to

encourage trading or increase sales.
ered True
swer False
Ques!on 3 0 / 1 pts
The accounts receivable account of an en"ty has a

gross balance of P600. If the carrying amount of the
accounts receivable is P430, the bad debts expense
account must have a balance of P170
ered True
swer False
Ques!on 4 1 / 1 pts
The effect of direct origina"on cost is a decrease in

the effec"ve interest rate of a loan receivable.
! True
False
Ques!on 5 1 / 1 pts
Interest receivable is computed by mul"plying the

carrying amount of a note by the effec"ve interest
rate.
True
! False
Ques!on 6 0 / 1 pts
The en"ty’s accounts receivable increased by P50

during the period. If total collec"ons of accounts
receivable during the period were P150, the net
credit sales were P200.
swer True
ered False
Ques!on 7 1 / 1 pts
For long-term note receivables that are interest-

bearing, the fair value is equal to the face value.
! True
False
Ques!on 8 0 / 1 pts
An en"ty provides a 45-day credit period to its

customers. In an en"ty’s aging schedule, receivables
under the age bracket “91 to 120 days” would also be
considered “91 to 120 days” past due.
ered True
swer False
Ques!on 9 1 / 1 pts
The term FOB shipping point means that the

ownership of the goods purchased is vested upon the
buyer upon receipt of the merchandise.
True
! False
An en"ty receives a P1,200,000, noninterest-bearing

note that is collec"ble in installments every year-
end. On ini"al recogni"on, the carrying amount of
the note was P900,000. If the amor"za"on of the
note during the period is P50,000, the carrying
amount of the note at the end of the period must be
P950,000.
ered True
swer False
Collec"on of accounts receivable previously wri!en

off results in an increase in cash and an increase in
Bad debt expense
Accounts receivable
Retained earnings
! Allowance for doub$ul accounts
Which of the following would be classified as “trade

receivable”?
! none of the choices
advances to officers, employees and affiliates
dividends receivable
claim for tax refund
Which of the following receivables is most likely to

be presented as current asset?
!
Loan-term trade receivables of a construc"on firm
whose normal opera"ng cycle extends beyond one
year.
Advances to an affiliate in which the se!lement

date is not yet agreed upon.
Loans receivables from the en"ty’s officers

collec"ble beyond 12 months from the balance
sheet date.
Receivable from a subscriber of the en"ty’s own

shares
On July 1 of the current year, an en"ty obtained a

two-year 10% note receivable for services rendered.
At that "me, the market rate of interest was 8%. The
face amount of the note and the en"re amount of
interest are due on the date of maturity. Interest
receivable on December 31 of the current year wa
swer 5% of the face amount of the note.
4% of the present value of the note.
5% of the present value of the note.
ered 4% of the face amount of the note.
Accounts receivable appear in the statement of

financial posi"on:
Only if the statement of financial posi"on method

of es"ma"ng uncollec"ble accounts is used.
As current assets, combined with cash and cash

equivalents.
swer
As current assets, immediately a%er cash and cash
equivalents.
ered
As either current assets or noncurrent assets,
depending on whether the allowance method or
the direct write-off method is used to account for
uncollec"ble accounts.
The amount computed under the percentage of

credit sales method is the
none of these
a or b
required balance of the allowance account.
! bad debts expense for the period.
Which of the following rates is used to compute for

the interest income on a note receivable?
coupon rate
! effec"ve interest rate
nominal rate
stated rate
On September 1 of this year, a company received a

one-year note receivable bearing interest at the
market rate. The face amount of the note receivable
and the en"re amount of the interest are due on
August 31 of next year. At December 31 of this year,
the company should report on its statement of
financial posi"on:
!
interest receivable for the interest accruing this
year.
interest receivable for the en"re amount of the

interest due on August 31 of the next year.
No interest receivable.
a deferred credit for interest applicable to next

year.
In calcula"ng the carrying amount of a loan, the

lender adds to the principal: 1) Direct loan
origina"on; 2) Loan origina"on costs incurred by the
lender and charged to the borrower
Yes, Yes
! Yes, No
No, Yes
No, No
The sales return and allowances account is reported

as:
Current liability on the statement of financial

posi"on.
Deduc"on from accounts receivable on the

statement of financial posi"on.
Selling expense on the income statement.
contra-revenue account on the income statement.
An en"ty’s accounts receivable balances at the

beginning and end of the period were P240,000 and
300,000, respec"vely. Write-offs and recoveries
during the period amounted to P30,000 and
P24,000, respec"vely. Collec"ons of sales on
account during the period totaled P360,000,
excluding the recoveries.
What amount should be reported as total credit sales

during the period?
510,000
474,000
! 450,000
330,000
On October 9, 2021 the company sold merchandise

with a list price of P500,000 to a customer. The
en"ty allowed trade discounts of 20% and 10%.
Credit terms were 5/10, n/30 and the sale was made
FOB Des"na"on, freight collect. The freight charged
paid by the customer was P25,000.
On October 19, 2021, what amount was received from

the customer as full remi!ance?
342,000
385,000
367,000
! 317,000
Informa"on from the records of an en"ty is shown

below:
Accounts receivable, net of P44,800

credit balance in customers’ accounts 224,000
Notes receivable (trade) 25,000
Notes receivable (non-trade), P22,000

112,000
due one year
Dividends receivable 4,200
Subscrip"on receivable 8,900
Advances to officers (due in 18 months) 17,920
Accounts payable – net of P26,200

debit balance in supplier’s accounts 13,400
What amount should be reported as “trade and other

receivables” in the statement of financial posi"on?
355,100
! 346,200
297,200
288,300
The following informa"on pertains to an en"ty’s

accounts receivable at December 31, 2022:
Days es"mated % of
Amount
outstanding Collec"bility
0 – 45 216,000 99%
46 - 90 162,000 98%
91 - 135 100,000 95%
Over 135 180,000 94%
During 2022, an en"ty wrote off P7,000 in

receivables and recovered P4,000 that had been
wri!en off in prior years. The en"ty’s December 31,
2021, allowance for uncollec"ble accounts was
P2,000.
Under the aging method, what amount of

uncollec"ble accounts should an en"ty report at
December 31, 2022?
28,200
23,200
! 22,200
21,200
The Bank granted a loan to a borrower on January 1,

2021 The interest rate on the loan is 10% payable
annually star"ng December 31, 2021. The loan
matures in five years on December 31, 2025.
Origina"on fee received

262,500
from the borrower
Direct origina"on cost

46,125
incurred
Indirect origina"on cost

12,500
incurred

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CHAPTER 1

▪ Money is the standard medium of exchange in business

▪ Cash includes money and any other negotiable instrument

But postdated checks received cannot considered as

 PAS1,paragraph 66,which provides that an entity shall classify

 To be reported as cash an item must be unrestricted in use.

b.Cash in bank- includes demand deposit or checking account

c. Cash funds- set aside for current purposes such as petty

 Examples of cash equivalents:

The control and proper use of cash is an important aspect

Any cash accumulated in excess of that needed for current

a. If the term is three months or less, such instruments are classified

Cash in foreign currency is measured at the current

If bank or financial institution holding the funds of an entity is

This caption includes all cash items, such as cash on hand,

However, the details comprising the cash and cash equivalents

Deposits in foreign countries which are not subject to any

Deposits in foreign bank which are subject to foreign

If cash fund is set aside for use in current operations or

Examples of this funds are sinking fund, preference share

The classification of cash fund as current or non current

However, a cash fund set aside for acquisition of noncurrent

 A bank overdraft is classified as a current liability and should not

 For example, an entity maintains two bank accounts:

The proper statement classification of the two accounts is as follows:

 Note that it is not necessary to adjust and open a bank overdraft

 It is to be stated that generally overdrafts are not permitted in

A compensating balance generally takes the form of minimum

For example, an entity borrows P5,000,000 from a bank and

 If the deposit is not legally restricted as to withdrawal by the

 If the deposit is legally restricted because of a formal compensating

 If the related is long-term, the compensating balance is classified

Accordingly, an adjusting entry is required to restore the cash

A postdated check delivered is a check drawn, recorded and

The original entry recording a delivered posdated check shall

 In determining what is a reasonable time, consideration should be made

If the amount of stale check is immaterial, it is simply

However, if the amount is material and liability is expected

Checking Account at Morgan Bank (P 30,000)

Determine the correct cash balance to be reported in the statement of

Checking account at Land Bank P 510,000

❖ Commercial savings account of 500,000 and a commercial checking

What is the correct amount of cash and cash equivalents an entity

 The travel advances should be reported as a receivable, but if

 Cash restricted in the amount of P1,100,000 for the retirement

 If reasonable efforts fail to disclose the cause of the shortage the

 The cash overage is treated as miscellaneous income is there is no claim

While internal control ideally requires that all payments should be

There are occasions when the issuance of checks becomes

There are two methods of handling the petty cash, namely:

b. Payment of expenses out of the fund.

The replenishment check is usually equal to the petty cash disbursement.

It is at this time that the petty cash disbursements are recorded.

The adjustment is to be reversed at the beginning of the next

e. An increase in fund is recorded as:

f. A decrease in the fund is recorded as:

 Moreover, petty cash disbursements are immediately recorded thus

A. Establishment of the fund:

B. Payment of expenses out of the petty cash fund: