LECTURE NOTES: RECEIVABLEs

RECEIVABLES
-financial assets that
represent a contractual right to receive cash or
another financial asset from another entity.
Classification

As to Source
1. Trade receivable - claims arising from sale of goods or services
in the normal course of business
2. Non-trade receivables - receivable other than trade
receivables
* Because of the application of the normal operating cycle,
trade receivables are generally classified as current assets.
Normal operating cycle of an entity is the time between the
the acquisition of assets for processing and their realization
in cash or cash equivalents. Meaning, it is the period required
for cash to be converted into inventories through purchase
and production, inventories into receivable through sale,
and receivable back into cash or cash equivalents through
collections.
* where the normal operating cycle of the business extends
beyond twelve months because of long term credit, as in
the case of certain installment receivable (e.g., installment
sale for household appliances), in which such accounts are
an integral part of working capital, it is proper to classify the
receivable as current assets; however, the amount or estimate
thereof not realizable within twelve months should be disclosed.
*non-trade receivables are classied as current if they are reasonably
expected to be realized in cash within twelve months from the
date of balance sheet, regardless of or notwithstanding the
length of operating cycle. If not realized within twelve months,
these are classified as non-current assets.

* Example of non-trade receivables:

loans to officers and employees, advances to affiliates,
accrued interest and dividends, deposits to guarantee
performance or payment subscription for the entity's securities, etc.
* Clarification & Further Discussion =)
Customers' credit balances is classified as current liabilities.
and included as part of trade and other payables.
Referring to the illustration in your book, there is an entry (i.e., debit AR
and credit customers' credit balance) making the AR to increase because:
The AR account reports a balance of Php500,000. When we check the
subsidiary ledger, wefind that the said balance is incorrect. How?
Simply because the remainig balance of AR is Php550,000 (400,000+
150,000) representing the accounts of A and B. Why the AR account
reports only Php500,000, it's because the credit balance worth
Php50,000 coming from the account of C was being offset. As a result,
the AR balance is understated by Php50,000, hence, we need to
increase the AR to reflect the correct balance, then increase the
liability to reflect that we have a payable from customer C.
On the other hand, if the problem shows balances for different types
of receivable (i.e., notes receivable, accounts receivable, etc.) and you'll
be asked for the correct balance of trade and other receivable, you need
not to include the customers' credit balance, since, again it is classified
as current liability.

As to Timing of Collection
1. Current receivable
2. Non-current receivable

LECTURE NOTES: ACCOUNTS RECEIVABLE

Initial Recognition:
Measured initially at face value or original invoice amount.
Subsequent measurement:
Measured at net realizable value

Deductions to consider in estimating the net reliazable value

1 Allowance for freight charge
FOB destination
> the seller shall be responsible for the freight charges up to the poin
FOB shipping point
> buyer will pay for the transportation charge from the point of shipm
point of destination
Freight collect
> freight charge is paid by the buyer
Freight prepaid
> freight charge on the shipped is already paid by the seller.

2 Allowance for sales returns

3 Allowance for sales discounts
Trade Discounts
> also known as volume or quantity discounts, are means of converti
to the price actually charged to the buyer.
> are always deducted from the list price prior to recording the accou
from a credit sales transaction.
> Example: AA Manufacturing sells merchandise on account with a l
on July 16, 2012. AA allowed trade discounts of 10%, 10% and 5%.
FOB shipping point. Freight paid to the shipper by AA Manufacturin
The invoice price of the merchandise is computed as follows:
100,000x.90x.90x.95 = 76,950
Accounts Receivable
Sales

76,950.00

Another method in recording credit sales (aside from gross and net method)
c. Allowance method:
Using the illustration above, below are the entries using the allowance method
Accounts Receivable
78,950.00 *
Allowance for sales discount
Sales
Cash

1,539.00 **
75,411.00
2,000.00

*AR plus 2,000 freight paid by the shipper but should be paid by the buyer since FOB shi
**2% of credit sales, 76,950

Entries if collection is within the discount period:

Cash
Allowance for sales discount
Accounts Receivable

77,411.00
1,539.00
78,950.00

Entries if collection is beyond the discount period:

Cash
78,950.00
Allowance for sales discounts
1,539.00
Sales discount forfeited
Accounts Receivable

*
*

1,539.00
78,950.00

Other clarifications
accounts written off included in the balance per aging should be deducted since it is written off, there
per aging, "more than one year" age correspond to 100% estimated uncollectible even such is not ind

ges up to the point of destination

the point of shipment to the

he seller.

means of converting a catalog list price

cording the accounts receivable arising

n account with a list price of Php100,000

0%, 10% and 5%. Terms were 2/10; n/30,
AA Manufacturing amounted to Php2,000
as follows:

76,950.00

uyer since FOB shipping point

collection beyond

written off, thereby no need to provide allowance

en such is not indicated in the problem

LECTURE NOTES: NOTES RECEIVABLE

Initial Recognition:
Short term
Long term

- at face value which is equal to its present value

- interest bearing note
- at face value which is its presen
non-interest note
- at present value

Subsequent measurement:
Measured at amortized cost

> for interest beaing note, subsequent to the date of the note, the present value is
face value plus accrued interest

Additional Note:
> When a non-interest bearing note is exchanged solely for cash and no other rights and privilege
the present value of the note on the date it is received, which is its amortized cost, is equal to t
proceeds exchanged.

> If a non-interest bearing note is exchanged for property, goods or services, the present value o
on the date it is received is the fair market value of the property, goods or services or the fair m
value of the note, whichever is more clearly determinable.
Sample problem related to impairment loss

Jon, one of Sonic Company's credit customers, is experiencing financial difficulties and a downw
in its financial performance. The firm is unable to service its debt and as result has missed the p
of this note and accured interest with Sonic Company. The principal amount of the note is P500,
is already due) with annual interest of 10% payable annually. Accrued interest balance at Decem
is P50,000. Jon management has negotiated a modification of its debt terms with Sonic Compan
Sonic Company agreed to the following new terms:
> Forgive the accrued interest at December 31, 2014
> Extend the payment of the principal for two years
> Reduce the interest rate (payable annually) to 8%
How much impairment loss should be recognized by Sonic Company on December 31, 2014?
Answer:
Solution:

67,380.00
PV of the note:
PV of principal
PV of interest
carrying value
impairment loss

413,200.00 *
69,420.00 **

482,620.00
550,000.00
(67,380.00)

*time factor uses 10%, 2yrs

**8% interest rate is being used; time factor uses 10%, 2 yrs

which is its present value

the present value is equal to the

rights and privileges are exchanged,

d cost, is equal to the cash

he present value of the note

rvices or the fair market

ulties and a downward trend

ult has missed the payment
of the note is P500,000 (which
st balance at December 31, 2014
with Sonic Company.

mber 31, 2014?