Documentos de Académico
Documentos de Profesional
Documentos de Cultura
AUDIT OF RECEIVABLES.
SUBSEQUENT MEASUREMENT → AC
Short-term
AR – NRV (face value less all AR allowances: Allowance for Sales Discounts / Sales Returns / Freight Charges)
NR – face value (not discounted – immaterial / “under customary trade terms”)
Long-term
Interest-bearing – AC (if NR = ER, AC = face value)
Noninterest-bearing – AC
TRADE AND OTHER RECEIVABLES to be reported under current assets (exclude noncurrent)
Trade
- from customers (arising from sale of inventory or normal business operations, not lending)
- noncurrent if collectible beyond the operating cycle or 1 year, whichever is longer
AR, AC (NRV/CA)
Postdated/NSF checks from trade accounts – part of trade AR
Trade installment receivable, AC (CA) – part of trade AR
(AC = trade installment receivable - unearned interest income)
NR (trade) (and if silent), AC (CA)
(AC = NR - UII)
× Credit balances in customers’ accounts
- current liability (not AP)
- don’t offset unless immaterial
- result from customers’
o overpayments
o advance payments
o returns and allowances
Nontrade
- noncurrent if collectible beyond 1 year
Noncurrent (usually)
Advances to
- affiliates
- subsidiaries
(long-term investments)
Special deposits
- security deposit on lease
- deposit on contract bids
(other noncurrent assets)
NR (nontrade), AC (CA)
(AC = NR - UII)
LR, AC (CA)
(AC = LR - UII
AR
Beg
Settlement by notes
and other non-cash items
Sales discount forfeited
(under net method)
Write-off
(initial plus additional
per aging if any)
End
* AR account
- also “customers’ accounts” or “trade debtors”
- full amount though pledged or assigned
* AR, end
- “Balance” of AR
- “Outstanding” AR
AFDA
Beg
Write-off Recovery
End
* AFDA account
- If silent, company uses allowance method (not direct write-off method)
- SFP approach (Entire AR or AR based on Aging):
→ AR, end x % = AFDA, end
- IS approach (Credit or Total, Net or Gross Sales):
→ Sales x % = DAE (If silent, DAE is admin expense, not selling expense.)
- % = bad debt percentage or percentage uncollectible (100% - probability of collection)
→ based on company policy (just follow the policy, e.g., number of past years covered)
→ generally computed as (Total Write-offs – Total Recoveries) / Total Credit Sales
→ [exclude current year amounts if to be applied on current year sales (IS approach)]
→ [include current year amounts if to be applied on current year AR, end (SFP approach)]
- Change in approach is a change in accounting estimate
→ If adjustment involves additional DAE, entry is Dr. DAE Cr. AFDA; otherwise, Dr. AFDA, Cr. DAE
* Sales / Service Revenue = Cash price (PV of NR + DP if cash price is not given)
* Cash price = invoice price (not list price); UII = NR + DP - Cash price
- Nominal Rate (NR) ≠ Effective Rate (ER) → Compute PV (PV of Principal + PV of Interest)
(Discount if NR ↓, Premium if NR ↑.)
- Time value of money (computation of present value factor of 1 or lump-sum, ordinary annuity, or annuity due)
- Amortization table:
Date Interest Collection Interest Income Amortization Principal Collection Present Value
(Interest date) (o/s Prin., beg x NR) (PV, beg x ER) (Int. Inc. - Int. Coll.) (if any) (PV, beg
+ A if discount
- A if premium
- Prin. Coll.)
* PV = PV, beg * (1 + ER) - Int. Coll. - Prin. Coll.
LOANS RECEIVABLE
IMPAIRMENT OF RECEIVABLES
RECEIVABLE FINANCING
Pledging / Hypothecating
- all AR
- disclosure only (balance still included in AR)
Assignment
- specific AR only
- reclassified (balance still included in AR)
- non-notification or notification basis
Factoring
- sale of AR
- Casual factoring: ordinary sale derecognizing related AFDA and recognizing gain or loss
- Factoring as a continuing agreement: Net cash proceeds = AR - commission – recv. from factor - interest - DTC)
Discounting
- Net cash proceeds = maturity value – discount
MV = principal + (principal x interest rate x term)
Discount = MV x discount rate x discount period/12 (If silent, discount rate is annual.)
- Without recourse: credit NR (If silent, discounting is with recourse)
- With recourse – conditional sale: credit NR discounted
- With recourse – secured borrowing: credit Liability for NR discounted (debit Interest expense instead of Loss)
- Dishonored discounted NR → Dr. AR (MV + protest fee and other bank charges) Cr. Cash (paid to bank)
On December 31, AAA Co.’s Accounts Receivable balance per ledger of P2,530,000 includes:
Based on the above and the result of your audit, compute the following:
PROBLEM 2
From inception of operations, BBB Co. carried no allowance for doubtful accounts.
Uncollectible accounts were expensed as written off and recoveries were credited to income as collected.
During 2018, management recognized that the accounting policy with respect to doubtful accounts was not correct
and determined that an allowance for doubtful accounts was necessary.
A policy was established to maintain an allowance for doubtful accounts based on historical bad debt loss percentage
applied to year-end accounts receivable.
The historical bad debt loss percentage is to be recomputed each year based on all available past years up to a
maximum of five years.
The entity reported accounts receivable of P1,250,000 on December 31, 2017 and P2,000,000 on December 31, 2018.
PROBLEM 3
Nets Company produces paints and related products for sale to the construction industry throughout Metro Manila.
While sales have remained relatively stable despite a decline in the amount of new construction, there has been a
noticeable change in the timeliness with which the company’s customers are paying their bills.
The company sells its products on payment terms of 2/10, n/30. In the past, over 75 percent of the credit customers have
taken advantage of the discount by paying within 10 days of the invoice date. During the year ended December 31,
2017, the number of customers taking the full 30 days to pay has increased. Current indications are that less than 60% of
the customers are now taking the discount. Uncollectible accounts as a percentage of total credit sales have risen from
the 1.5% provided in the past years to 4% in the current year.
In response to your request for more information on the deterioration of accounts receivable collections, the company’s
controller has prepared the following report:
Nets Company
Accounts Receivable Collections
December 31, 2018
The fact that some credit accounts will prove uncollectible is normal, and annual bad debt write-offs had been
1.5% of total credit sales for many years. However, during the year 2018, this percentage increased to 4%. The
accounts receivable balance is P1,500,000, and the condition of this balance in terms of age and probability of
collection is shown below:
At the beginning of the year, the Allowance for Doubtful Accounts had a credit balance of P27,300. The
company has provided for a monthly bad debt expense accrual during the year based on the assumption that
4% of total credit sales will be uncollectible. Total credit sales for the year 2018 amounted to P8,000,000, and
write-offs of uncollectible accounts during the year totaled P292,500.
1. How much is the adjusted balance of the allowance for doubtful accounts as of December 31, 2018?
2. The necessary adjusting journal entry to adjust the allowance for doubtful accounts as of December 31, 2018 would
include a credit to allowance for doubtful accounts of
PROBLEM 4
DDD Corporation included the following in its notes receivable as of December 31, 2018:
In connection with your audit, you were able to gather the following transactions during 2018 and other information
pertaining to the company’s notes receivable:
I. On January 1, 2018, DDD sold a tract of land. The land, purchased 10 years ago, was carried on DDD’s books at a
value of P1,000,000. DDD received a noninterest-bearing note for P1,760,000. The note is due on December 31, 2019.
There is no readily available market value for the land, but the current market rate for comparable notes is 10%.
II. On January 1, 2018, DDD finished consultation services and accepted in exchange a promissory note with a face
value of P2,400,000, a due date of December 31, 2020, and a stated rate of 5%, with interest receivable at the end
of each year. The fair value of the services is not readily determinable and the note is not readily marketable. Under
the circumstances, the note is considered to have an appropriate imputed rate of interest of 10%.
III. On January 1, 2018, DDD sold an equipment with a carrying amount of P3,200,000 to X Corporation. As payment, X
gave DDD a P4,800,000 note. The note bears an interest rate of 4% and is to be repaid in three annual installments of
P1,600,000 plus interest on the outstanding balance. The first payment was received on December 31, 2018. The
market price of the equipment is not reliably determinable. The prevailing interest rate for similar notes is 8%.
PROBLEM 5
On January 1, 2015, DDD Co. loaned P3,000,000 to DEF Co. The terms of the loan were payment in full on January 1, 2020
plus annual interest payments at 11%. The interest payment was made as scheduled on January 1, 2016, however, due
to financial setbacks DEF Co. was unable to make its 2017 interest payment. DDD Co. considers the loan impaired and
projects the following cash flows from the loan as of December 31, 2017 and 2018. Assume that DDD Co. accrued the
interest at December 31, 2016, but did not continue to accrue interest due to the impairment of the loan.
Amount projected as of
Date of flow December 31, 2017 December 31, 2018
December 31, 2018 P200,000 200,000
December 31, 2019 400,000 600,000
December 31, 2020 800,000 1,200,000
December 31, 2021 1,200,000 1,000,000
December 31, 2022 400,000
Your client requested you to determine the following: (Round off present value factors to four decimal places, e.g.,
0.8264, 1.7355.)
PROBLEM 6
The following transactions transpired for E Co. during the year 2017:
a. On May 1, received a P900,000, six-month, 12% interest-bearing note from GHI, a customer, in settlement of an
account.
b. On June 30, factored P1,200,000 of its AR to a finance company. The finance company charged a factoring fee of
5% of the accounts factored and withheld 20% of the amount factored.
c. On August 1, E Co. discounted the GHI note at the bank at 15%.
d. On November 1, GHI defaulted on the P900,000 note. E Co. paid the bank the total amount due plus a P36,000
protest fee and other bank charges.
e. On December 31, E Co. assigned P1,800,000 of its accounts receivable to a bank under a nonnotification basis. The
bank advanced 80% less a service fee of 5% of the accounts assigned. E Co. signed a promissory note for the loan.
f. On December 31, E Co. collected from GHI in full including interest on total amount due at 12% since default date.
g. On December 31, it is estimated that 5% of the accounts receivable may prove uncollectible.