Session 4 – May 27, 2023

 Definition: Represents financial asset arising from a contractual right to

receive cash or another financial asset from another company. It falls under
one of four categories of financial instruments, namely Loans and
Receivables.
 Classes of Receivables:
1. Trade Receivables - are claims arising from sale of merchandise or service in the
ordinary course of business operations; such as the following (a) accounts
receivable and (b) notes receivable.
2. Non-trade receivable – are claims arising from sources other than from sale of
goods and services in the normal course of business; such as the following (a)
advances to officers and employees (b) advances to subsidiaries (c) dividends and
interest receivable (d) deposits as a guarantee of performance or payment (e)
deposits to cover potential damages or losses (f) claims for; insurance, tax
refunds, lawsuits, merchandise damaged or lost in transit, returnable items, etc.
 Presentation: Receivables are disaggregated into amounts receivable from trade
customers, receivables from related parties prepayments and other amounts
 One line item in BS as Trade Receivables – disclosed in Notes to FS; One line item as Non-
Trade Receivables – details disclosed in Notes to FS
 Initial:
 Loans and Receivables – measured at fair value (transaction price); transaction
price of short term receivables with no stated interest rate may be measured at the
original invoice amount.
 Notes Receivable – stated at the present value:
 Face value – for short term and interest-bearing long term notes
 Discounted value – for long-term non-interest bearing and long-term interest bearing but
the stated/nominal rate is different than the prevailing rate on interest for similar debt
instruments
 Subsequent:
 Loans and Receivables – measured at amortized cost
 TRADE RECEIVABLES Bad Debts/Doubtful Accounts:
1. % of sales – Bad Debts Expense
Beginning balance *Collection – AR/NR
2. % of AR – ADA, ending
Credit sales Sales discount (gross) 3. Aging of AR – ADA, ending
Recovery* Sales Return &
Allowances
Allowance for Doubtful Accounts
Write-off
Write-off Beginning balance
Sale of AR/NR
Recoveries
Ending balance
Bad Debts Expense
*collection of AR/NR should be net of recovery
Ending balance

• Dishonored NR is recognized as AR LOAN RECEIVABLES

(including interest and protest fee). Principal Loan Amount xx
Direct Origination Cost xx
Direct Origination Fees (xx)
Initial Amortized Cost xx
 Pledge Assignment* Factoring Discounting
Type of Accounts Receivable Accounts Receivable Accounts Receivable Notes Receivable
receivable
Rules 1. Continue to recognize and report the 1. If seller retains significant risks and
receivable with appropriate disclosure or benefits relating to the receivable, seller
*transfer the account receivable to should continue to recognize the asset
account receivable assigned. and the proceeds of sale will be recognized
2. Recognized the proceeds as a liability as a liability
3. Charge interest on the carrying value of 2. If seller does not retain significant risks
the liability and benefits, treated as sale and receivable
4. Any transaction cost incurred is a will be derecognized.
finance cost

Computation A/R factored xx Principal xx

Finance charge (x) Interest (x)
Sales Price xx Maturity Value xx
Factor’s holdback (x) Discount (x)
Proceeds xx Proceeds xx

Sales price xx Proceeds xx

CV of A/R (x) CV of N/R (x)
Gain (Loss) xx Gain (Loss) xx
1. Trade receivables are classified as current assets when they are reasonable expected
to be collected
a. Within one year
b. Within normal operating cycle
c. Within one year or within the normal operating cycle, whichever is shorter
d. Within one year or within the normal operating cycle, whichever is longer

2. If a company employs the gross method of recording accounts receivable from

customers, then sales discounts taken should be reported as
a. a deduction from sales in the income statement.
b. an item of "other income and expense" in the income statement.
c. a deduction from accounts receivable in determining the net realizable value of
accounts receivable.
d. sales discounts forfeited in the cost of goods sold section of the income statement.
3. Which of the following should be recorded in Accounts Receivable?
a. Receivables from officers
b. Receivables from subsidiaries
c. Dividend receivables
d. Sale of goods on account to a customer

4. Which of the following accounts is not affected when an account receivable written off
as uncollectible is recovered?
a. Cash
b. Bad debts expense
c. Accounts Receivable
d. Allowance for bad debts
5. Which of the following transaction will decrease the recorded accounts receivable?
a. Sale of goods on account.
b. Collection of accounts previously written off.
c. Return of goods sold to a customer on account.
d. Cash discount availed using the net method.
6. Jedrick Company prepares an account receivable aging schedule with a series of
computations as follows: 2% of the total peso balance of accounts from 1-60 days
past due, plus 5% of the total peso balance of accounts from 61-120 days past due
and so on. How would you describe the total of the amounts determined in this
series of computations?
a. It is the amount of uncollected accounts expense for the year.
b. It is the amount that should be added to the allowance for uncollectible accounts
at year-end.
c. It is the amount of the desired credit balance of the allowance for uncollectible
accounts to be reported in the year-end financial statements.
d. When added to the total of accounts written off during the year, this new sum is
the desired credit balance of the allowance account.
7. When the allowance method of recognizing uncollectible account expense is used, the
entries at the time of collection of an account previously written off would
a. Increase profit.
b. Increase the amortized cost of accounts receivable.
c. Decrease profit.
d. Decrease the amortize cost of accounts receivable.

8. Courage Company, which has an adequate amount in its allowance for doubtful
accounts, write-off as uncollectible an account receivable from a bankrupt customer.
This action will:
a. Have no effect on total current assets
b. Reduce net income for the period
c. Reduce total current assets
d. Reduce the amount of total equity
9. A non-interest-bearing note receivable:
a. Cause no interest revenue to be recorded.
b. Includes a specified principal amount plus specified interest
c. Includes a specified principal amount but an unspecified interest
d. Includes an unspecified principal amount and unspecified interest

10. On July 1 of the current year, an entity received a one-year note receivable bearing
interest at the market rate. The face amount of the note receivable and the entire
amount of the interest are due on June 30 of next year. On December 31 of the
current year, the entity should report in the statement of financial position
a. No interest receivable
b. A deferred credit for interest applicable to next year
c. Interest receivable for the interest accruing this year
d. Interest receivable for the entire amount of the interest due on June 30 of next
year
11. The amortization of discount on note receivable will:
a. Increase the amount of interest received to arrive at interest income.
b. Decrease the amount of interest received to arrive at interest income.
c. Decrease the carrying value of the note receivable.
d. Increase the face value of the note receivable.

12. If the note has a nominal interest of 10% and was issued at a market rate of
interest of 12%, the note:
a. was issued at market rate of interest.
b. was issued resulting to a discount.
c. was issued resulting to a premium.
d. was a non-interest bearing note
13. How would the interest-bearing note collectible in installment shall be reported in
the statement of financial position?
a. the entire carrying value is always reported as non-current asset.
b. the carrying value maybe reported as partly current and partly non-current.
c. the entire carrying value is always reported as current asset.
d. the carrying value is not reported in the statement of financial position.

14. The total interest on a non-interest-bearing note is equal to?

a. The excess of the face value over the present value
b. The excess of the present value of over the face value
c. The excess of the market value over the present value
d. Zero
15. Ding Belle Inc. received a three-year, non-interest-bearing note for P50,000 on
January 1, 2020. The current interest rate at that time was 15% for similar notes.
Ding Belle recorded the receipt of the note as follows:
Notes Receivable 50,000
Sales 50,000
The effect of this accounting for note receivable on Ding Belle’s profit for the years
2020, 2021 and 2022 and its retained earnings at the end of 2022, respectively
shall be
A. overstate, overstate, understate, no effect
B. overstate, understate, understate, understate
C. overstate, understate, understate, no effect
D. no effect on any of these
16. The proceeds on discounting notes receivable is:
a. Reduced by the amount of interest up to maturity value.
b. Reduced by the amount of discount
c. Increased by the total interest earned by the company
d. Increased by any protest fee

17. Statement 1: When a notes receivable is discounted on a with recourse basis, the
transaction is treated as borrowing.
Statement 2: The amount of finance charge (interest expense) recognized on a
discounting of notes receivable is always equals to the amount of discount.
A. Only statement 1 is true
B. Only statement 2 is true
C. Both statements are true
D. Both statements are false
18. Which of the following is deducted from the principal loan amount when a loan was
made to arrive at its initial amortized cost?
a. direct origination costs.
b. direct origination fees.
c. discount on loan receivable.
d. premium on loan receivable.

19. Statement 1: The loan after the effect of direct origination costs and fees shall have
a new effective interest.
Statement 2: The loan receivable shall be amortized using the original nominal
interest.
a. only statement 1 is true
b. only statement 2 is true
c. both statements are true
d. both statements are false
Ube Company has four operating segments, one segment is into wholesaling of groceries, other segment deals in the trading
of household equipment and office equipment, the other segment is into servicing. The other segment is into car rental. The
following items were taken from the books of the different segments pertaining to their Receivables as of December 31, 2021:
Arising from sale of groceries P 650,000
Arising from sale of old grocery store equipment 600,000
Arising from sale of household and office equipment 580,000
Arising from sale of service 550,000
Arising from sale of old service equipment used in servicing segment 500,000
Arising from rental of cars 420,000
Claim from insurance for damage of rental cars 370,000
Arising from sale of old cars 330,000
Arising from the accrual of interests on above receivables 280,000
Arising from employee advances 150,000

In the consolidated December 31, 2021 statement of financial position what total amount of trade receivables should Ube
Company report?
a. P2,200,000
b. P2,530,000
c. P3,030,000
d. P3,630,000
On January 1, 2021, Boss Company accounts receivable has an outstanding balance of P500,000. Below are
the transactions in its accounts receivable during 2021:

Total Sales (including a P500,000 cash sales) P8,000,000

Account receivable written-off 60,000
Total Sales Returns (of which P30,000 were sales on a cash basis) 80,000
Amount received from credit customers 5,100,000
Sales discount and allowances granted 70,000
Amount received representing recovery (not included in P5.1M) 120,000

What is the amortized cost of the accounts receivable on December 31, 2021, assuming that the company’s
policy is to provide 5% allowance based on outstanding balance?
a. P2,470,000
b. P2,584,000
c. P2,973,500
d. P3,087,500
The December 31, 2020 statement of financial position of Leon Company showed accounts receivable balance
of P500,000 and Allowance for Bad Debts of P48,000. Following is a summary of accounts receivable
transactions recorded by the company in 2021:
Credit sales during the year P 3,120,000
Total accounts collected from customers during the year 3,020,160
Accounts written off as uncollectible 42,000
Recoveries of accounts written off in the previous year 2,160

On December 31, 2021, an aging of accounts receivable indicated the following:

Age Group % of total recoverable amount Probability of collection

Less than 60 days 60% 99%
61-120 days 22% 88%
121-180 days 15% 45%
Over 180 days 3% 20%
Question 1: The adjusted gross balance of accounts Question 4: The net realizable value (or amortized cost) of the
accounts receivable as of December 31, 2021 is?
receivable is?
a. P480,356
a. P560,000
b. P480,516
b. P562,160
c. P482,456
c. P570,000
d. P482,216
d. P604,160
Question 5: Assuming that the over 180 days account is
Question 2: The balance of allowance for bad debts as of 100% uncollectible, how much is the balance of allowance
December 31, 2021 is? for bad debt at year end?
a. P77,484 a. P43,244
b. P77,324 b. P64,344
c. P77,784 c. P44, 684
d. P77,544 d. P58,924
Question 3: The bad debt expense for the year 2021 is?
a. P69,324
b. P69,624
c. P69,664
d. P69,124
You are given the following data for Heat Company:
Cash Credit Total
Cost of sales P500,000 P4,500,000 P5,000,000
Cash received from customers 650,000 5,850,000 6,500,000

Merchandise were mark to sell as follows: Cash sales, 30% above cost and credit sales at 40% above cost, all
of which are collectible. The balance of accounts receivable at the end of the year was:
a. P1,475,000
b. P1,350,000
c. P450,000
d. P125,000
On January 1, 2021, Exo Company received a P200,000 cash and a 4-year, 3%, P500,000 note to be collected
on December 31, 2024. Interest on this note is to be collected at the end of each year. The note was received
from sale of an equipment with original cost of P1,000,000 and accumulated depreciation of P400,000 on
date of sale. Interest effective on the note is 5%.
Question 1: How much is the amount of gain (loss) on sale recognized on January 1, 2021 from sale of
equipment?
a. (P63,240)
b. P52,460
c. P64,540
d. (P135,460)
Question 2: How much is the amount of interest income recognized in its statement of comprehensive
income for the period ending December 31, 2022?
a. P23,227
b. P23,638
c. P24,070
d. P24,524
Twice Incorporated sold a building which is no longer used in its operation on August 1, 2020. The building
has estimated useful life of 5 years with an original cost of P15,000,000 and carrying value of P9,500,000 on
date of sale. Twice received a P6,000,000, 3-year noninterest bearing note to be collected in equal annual
installment of P2,000,000 every July 31 of each year starting 2021. There is no available fair value for the
building but on August 1, 2020, interest effective was at 6%.
Question 1: How much is the amount of interest income recognized in its statement of comprehensive
income for the period ending December 31, 2021?
a. P320,761
b. P133,651
c. P220,007
d. P278,781
Question 2: How much is the current portion of the note receivable reported in its December 31, 2021
statement of financial position?
a. P1,779,993
b. P1,824,493
c. P1,886,792
d. P1,933,962
On January 1, 2021, Arezzo Company received a 10%, P14,000,000, note collectible in installment plus
interest every December 31 of each year until December 31, 2025. The note is collectible in principal as
follows:
December 31, 2021 P4,000,000
December 31, 2022 3,500,000
December 31, 2023 3,000,000
December 31, 2024 2,500,000
December 31, 2025 1,000,000

The interest effective on January 1, 2021 is at 14%, on December 31, 2021 is at 15%.
Question 1: How much is the initial present value of the note receivable when received on January 1, 2021?
a. P12,921,826
b. P12,098,192
c. P11,326,352
d. P10,226,392
Question 2: How much is the carrying value of the note on December 31, 2021?
a. P13,330,882
b. P11,512,041
c. P9,330,882
d. P8,391,939

Question 3: How much of the carrying value of the note receivable is reported as non-current as of December
31, 2022?
a. P6,137,206
b. P3,346,414
c. P6,002,891
d. P3,129,324
On October 31, 2021, Hagrid Corp. engaged the following transactions:
 Obtained a P500,000, 6-month loan from Citibank, discounted at 12%. The company pledge P600,000 of
the accounts receivable as a security for the loan.
 Factored P1,000,000 of accounts receivable without recourse on a notification basis with Nahum Finance
Company. Nahum Finance charged a factoring fee of 5% of the amount of receivable factored and withheld
10% of the receivable factored.

What is the total cash received from the financing of receivables and the amount of loss, respectively?
a. P1,320,000 and P50,000
b. P1,320,000 and P150,000
c. P1,420,000 and P50,000
d. P1,420,000 and P150,000
On April 1, 2021, Lunar Company loaned P20,000,000 to Eclipse Company. The loan is to repayable after 5 years.
Interest on this loan is 3% annually every April 1 of each year starting 2022. Direct origination cost of P478,991 was
paid by Lunar and direct origination fee was deducted to the proceeds received by Eclipse Company. The interest
effective on this loan is 5% after the origination costs and fees.
Question 1: How much is the direct origination fee?
a. P2,178,271
b. P2,008,899
c. P2,210,782
d. P2,190,792
Question 2: How much is the interest income recognized in its 2022 income statement?
a. P925,163
b. P913,410
c. P929,081
d. P941,442
Question 3: What is the carrying value of the loan on December 31, 2022?
a. P18,581,620
b. P18,828,431
c. P18,910,701
d. P19,169,852