RECEIVABLES
Chapter 15
Receivables in General
Definition
Receivables are financial assets because they represent a contractual right to
receive cash or another financial asset from another entity.
Measurement
Initial Measurement
Fair Value + Transaction Costs*
Subsequent Measurement
Amortized Cost**
Receivables in General
Classification
(1)Trade Receivable - are receivables arising from the sale of goods and services in
the ordinary course of business.
Presentation on the FS: classified as current assets when they are expected to be
realized in cash within the normal operating cycle or one year, whichever is longer.
Examples: Trade accounts receivable, trade notes receivable and trade installment
receivable.
(2)Non-trade Receivable - are receivables arising from other sources.
Presentation on the FS: classified as current assets when they are expected to be
realized in cash within one year, the length of the operating cycle notwithstanding
Receivables in General
Presentation
All trade and current non-trade receivables are presented in one line
item in the current asset section of the Statement of Financial Position
as "Trade and Other Receivables".
Accounts Receivable
Initial Measurement
Transaction Price / Invoice Price
Solution guide:
List price XX
Less: 1st Trade Discount XX
Balance XX
Less: 2nd Trade Discount XX
Invoice Price XX
Accounts Receivable
Initial Measurement
Illustration
An entity sold goods to its customers at a list price of P10,000 on account under credit terms
10, 20, 2/10 n/30.
The 10, 20 figures represent the trade discount. This means that the first trade discount is 10%
and the second trade discount is 20%.
The 2/10 n/30 means that there is an available 2% cash discount if the customer pay on or
before the 10th day and the credit terms is 30 days.
Answer:
List price P10,000
Less: 1st Trade Discount (10,000*10%) 1,000
Balance 9,000
Less: 2nd Trade Discount (9,000*20%) 1,800
Invoice Price 7,200
Accounts Receivable
Initial Measurement
Summary of Journal Entries
Gross Method Net Method
1. Sale on account Accounts receivable 7,200 Accounts receivable 7,056
Sales 7,200 Sales 7,056
2. Assume collected within Cash 7,056 Cash 7,056
discount Sales discount 144 Accounts receivable 7,056
Accounts receivable 7,200
3. Assume collected Cash 7,200 Cash 7,200
Accounts receivable 7,200 Sales discount forfeited 144
Accounts receivable 7,056
Accounts Receivable
Credit balances or negative balances in accounts receivable resulting
from overpayment or advances cannot be offset against receivables
with positive balances. These should be presented as current liabilities.
Accounts Receivable
Subsequent Measurement
Net Realizable Value = Gross Balance – Allowances
To compute the ending gross balance of accounts receivable, please see
the below template:
Accounts Receivable
Beg. Balance xx Collections xx
Credit Sales xx Sales Discount xx
Sale Discount Forfeited xx Sales Return xx
Notes As Payment xx
Write-off xx
End. Balance xx
Accounts Receivable
Subsequent Measurement
There are four types of allowances:
(1) Allowance for sales returns
(2) (2) Allowance for sales discounts
(3) (3) Allowance for freight charge
(4) Allowance for doubtful accounts
Accounts Receivable
Subsequent Measurement
Pro-forma Entries
1. Entry for allowance for sales returns
Sales return xx
Allowance for sales returns xx
2. Entry for allowance for sales discounts
Sales discounts xx
Allowance for sales discounts xx
Accounts Receivable
Subsequent Measurement
(continuation…)
3. Allowance for freight charge - results when the shipping term is FOB
Destination, Freight Collect
Accounting for Freight Charges
Party Who is chargeable? Who actually paid?
Buyer FOB Shipping Point Freight Collect
Seller FOB Destination Freight Prepaid
Accounts Receivable
Subsequent Measurement
(continuation…)
4. Allowance for doubtful accounts Percent of AR
Balance Sheet
Direct Write-off Method Aging Method
Accounting Method (ADA)
for bad debts
Allowance
Percentage of
Method Income Statement
Credit Sales
Method
Method (DAE)
Mixed
Accounts Receivable
Subsequent Measurement
Summary of Journal Entries
Direct Write-off Allowance
1. Collectability become No entry Bad Debts Expense xx
doubtful Allowance for Bad Debts xx
2. Write-off Bad Debts Expense xx Allowance Bad Debts Expense xx
Accounts receivable xx Accounts receivable xx
3. Recovery Accounts receivable xx Accounts receivable xx
Bad Debts Expense/Gain xx Allowance for Bad Debts xx
Cash xx Cash xx
Accounts Receivable xx Accounts Receivable xx
Accounts Receivable
Subsequent Measurement
To compute the ending gross balance of allowance for doubtful
accounts, please see the below template:
Allowance for Doubtful Accounts (ADA)
Write-off xx Beg. Balance xx
Doubtful Accounts Expense(DAE) xx
Recovery xx
End. Balance xx
Notes Receivable
Definition
Notes receivable are claims supported by formal promises to pay
usually in the form of notes. A promissory note is a written contract in
which one person, known as the maker, promises to pay another
person, known as the payee, a definite sum of money.
Notes Receivable
Measurement
Classification Initial Subsequent
Measurement Measurement
Interest bearing
Short-term
Non-interest bearing* Face Value
Interest bearing With reasonable Amortized Cost
rate
Long-term With unreasonable
rate** Present Value
Non-interest bearing
Loans Receivable
Definition
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.
Measurement
Initial Measurement
Face Value xx
Add: Direct Origination Costs xx
Less: Origination Fee (xx)
Initial Carrying Value (ICV) xx
Loans Receivable
Measurement
Subsequent Measurement
Amortized Cost
If Scenario Interest Treatment on
1. Amortization
ICV > Face Value Premium Nominal Interest > Effective Interest Deduct from CA
ICV < Face Value Discount Nominal Interest < Effective Interest Add to CA
2. The fees charged by the bank against the borrower for the creation of the
loan are known as "origination fees".
Direct origination costs are directly attributable costs incurred by the lender to
originate a loan.
Loans Receivable
Impairment of Loans
Impairment is the decrease in the carrying amount of a receivable due
objective evidence of loss events.
PFRS 9, paragraph 5.2.2, in conjunction with PAS 39, paragraph 58,
provides that an entity shall assess at every end of reporting period
whether there is objective evidence that a financial asset or group of
financial assets is impaired. If such evidence exists, the entity shall
determine and recognize the amount of any impairment loss.
The carrying amount of the loan receivable shall be reduced either
directly or through the use of an allowance account.
The amount of the impairment loss shall be recognized in profit or loss.
Loans Receivable
Impairment of Loans
How to compute impairment loss?
Carrying amount of loan receivable xx
PV of recoverable amount xx
Impairment Loss xx
Receivable Financing
Definition
This refers to the act of inducing cash inflows from the receivables other than
collection on a normal basis. Simply stated, it is the financial flexibility of an
entity to raise money out of its receivable.
Common Forms
The following are the common forms of receivable financing:
Pledge/Hypothecation
Assignment
Factoring
Discounting
Receivable Financing
Common Forms
Pledge/Hypothecation
Characteristics:
(1)Receivables serve as collateral security for loans. (Pledge is a secured
borrowing transaction)
(2)Pledge receivables are not derecognized; thus, there is no change in
receivable balance.
(3)Disclosure of AR pledged is required
Receivable Financing
Common Forms
Pledge/Hypothecation
Frequently asked questions (FAQs):
(1)Proceeds from pledge
Solution guide:
Face value of loan xx
Less: Discount on loan xx
Net proceeds from pledge xx
Receivable Financing
Common Forms
Assignment
To properly understand what assignment of receivables is, let us compare
it with pledge.
Pledge Assignment
1) Formal? X P
2) Transfer of rights? X P
3) Transfer of ownership? X X
4) AR serve as security P P
(General) (Specific)
Receivable Financing
Common Forms
Assignment
Features of Assignment:
1) The loanable amount is only a percentage of the face value of AR.
2) Bank charges a service fee or commission in advance.
3) Equity on assigned accounts should be disclosed in notes to FS.
Receivable Financing
Common Forms
Assignment
Forms of Assignment:
1) Notification basis - debtors whose receivables have been assigned
are notified of the assignment. Hence, the debtors will remit
payments on the receivables not to the assignor but to the
assignee.
2) Non-notification basis - debtors whose receivables have been
assigned are NOT notified of the assignment. Hence, the debtors
will continue to remit payments on the receivables to the assignor.
Assignments are commonly made on a non-notification basis.
Receivable Financing
Common Forms
Assignment
Frequently asked questions (FAQs):
(1)Proceeds from assignment
Solution guide:
Face value of loan (certain % x face value of AR) xx
Less: Commission and other charges xx
Net proceeds from assignment xx
Receivable Financing
Common Forms
Assignment
Frequently asked questions (FAQs):
(2) Equity on assigned accounts
Solution guide:
CA of AR (use the template on AR in computing end. balance) xx
Less: CA of loans payable (Beg. Balance less payments) xx
Equity on assigned accounts xx
Receivable Financing
Common Forms
Factoring
It is a sale of accounts receivable usually on a without recourse,
notification basis to a factor (usually a bank). The factor then assumes
responsibility for uncollectible accounts.
Forms of factoring
1) Factoring without recourse (if silent) - the transferor is not liable in
case the debtor fails to pay.
2) Factoring with recourse - the transferor guarantees payment in the
event the debtor fails to pay.
Receivable Financing
Common Forms
Factoring
Frequently asked questions (FAQs):
1. Proceeds from factoring
Solution guide:
Face value of AR xx
Less: Commission and other charges xx
Factor's holdback* xx
Net proceeds from factoring xx
Receivable Financing
Common Forms
Factoring
Frequently asked questions (FAQs):
2. Gain or loss on factoring
Solution guide:
Selling Price (Net Proceeds + Factors' Holdback) xx
Less: CA of AR (NRV) xx
Gain or Loss on Factoring xx
Receivable Financing
Common Forms
Discounting
This is a transfer or endorsement of a promissory note by the payee in
favor of another party, usually a bank.
Forms of Discounting
Without Recourse
Basis Conditional Sale (if
Types of Negotiation silent)
With Recourse Basis
(if silent) Secured Borrowing
Receivable Financing
Common Forms
Discounting
Forms of Discounting
1) Discounting without recourse basis - the holder is not held liable in the
case the maker fails to pay. The note discounted has been essentially
sold outright and therefore derecognized.
2) Discounting with recourse basis - the holder is held liable in case the
maker fails to pay. The note receivable is not derecognized.
(a)Conditional sale - a contingent liability is disclosed in the notes to
financial statements.
(b)Secured borrowing - a liability is recognized on the discounting.
Receivable Financing
Common Forms
Discounting
Frequently asked questions (FAQs):
1. Proceeds from discounting
Solution guide:
Maturity Value (Principal + Total Interest) xx
Less: Discount (MV x Discount Rate x Discount Period) xx
Net proceeds from discounting xx
Receivable Financing
Common Forms
Discounting
Frequently asked questions (FAQs):
1. Gain or loss on discounting
Solution guide:
Selling Price (Net Proceeds) xx
Less: CA of NR (including accrued interest) xx
Gain or loss on discounting xx
Receivable Financing
Common Forms
Discounting
Summary of Entries on Discounting
Cash xx Cash xx Cash xx
Loss on Discounting xx Loss on Discounting xx Interest Expense xx
Notes Receivable xx Notes Receivable Discounted xx Liability for NR Discounted
Gain on Discounting xx Gain on Discounting xx xx
Interest Income xx Interest Income Interest Income xx
xx Interest Income xx
Receivable Financing
Dishonored Notes
Notes receivable not collected at maturity are considered
dishonored notes. Dishonored notes are transferred from
notes receivable to accounts receivable the amount of which
is equal to the maturity value of the note plus any direct costs
or protest fees.
Quiz
Straight Problem 1
HQ COMPANY presented the following information regarding Its receivables account
balance for the current year,2024
Loans receivable 180,000
Advances to employees 140,000
Advances to subsidiaries 20,000
Due from customer on sales on account (net of P15,000 credit balances) 235,000
Dividend receivable (8 mos.) 20,000
Subscription receivable (5 mos.) 80,000
Subscription receivable (15 mos.) 160,000
Accounts payable (net of P20,000 debit balances) 180,000
Due from customers on sales in exchange for promissory 110,000
Unearned interest income 30,000
Advances to suppliers 45,000
Claims receivable 55,000
Straight Problem 1
REQUIREMENTS:
(1) What is the total amount of trade receivables?
(2) What is the total amount to be presented in the
Statement of Financial Position as "Trade and Other
Receivables"?
Straight Problem 2
At the beginning of the current year, 2024, ODE CORP. sold goods to a
customer at a list price of P150,000. The credit term of the sales
transaction is 10, 15 2/10 n/30. The related freight cost of the
transaction is P5,000. The account was paid on January 8, 2024.
REQUIREMENTS:
How much net cash did ODE received from the customer on January
& assuming the freight terms is:
a) FOB Shipping Point, Freight Collect
b) FOB Destination, Freight Prepaid
c) FOB Shipping Point, Freight Prepaid
d) FOB Destination, Freight Collect
