MODULE

4 RECEIVABLES PART II
Week 3

LEARNING OBJECTIVES
 State the initial and subsequent measurement of notes receivables.
 Compute for present value factors and apply them properly.
 Prepare amortization tables.
 Compute for the effective interest rate

INTRODUCTION

Long-term notes receivable may be classified as interest bearing and non-

interest bearing. Interest bearing note may be further classified into two, with
realistic interest rates and unrealistic interest rates.

COURSE CONTENT

INITIAL MEASUREMENT: LONG-TERM NOTES RECEIVABLE

A. Interest Bearing Notes Receivable – With Realistic Interest Rate
Interest bearing notes with realistic or reasonable interest rate is initially
measured at its fair value, which is equal to its face value.
B. Interest Bearing Notes Receivable – With Unrealistic Interest Rate
Interest bearing notes with unrealistic rates are discounted using the
imputed interest rate that approximates the market rate of interest for the
same note.

Unrealistic Interest Rates –interest bearing note with a nominal rate which
is significantly different from prevailing interest rate for similar notes or
when the notes face value is significantly different from market value of the
consideration given up on exchange for the note.

Note: Discount is same as unearned finance charge or unearned income.

The discount or premium is amortized as revenue over the term of the note
using the effective rate method. Premium on receivable is a reduction of
interest income while discount is an addition.

i. One-time collection Present value of Principal (Principal of the

Principal xPV of 1) XX
Amount of the NR Add: Present value of interest payments (Principal
x nominal rate x PV of ordinary annuity) XX
Present value of Notes receivable XX
ii. Uniform collection Present value:
 of the Principal 1st total collection of Principal and
amount of the NR interest x PV of 1 after one period XX
each year (collection Nth total collection of Principal and
made after one year) interest x PV of 1 after n periods XX
Present value of Notes receivable XX

C. Non-Interest-Bearing Notes Receivable/Zero-Interest Bearing

Non-interest-bearing note is discounted to arrive at the fair value or the
present value of future cash flows using the prevailing market rate of interest
for the similar receivables. In determining the fair value of non-interest
bearing notes, the following rules should be applied:
1. Periodic payment (with available cash price). The present value of the note is
equal to the cash price.
2. One-time collection of principals (no available cash price). The present value
of the note is equal to face value multiplied by present value of 1.
3. Uniform collection of principal annually (no available cash price). The present
value of the note is equal to periodic payment multiplied by present value of
ordinary annuity of 1.

SUBSEQUENT MEASUREMNT: LONG-TERM NOTES RECEIVABLE

Long-term notes receivable is subsequently measured at amortized cost using
effective interest methods.

A. Interest Bearing Notes Receivable-With Realistic Interest Rate

Interest bearing notes with realistic or reasonable interest rate is
subsequently measured at amortized cost. Its amortized cost is its face
value.
B. Interest Bearing Notes Receivable-With Unrealistic Interest Rate
Interest bearing notes with unrealistic rates are subsequently measured at
amortized cost using the imputed interest rate that approximates the market
rate of interest for the same receivables.
C. Non-Interest-Bearing Notes Receivable/Zero-Interest Bearing
Non-interest-bearing note are measured subsequently at amortized cost
using the prevailing market rate of interest for the similar receivables.

The amortized cost for interest bearing note with unrealistic interest rate or
non-interest-bearing note is computed as follows:

Face amount XX
Add: Premium on notes receivable XX
Less: Discount on notes receivable (XX)
Loss allowance (XX)
Amortized cost XX

Note: The interest rate used in computing the initial value of the receivable is
the rate to be used in amortizing the receivable.

ILLUSTRATION: Interest-Bearing Note with Realistic Interest Rate

On January 1,2018, Florendo Co. Sold a machine to Gregorio Co. In lieu of cash
payment, Gregorio gave Florendo a 4-year, P100,000, 10% note. The notes requires
interest to be paid annually on December 31. The machinery has a cost of P500,000
and accumulated depreciation as of January 1,2018 of P350,000.

The 10% interest rate is a realistic rate of interest for a note of this type.
Required:
A. Compute for the following as of December 31,2018:
1) Gain or loss on sale of machinery
2) Interest income
3) Current portion of the Notes Receivable
4) Noncurrent portion of the Notes Receivable
B. Prepare all the necessary entries in 2018.

SOLUTION:
Requirement No. 1
Nest Selling prince = present value of
Principal = face value P100,000
Less: Carrying amount of machinery
Cost P500,000
Less: Accumulated depreciation 350,000 150,000
Loss on sale (P50,000)
Requirement No.2
Interest income (P100,000 x 10%) =P10,000

Requirement No.3
Zero, since no principal amount is collectible within one year from the reporting
date

Requirement No.4
The entire principal amount of notes receivable of P100,000 is treated as
noncurrent asset since it is collectible beyond one year from the reporting date.

Journal entries for 2018 are as follows:

Jan.1 Notes receivable P100,000.
Accumulated depreciation 350,000
Loss on sale 50,000
Machinery P500,000

Dec.31 Cash 10,000

Interest income 10,000

ILLUSTRATION: Interest-Bearing Note with Unrealistic Interest Rate, One-

Time Collection of Principal.
On January 1,2018, Gregorio Co. sold a machine to Florendo Co. In lieu of cash
payment, Florendo gave Gregorio a 4-year, P100,000, 10% note. The note requires
interest to be paid annually on December 31. The machinery has a cost of P500,000
and accumulated depreciation as of January 1,2018 of P350,000. The prevailing
rate of interest for a note of this type is 16%.
Required:
A. Compute the following as of December 31,2018:
1. Gain or loss on sale of machinery.
2. Interest income
3. Current portion of the Notes Receivable
4. Noncurrent portion of the Notes Receivable
B. Prepare all the necessary entries in 2018.

SOLUTION:
Requirement NO.1
Net Selling price:
Present value of principal (P100,000 x .5523) P55,230
Add: Present value of interest (P100,000 x 10% x 2.7982) 27,982
P83,212
Less: Carrying amount of machinery
Cost P500,000
Less: Accumulated depreciation 350,000 150,000
Loss on sale (P66,788)
Amortization table:
Date Interest Interest Discount Present value
collection income amortization
01/01/2018 P83,212
12/31/2018 P10,000 P13,314 P3,314 86,526
12/31/2019 10,000 13,844 3,844 90,370
12/31/2020 10,000 14,459 4,459 94,829
12/31/2021 10,000 15,173 5,171 100,000

Notes:
/ Interest income= Beginning balance of present value x effective interest rate
/ Present value 2nd year = Present value end of 1 st year minus premium,
amortization plus discount amortization.
/ If the principal amount of the note is collectible within one year, the entire
carrying amount will be presented as current assets; otherwise, it will be presented
as noncurrent assets.

Requirement No.2
Interest income = P13,314 (see amortization table above)

Requirement No.3
Zero, since no principal amount is collectible within one year from the reporting
date.

Requirement No. 4
Principal Collectible beyond one-year P100,000
Less: Unearned interest income 13,474
Carrying amount of notes receivable P86,526
The entire principal amount of notes receivable is treated as noncurrent asset since
it is collectible beyond one year from the reporting date.

Journal entries for 2018 are as follows:

Jan.1 Notes Receivable P100,000
Accumulated depreciation 350,000
Loss on sale 66,788
Machinery P500,000
Unearned interest income (P100,000 – P83,212) 16,788

Dec. 31 Cash 10,000

Interest income 10,000
Unearned interest income 3,314
Interest income 3,314

ILLUSTRATION: Interest-Bearing Note with Unrealistic Interest Rate, Interest

is Payable Semi-Annually, One-Time Collection of Principal
On January 1,2018, Teofilo Co. sold a machine to Candicho Co. In lieu of cash
payment, Candido gave Teofilo a 4-year, P100,000, 10% note. The note requires
interest to be paid semi-annually every June 30 and December 31. The machinery
has a cost of P500,000 and accumulated depreciation as of January 1,2018 of
P350,000.

The prevailing rate of interest for a note of this type is 16%.

Required:
A. Compute for the following as of December 31,2018:
1) Gain or loss on ale of machinery
2) Interest income
3) Current portion of the Notes Receivable
4) Noncurrent portion of the Notes Receivable.
B. Prepare all the necessary entries in 2018.

SOLUTION:
Requirement NO.1
Net Selling price:
Present value of principal (P100,000 x .5403) P54,030
Add: Present value of interest (P100,000 x 5% x 5.7466) 28,733
P82,763
Less: Carrying amount of machinery
Cost P500,000
Less: Accumulated depreciation 350,000 150,000
Loss on sale (P67,237)

Amortization table:
Date Interest Interest Discount Present value
collection income amortization
01/01/2018 P82,763
06/30/2018 5,000 6,621 1,621 84,384
12/31/2018 5,000 6,751 1,751 86,135
 06/30/2019 5,000 6,891 1,891 88,026
12/31/2019 5,000 7,042 2,042 90,068
06/30/2020 5,000 7,205 2,205 92,273
12/31/2020 5,000 7,382 2,382 94,655
06/30/2021 5,000 7,572 2,572 97,227
12/31/2021 5,000 7,778 2,773 100,000

Note:
/ Since the stated interest of the note is payable semi-annually, the present
value factor to be used in computing for the total present value is 8% for 8 semi-
annual periods (4 years x 2), both for the principal and interest.

Requirement No.2
Interest income (P6,621 + P6,751) = P13,372 (see amortization table above )

Requirement No.3
Zero, since no principal amount is collectible within one year from the reporting
date.

Requirement No.4
Principal Collectible beyond one year P100,000
Less: Unearned interest income 13,865
Carrying amount of notes receivable P86,135

The entire principal amount of notes receivable is treated as noncurrent asset since
it is collectible beyond one year from the reporting date.

Journal entries for 2018 are as follows:

Jan.1 Notes receivable P100,000
Accumulated depreciation 350,000
Loss on sale 67,237
Machinery 500,000
Unearned interest income (P100,000 – P82,763) 17,237

June 30 cash 5,000

Interest income 5,000
To record interest collection

Dec. 31 Cash 5,000

Interest income 5,000
To record interest collection

Unearned interest income

(P1,621 + P1,751) 3,372
Interest Income 3,372
To record amortization of discount
ILLUSTRATION: Interest-bearing Note with Unrealistic Interest Rate, Uniform
Collection of Principal
On January 1,2018, Candido Co. sold a machine to Teofilo Co. In lieu of cash
payment, Teofilo gave Candido a 4-year, P100,000, 10% note. The note requires
interest to be paid annually on December 31. The machinery has a cost of P500,000
and accumulated depreciation as of January 1,2018 of P350,000.

The prevailing rate of interest for a note of this type is 16% and the principal
amount of the note is to be paid in four equal annual installments of P25,000 every
December 31.
Required:
A. Compute for the following as of December 31, 2018:
1) Gain or loss on sale of machinery
2) Interest income
3) Current portion of the Notes Receivable
4) Noncurrent portion of the Notes Receivable
B. Prepare all the necessary entries in 2018.

SOLUTION:
Requirement No.1
Net Selling price= Present value of notes receivable P88,733
Less: Carrying amount of machinery
Cost 500,000
Less: Accumulated depreciation 350,000 150,000
Loss on sale (P61,267)

Present value of notes receivable:

Date Principal Interest Total PV of 1 D Present
(A) collection collection value
(B) C=A+B E=CxD
12/31/2018 25,000 10,000 35,000 0.8621 30,172
12/31/2019 25,000 7,500 32,500 0.7432 24,153
12/31/2020 25,000 5,000 30,000 0.6407 19,220
12/31/2021 25,000 2,500 27,500 0.5523 15,188
Total present value of notes receivable P88,733

Amortization table
Date Interest Interest Amortization Principal Present
collection income collection value
01/01/201 P88,733
8
12/31/201 10,000 14,197 4,197 25,000 67,930
8
12/31/201 7,500 10,869 3,369 25,000 46,299
9
12/31/202 5,000 7,408 2,408 25,000 23,707
0
12/31/202 2,500 3,793 1,293 25,000
 1

Requirement No.2
Interest income = P14, 197 (see amortization table above)

Requirement No.3
Prncipal collectible within one year P25,000
Less: Discount amortization 3,369
Carrying amount of notes receivable P21,631

Requirement No.4
Principal collectible beyond one year (P25,000 x 2) P50,000
Less: Discount amortization (P2, 408 + P1, 293) 3,701
Carrying amount of notes receivable P46, 299

Journal entries for 2018 are as follows:

Jan.1 Notes receivable P100,000
Accumulated depreciation 350,000
Loss on sale 61,267
Machinery 500,000
Unearned interest income (P100,000-P88,733) 11,267
Dec. 31 Cash 35,000
Notes receivable 25,000
Interest income 10,000

Unearned interest income 4,197

Interest income 4,197

ILLUSTRATION: NonInterest-bearing Note, One-time Collection of Principal

On January 1,2018, Rosenio Co. sold a machine to Rose Co. In lieu of cash
payment, Rose gave Rosenio a 5-year, P500,000 note. The machinery has a cost of
P500,000 and accumulated depreciation as of January 1,2018 of P150,000.

The note is a non-interest bearing note and the prevailing rate of interest for a note
of this type is 10%.

Required:

A. Compute for the following as of December 31,2018:

1) Gain or loss on sale of machinery
2) Interest income
3) Current portion of the Notes Receivable
4) Noncurrent portion of the Notes Receivable
B. Prepare all the necessary entries in 2018.

SOLUTION:
Requirement No.1
Net Selling price= Present value of principal
(P500,000 x .6209) P310,450
Less: Carrying amount of machinery
Cost 500,000
Less: Accumulated depreciation 150,000 350,000
Loss on sale (P39,550)

Amortization table
Date Interest income Present value
01/01/2018 P310,450
12/31/2018 P31,045 341,495
12/31/2019 34,150 375,645

Requirement No.2
Interest Income = P31,045 (see amortization table above)

Requirement No.3
Zero, since the entire note receivable is collectible beyond one year.

Requirement No.4
Principal Collectible beyond one year 500,000
Less: Unearned interest income 124,355
Carrying amount of notes receivable P375, 645

The entire principal amount of notes receivable is treated as noncurrent asset since
it is collectible beyond one year from the reporting date.

Journal entries for 2018 are as follows:

Jan.1 Notes receivable P500,000
Accumulated depreciation 150,000
Loss on sale 39,550
Machinery 500,000
Unearned interest income (P500,000 – 310, 450) 189,550
Dec. 31 unearned interest income 31,045
Interest income 31,045

ILLUSTRATION: Noninterest-bearing Note, Uniform Collection of Principal

On January 1,2018, Ronaldo Co. sold a machine to Ron Co. In lieu of cash
payment, Ron gave Ronaldo a 3-year, P600,000 note. The machinery has a cost of
P500,000 and accumulated depreciation as of January 1,2018 of P150,000.

The note is a non-interest bearing note and the prevailing rate of interest for a note
of this type is 14% and the principal amount of the note is to be paid in three equal
annual installments of P200,000 every December 31.

Required:

A. Compute for the following as of December 31,2018:

1) Gain or loss on sale of machinery
2) Interest income
3) Current portion of the Notes Receivable a sof December 31,2018.
 4) Noncurrent portion of the Notes Receivable as of December 31, 2018.
B. Prepare all the necessary entries in 2018.

SOLUTION:
Requirement No.1
Net Selling price = present value of principal (P200,000 x 2.3216)
P464,320
Less: Carrying amount of machinery
Cost 500,000
Less: Accumulated depreciation 150,000 350,000
Gain on sale P114,320

Amortization table
Date Annual Interest Amortization Present value
collection income
01/01/2018 P464,320
12/31/2018 200,000 P65,005 P134,995 329,325
12/31/2019 200,000 46,105 153,895 175,430
12/31/2020 200,000 24,570 175,430 -
Notes:
/ Annual collection = periodic payment
/ Interest income = Beginning balance of present value x effective interest rate =
(P464,320 x 14%)

SHORTCUT FORMULA:

/ Present value of the next period end may be computed as follows:

[Present value beginning of 1st year x (1+effective interest rate)] – total annual collection of
interest and principal

/ Example: Using the previous amortization table, the present value of the note for years 2018
to 2020 is computed as follows:
Requirement 1) No.2
PV end of 12/31/2018 = (P464,320 x 1.14) – 200,000 = P329,325
Interest income = P65, 005 (see amortization table above)
2) PV end of 12/31/2019=(P329,325 x1.14) -200,000 = P175,430
Requirement 3) No.3
PV end of 12/31/2020=(P175,430 x1.14)-200,000=0
Principal Collection next year P200,000
Less: Unearned interest income 46,105
Carrying amount of notes receivable P153,895

Requirement No.4
Principal Collectible beyond one year P200,000
Less: Unearned interest income 24,570
Carrying amount of notes receivable P175,430
Journal entries for 2018 are as follows:
Jan.1 Notes receivable P600,000
Accumulated depreciation 150,000
Gain on sale 114,320
Machinery 500,000
Unearned interest income (P600,000 -464,320) 135,680

Dce.31 Cash 200,000

Notes receivable 200,000
Unearned interest income 65,005
Interest income 65,005

ILLUSTRATION: Noninterest Bearing Note Periodic Payment and with available

Cash Price
On January 1,2018, Jasmin Co. sold a machine to Tabs Co. In lieu of cash
payment, Tabs gave Jasmin a 3-year, P300,000 note. The machinery has a cost of
P500,000 and accumulated depreciation as of January 1,2018 of P200,000. The
machinery has a cash price of P288,000.

The note is a non-interest bearing and payable in three equal annual installments
of P100,000 every December 31 beginning December 31, 2018.

Required:

A. Compute for the following as of December 31,2018:

5) Gain or loss on sale of machinery
6) Interest income
7) Current portion of the Notes Receivable a sof December 31,2018.
8) Noncurrent portion of the Notes Receivable as of December 31, 2018.
B. Prepare all the necessary entries in 2018.

SOLUTION:
Requirement No.1
Net Selling price=Cash price P288,000
Less: Carrying amount of machinery
Cost 500,000
Less: Accumulated depreciation 200,000 300,000
Loss on sale (P12,000)

The difference of the cash price and the face value of the note of P12,000, is
allocated as follows:
Years Notes outstanding Fraction Allocated interest
income
1/1/18-12/31/18 300,000 3/6 6,000
1/1/19-12/31/19 200,000 2/6 4.000
1/1/20-12/31/20 100,000 1/6 2,000
Total P600,000 P12,000

Requirement No.2
Interest income =P6,000 (see table above)

Requirement No.3
Principal collectible in 2019 P100,000
Less: Unearned interest income 4,000
Current portion of Notes receivable, Dec. 31, 2018 P96,000

Requirement No.4
Principal collectible in 2020 P100,000
Less: Unearned interest income 2,000
Noncurrent portion of Notes Receivable, Dec. 31, 2018 P98,000

Journal entries for 2018 are as follows:

Jan. 1 Notes receivable P300,000
Accumulated depreciation 200,000
Loss on sale 12,000
Machinery 500,000
Unearned interest income(P300,000 – 288,000) 12,000

Dec. 31 Cash 100,000

Notes receivable 100,000
To record collection of P100,000 notes receivable
Unearned interest income 6,000
Interest income 6,000
To record amortization of interest

Computation of annual collection

Some problem will require computation of the uniform annual collection for the
notes receivable when such notes are compounded. The formula for the annual
collection is:

Present value of the notes

Annual Collection =
PV of ordinary annuity or annuity due

ILLUSTRATION: Computation of Annual Payment or Collection

On January 1,2018, Jayzel Company sold an inventory to Joyce Company for
P2,000,000. A note was received in exchange for the product which provides that
four equal annual installments will be made every December 31, starting December
31, 2018. The effective rate of the notes receivable which is compounded annually is
10%

Required:
Compute for the:
1) Annual collection
2) Interest income in 2018

Case No.1: Based on the given data.

Case No.2: Assume instead that the first payment is made on January 1, 2018.

SOLUTION:
Case No.1
Requirement No.1
Present value of the notes
Annual Collection =
PV of ordinary annuity or annuity due

Annual collection = P2,000,000/3.1699 = P630,935

Requirement No.2
Interest income (10%x P2,000,000) = P200,000

Case No.2
Requirement No.1
Present value of the notes
Annual Collection =
PV of ordinary annuity=orP573,575
Annual collection =P2,000,000/3.4869 annuity due

Requirement No.2
Interest Income [10% x (P2,000,000 – P573,575)] = P142,642
LESSON 3: LOAN RECEIVABLE

For banks and other financial institutions, loans receivables arise from loans
to heterogenous customers.

INITIAL MEASUREMENT – LOAN RECEIVABLE

Loans receivable should be initially measured at fair value plus transaction cost. In
other words, the following items should be considered in the initial measurement of
loans receivable which is directly related in granting a loan to a customer or
borrower:

1) Origination fees include compensation for activities such as evaluating the

borrower’s financial condition, evaluating guarantees, collateral and other
security, negotiating the terms of the loan, preparing and processing
documents and closing the loan transaction. Origination fees received from
the borrower is recorded as unearned interest income.
2) Direct origination cost refers to origination cost or transaction cost not
chargeable to customers.
3) Indirect origination cost shall be treated as expense

Therefore, the initial carrying amount of the loans receivable may be computed
as follows:
Principal Amount XX
Less: Origination fee received (XX)
Add: Direct origination cost XX
Initial present value or carrying amount XX

Journal entries:
1. To record the loan
Loan receivable XX
Cash XX
2. To record the receipt of origination fees
Cash XX
Unearned interest income XX
3. To receord the payment of direct origination costs
 Present value of the notes
Annual Collection =
PV of ordinary annuity or annuity due
Unearned interest income XX
Cash XX
4. To record collection of loan receivable
Cash XX
Loan receivable XX
5. To record amortization of unearned interest income
Uneraned interest income XX
Interest income XX

SUBSEQUENT MEASUREMENT: LOAN RECEIVABLE

Loans receivable is subsequently measured at amortized cost using effective interest
method. Since loans receivable frequently involves transaction cost, a new effective
rate should be computed through interpolation. When computing the effcetive
interest rate, always remember the rule on present value, that “the higher the
interest rate, the lower the present value”.

ILLUSTRATION: Computation of Effective Interest Rate through Interpolan

On January 1, 2018, Loner granted a 4-year loan to a borrower in the amount of
P5,000,000. The company incurs P200,000 of direct loan origination cost and
receives nonrefundable origination fee amounting to P500,000. The stated interest
is 10% payable annually every December 31.

Required:
A. Compute for the following:
1) Effective interest rate
2) Interest income on December 31, 2018
3) Carrying amount of the loans receivable, December 31, 2018
4) Current portion of the loans receivable, December 31, 2018
5) Noncurrent portion of the loans recivable, December 31, 2018
B. Prepare all the necessary entries in 2018.

SOLUTION:
Requirement No.1 –Steps:
1. Compute for the initial present value of the loan receivable.
Principal P5,000,000
Add: Direct origination cost incurred 200,000
Less: Origination fees received 500,000
Initial present value of loan receivable P4,700,000
2. Get the present value using a lower rate (in this example 11%, the present
value is P4,844,700)
Note: There is a discount if effective rate is greater than nominal rate
premium if otherwise.
 Present value of Principal (P5,000,000 X .6587)
P3,293,500
Add: Present value of interest payments (P5M x 10%x 3.1024) 1,551,200
Total present value P4,844,700
3. Compute the present value using a higher rate (in this example, the present
value using 12% is P4,696,150).
The present value of lower rate must be higher than the net proceeds while
the present value of the higher rate must be lower than the net proceeds.
Present value of Principal (P5,000,000 x .6355) P3,177,500
Add: PV of interest payments (P5M x 10% x 3.0373) 1,518,650
Total present value P4,696,150

4. Use the following formula in computing the effective interest rate.

Effective rate Present value Gap differences Gap percentage
11% P4,844,700
P144,700
? P4,700,000 1%
P3,850
12%
P4,696,150________________________________________________________
Total gap difference P148,550
Computation using the lower rate as a starting point:
(PV of LR –PV of X)
X = Lower rate + [ (HR –LR) x ]
PV of LR –PV of HR

P144,700
X = 11% + [ (12% –11%) x ]
P148,550

X = 11.97%
Computation using the higher rate as a starting point:
(PV of X –PV of HR)
X = Higher rate + [ (HR –LR) x ]
PV of LR –PV of HR

P3,850
X = 12% + [ (12% –11%) x ]
P148,550

X= 11.97%

Legend: LR- lower rate HR-higher rate PV-Present value

Amortization table-using 11.97%

Date Interest Interest Discount Present value
collection income amortization
 01/01/2018 P4,700,000
12/31/2018 500,000 562,590 62,590 4,762,590
12/31/2019 500,000 570,082 70,082 4,832,672
12/31/2020 500,000 578,471 78,471 4,911,143
12/31/2021 500,000 587,864 88,857 5,000,000

Requirement No.2
Interest Income = P562,960 (see amortization table above)

Requirement No.3
Principal amount collectible beyond one year P5,000,000
Less: Unearned interest income 237,410
Carrying amount of notes receivable P4,762,590

Requirement No.4
Zero, the entire note receivable is collectible beyond one year.

Requirement No.5
Principal amount collectible beyond one year P5,000,000
Less: Unearned interest income 237,410
Carrying amount of notes receivable P4,762,590

The entire principal amount of notes receivable is treated as noncurrent asset since
it is collectible beyond one year from the reporting date.

Journal entries for 2018 are as follows:

Jan.1 Loans receivable P5,000,000
Cash P5,000,000
Unearned interest income 200,000
Cash 200,000
To record the direct origination cost incurred

LOAN AND RECEIVABLE IMPAIREMENT

At each reporting date, an entity shall recognize a loss allowance for expected credit
losses on a lease receivable, a contract asset or a lose commitment and financial
guarantee contract as follows:
1.Lifetime expected credit loss – if the credit risk on that financed instrument
has increased significantly since initial recognition.
2. 12-month expected credit loss- if the credit risk on the financed instrument
has not increased significantly since initial recognition.
Impairment gain or loss
In accordance with paragraph 5.5.5 of PFRS 9, an entity shall recognize of profit or
loss, as an impairment gain or loss, the amount of expected credit losses (or
reversal) that is required to adjust the loss allowance at the reporting date. Note the
following difference,
Description PAS 39 PFRS 9
1. Impairment loss P&L P&L
2. Impairment gain P&L, with limit * P&L, no limit
 3. Discount rate Original effective Original effective rate or
rate credit-adjusted effective
interest rate for purchased
in originated credit impaired
financial assets

 The reversal shall not result in a carrying amount of the financial asset that
exceeds what the amortized cost would have been had the impairment not
been recognized at the date the impairment is reversed. The gain on reversal
of impairment may be determined as follows:

Present value of future cash

flows using original effective
rate (e.g. P 5M) Lower amount
(e.g.vs.
P 5M) Gain on impairment
Would have been amortized
recovery (P .2M) P&L
cost had been there no Actual amortized cost,
impairment ( e.g. P 6M) date of reversal (e.g P
4.8 M)

Impairment of Receivable
Carrying amount of the receivable
Less: Present value of expected future cash flows discounted using the original
effective rate
Receivable impairment loss
Carrying amount of loan receivable:
1. For receivable (e.g. loan ) originally issued without premium or discount, its
effective rate is equal is equal to the nominal rate.
Principal XX
Add: Accrued interest (if recorded by the company) XX
Carrying amount of loan receivable: XX
2. For receivable (e.g. loan) originally issued with premium or discount:
Carrying amount of loan receivable = Present value at the date of impairment
plus any unpaid accrued interest recorded by the company.

Present value of expected future cash flows:

Date Cash Flow Present Value Total
End of (CF) Factor (PVF) CF
x PVF)
Year 1 XX XX XX
Year 2 XX XX XX
Year n XX XX XX

Total present value of future cash flows XX

The date is from the date of impairment until date of receipt of cash.
Journal entries are as follows:
1. Date of impairment
Loan impairment XX
Accrued interest receivable (if any) XX
Loss allowance XX

2. Amortization of loan impairment

Loss allowance XX
Interest income XX

Illustration: Impairment Loss

On January01, 2017, Kinakaya Pa Company granted a five year loan to a borrower
amounting to P5,000,000. The loan bears interest of 10 % and is collectible every
December 31.

On December 31,2018, Kinakaya Pa considers the loan impaired and that only
P4,000,000 principal amount will be collected. No cash was received in 2018. The
prevailing rate of interest for a loan of this type is 12 %.

Assuming the following independent cases:

Case No.1 : Kinakaya Pa company accrued the interest on December 31,2018 and
the entire P4,000,000 will be collected on the maturity date.

Case No.2 : Kinakaya Pa Company did not accrue the interest on December
31,2018 and the entire P4,000,000 will be collected on the maturity date.

Case No.3: Kinakaya Pa Company did not accrue the interest on December
31,2018 and the P4,000,000 will be collectible as follows:
Date Amount
December 31,2019 P1,500,000
December 31, 2020 P2,500,000

Case no. 4: Kinakaya Pa Company did not accrue the interest on December
31,2018 and the P4,000,000 will be collectible as follows:
Date Amount
January 01,2019 P1,000,000
December 31,2019 P2,000,000
December 31,2020 P1,000,000

Required:
A. Compute the following:
1) Loan impairment loss in 2018.
2) Interest income in 2019.
3) Carrying amount of the loan, December 31,2019.

B. Prepare the necessary entries from the date of impairment to 2019.

SOLUTION:
CASE NO.1
Requirements No.1
Carrying amount of receivable:
Principal 5,000,000
Add: Accrued Interest
(P 5,000,000 x 10 % x 12/ 12) 500,000 5,500,000

Less: Present value of expected cash flows

(P 4,000,000 x.7513) 3,005,200
Loan impairment -12/31/2018 2,494,800

Amortization Table
Date Interest Income Present Value
12/31/2018 3,005,200
12/31/2019 300,520 3,305,720
12/31/2020 330,572 3,636,292
12/31/2021 363,708 4,000,000

Requirement No. 2
Interest Income = P300,520 (see amortization table above)

Requirement No. 3
Carrying amount = P3,305,720 (see amortization table above)

Presentation in the Statement of Financial Position

Loan Receivable P5,000,000
Less: Allowance for loan impairment (1,994,800 – 300,520) 1,694,280
Carrying amount of Loan receivable P3,305,720

Journal entries:
12/31/17 Loan impairment P2,494,800
Accrued for loan receivable P500,000
Allowance for loan impairment 1,994,800
12/31/18 Allowance for loan impairment 300,520
Interest income 300,520

CASE NO. 2
Requirement No. 1
Carrying amount of receivable = Principal P5,000,000
Less: Present value of expected cash flows
(P4,000,000 x .7513) 3,005,200
Loan Impairment – 12/31/2018 P1,994,800

Amortization Table
Date Interest Income Present Value
12/31/2018 P 3,005,200
 12/31/2019 P300,520 3,305,720
12/31/2020 330,572 3,636,292
12/31/2021 363,708 4,000,000
Requirement No.2
Interest Income = P300,520 (See amortization table above)

Requirement No.3
Carrying amount = P3,305,720 (see amortization table above)
Presentation in the Statement of Financial Position
Loan Receivable P5,000,000
Less: Allowance for loan impairment ( 1,994,800 – 300,520 ) 1,694,280
Carrying amount of Loan receivable P3,305,720

Journal entries
12/31/17 Loan Impairment P 1,994,800
Allowance for loan impairment P1,994,800
12/31/18 Allowance for loan impairment 300,520
Interest income 300,520

CASE NO.3
Requirement No.1
Carrying amount of receivable = Principal P5,000,000
Less: Present value of expected cash flows 3,429,650
Loan impairment – 12/31/2018 P1,570,350

Present value of expected cash flows:

Date Cash flow Present value
Total
End of (CF) Factor (PVF)
CF x PFV)
12/31/2019 P1,500,000 0.9091 P1,363,650
12/31/2019 2,500,000 0.8264 P2,066,000
Total present value of future cash flows P 3,492,650

Amortization Table
Date Annual Interest Amortization Present Value
Collection Income
12/31/2018 P3,429,650
12/31/2019 1,500,000 342,965 1,157,035 2,272,610
12/31/2020 2,500,000 227,262 2,272,615

Requirement No.2
Interest Income = P342,965 (see amortization table above)

Requirement No. 3
Carrying amount = P 2,272,615 (see amortization table above)
Presentation in the Statement of Financial Position
Loan Receivable (P5,000,000 = P1,500,000) P3,500,000
Less: Allowance for loan impairment ( 1,570,350 – 342,965 )1,227,385
Carrying amount of Loan receivable P2,272,615

Journal entries
12/31/17 Loan Impairment P1,570,350
Allowance for loan impairment P1,570,350

12/31/18 Allowance for loan impairment 342,965

Interest income 342,965

Cash 1,500,000
Loan Receivable 1,500,000

Requirement No.1
Carrying amount of receivable = Principal P5,000,000
Less: Present value of expected cash flows 3,644,600
Loan impairment – 12/31/2018 P1,355,400

Present value of expected cash flows:

Date Cash flow Present Value Total
End of (CF) Factor (PVF) (CF
x PVF)
01/01/2019 P1,000,000 1.0000 P1,000,000
12/31/2019 2,000,000 0.9091 1,818,200
12/31/2020 1,000,000 0.8264 826,400
Total present value of future cash flows
P3,644,600

Amortization Table
Date Annual Interest Amortization Present Value
Collection Income
12/31/2018 P3,644,600
01/01/2019 1,000,000 - 1,000,000 2,644,600
12/31/2019 2,000,000 264,460 1,735,540 909,060
12/31/2020 1,000,000 90,906 909,060 -

Requirement No.2
Interest Income = P264,460 (see amortization table below)

Requirement No.3
Carrying amount = P909,060 (see amortization table below)

Presentation in the Statement of Financial Position

Loan Receivable (P5,000,000 – P1,000,000 – P2,000,000) P2,000,000
Less: Allowance for loan impairment (1,355,400 – 264,460) 1,090,940
Carrying amount of Loan receivable P909,060

Journal entries:
12/31/17 Loan impairment P1,355,400
Allowance for loan impairment P1,355,400
01/01/18 Cash 1,000,000
Loan receivable 1,000,000
12/31/18 Allowance for loan impairment 264,460
Interest income 264,460

Cash 2,000,000
Loan receivable 2,000,000

Illustration L Reversal of Impairment Loss

On January 1,2019, Kinakaya Pa Company granted a five year loan for a borrower
amounting to P 5,000,000. The loan bears interest 10 % and to be collectible every
December 31.

On December 31,2020, Kinakaya Pa considers the loan impaired and the only
P4,000,000 principal amount will be collected. No cash flows received in 2020 and
the company did not accrue the interest because of the impairment. The prevailing
rate of interest for a loan of this type is 12 %.

On December 31, 2021, the financial condition of the borrower is improved and that
it can pay its entire unpaid obligation, including principle and interest at maturity.

Required:

1) Compute for the gain on reversal of impairment loss in 2021 under

1. PAS 39
2. PFRS 9
2) Prepare all the necessary entries in 2020 and 2021 under:
a) PAS 39
b) PFRS 9
SOLUTION:
Recall that the loan impairment is computed as follows:
Carrying amount of receivable = Principal P5,000,000
Less: Present value of expected cash flows
(4,000,000 x .7513) 3,005,200
Loan impairment – 12/31/2020 P1,994,800

Amortization Table
Date Interest income Present Value
12/31/2020 3,005,200
12/31/2021 300,520 3,305,720
12/31/2021 330,572 3,636,292
12/31/2021 363,708 4,000,000

Requirement No.1a PAS 39

present value of future cash flows using original effective rate:

Principal P5,000,000
Add: Unpaid interest
(P5M x 10% x 4 years) 2,000,000
Total cash flow P7,000,000
Multiply by: PV of 1 for 2 periods 0.8264 5,784,800 Lower
Would have been amortized cost, no impairment 5,000,000 5,000,000
Less: Actual amortized cost/ present value 3,305,720
Gain on impairment recovery P1,694,280

Requirement No. 2a PAS 39

Journal entries for 2020 and 2021 are :
12/31/20 Loan Impairment P1,994,800
Allowance for loan impairment P1,994,800

12/31/21 Allowance for loan impairment 300,520

Interest income 300,520

Allowance for loan impairment 1,694,280

Gain on impairment recovery 1,694,280

Statement of Financial Position,12/31/2021

Loan Receivable (P3,305,720 + P1,694,280) P5,000,000

Requirement No.1a PFRS 9

Present value of future cash flows using original effective rate:
Principal P5,000,000
Add: Unpaid interest (P5M x 10% x 4years) 2,000,000
Total cash flow P7,000,000
Multiply by : PV of 1 for 2 periods 0.8264
Present value of future cash inflows P5,784,800
Less: Actual amortized cost/present value 3,305,720
Gain on impairment recovery P2,479,080

Requirement No. 2a PFRS 9

Journal entries for 2020 and 2021 are:
12/31/20 Loan Impairment P1,994,800
Allowance for loan impairment P1,994,800

12/31/21 Allowance for loan impairment 300,520

Interest income 300,520

Allowance for loan impairment 2,479,080

Gain on impairment recovery 2,479,080

Statement of Financial Position,12/31/2021

Loan receivable ( P3,305,720 + P2,479,080) P5,784,800
LESSON 4: RECEIVABLE FINANCING
Sufficient cash is an essential part of running the operations of a business.
However, there are some occasions in which an entity may have insufficient funds
to use for its operations. An entity may generate cash from various source of
financing. One form of raising funds is through receivable financing which is the
capability or financial flexibility of the company to generate cash out of its
receivable.

The most common forms of receivable financing are as follows:

1. Pledging of receivable
2. Assignment of receivable
3. Factoring of receivable
4. Discounting of receivable

PLEDGING/HYPOTHECATING
Pledging or hypothecating of receivables refers to borrowing of money from
the bank or nay financial institution in which receivables in general are used as
collateral or security for a loan. Since receivables in general are used as collateral,
pledging is sometimes called general assignment.

Illustration: Pledging of Accounts Receivable

On October 1 of the current year, Blackberry Company borrowed P1,000,000 for
one year from Samsung Bank with a stated interest rate of 12 %. As a security for
the loan, Blackberry Company hypothecated in accounts receivable amounting to
P1,500,000. Samsung Bank deducted of one year interest in advance.

Required:
Prepare the entries in relation to the assignment of the account receivables,
assuming amortization of interest deducted in advance is to be made equally for the
entire loan term.

SOLUTION:
Journal entries are:
Oct. 1 Cash ( P1,000,000 – P120,000) P880,000
 Discount on Notes Payable
(P1,000,000 x 12% x 12/12) 120,000
Notes payable-bank P1,000,000

Dec.31 Interest expense (P120,000 /12 x 3) 30,000

Discount on notes payable 30,000

Financial Statement Presentation

Statement of Financial Position-Current Liability:
Loans P1,000,000
Less: Discount on loan payable (P120,000 – P30,000) 90,000
Income Statement
Interest expense P30,000

ASSIGNMENT
Assignment is a more formal borrowing arrangement in which the specific
receivables are identified and used as security. The assignor or borrower transfers
its rights in some of its accounts receivables to a lender or assignee in consideration
for a loan. The flowing are some of the characteristics of an assignment:
1. The loan is at a specified percentage of the face value of the collateral and
interest and service fees are charged to the assignor (borrower).
2. The debtors are occasionally notified to make payments to the assignee
(lender) but most assignments are not on a notification basis.
3. Assigned accounts are segregated from other accounts. The notes payable
should be deducted from the balance of A/R assigned to determine the
equity in assigned accounts receivable.
Assignment may either be:
1. Non-notification basis – buyer is not informed of the assignment
arrangement and will continue to remit its payment to the seller (assignor).
2. Notification basis –buyer is informed of the assignment arrangement and
will remit payment directly to the assignee ( e.g bank)

Journal entries : non-notification vs. notification

Non-notification Notification

To separate the assigned accounts:

A/R – assigned xxx A/R - assigned xxx
Accounts receivable xxx Accounts receivable xxx

To record the loan:

cash xxx Cash xxx
Service charge xxx Service charge xxx
Notes payable bank xxx Notes payable bank xxx

Issued credit memo (i.e.sales return):

Sales return xxx Sales return xxx
A/R - assigned xxx A/R - assigned xxx
 To record the collection:
cash xxx Notes payable bank xxx
Service discount xxx Sales discount xxx
A/R – assigned xxx A/R – assigned xxx

To record remittance:
N/P –bank xxx Interest Expense xxx
Interest expense Xxx Cash Xxx
cash Xxx
To record write-off of accounts assigned :
Allowance xxx Allowance for bad debt xxx
A/R -assigned xxx A/R –assigned Xxx

To transfer the remaining balance of A/R –assigned to A/R unassigned

Accounts receivable xxx Accounts receivable xxx
A/R – assigned xxx A/R – assigned xxx

The amount to be transferred to unassigned accounts may be computed as follows:

Total accounts receivable – assigned XX
Less: Collections XX
Sales discount XX
Sales return XX
Worthless accounts XX (XX)
XX
Balance
As you may have observed from the foregoing journal entries, the difference between
notification and non-notification is on the recording of remittance to the bank. Non-
notification calls for the buyer to pay directly to the seller and the seller will remit
the total payment (i.e. principal and interest) to the bank, while notification basis
calls for the buyer to remit directly to the bank and the seller will pay an additional
amount to cover the interest.

Illustration : Assignment – Non-notification Basis

On November 01, of the current year, Nokia Company assigned customer’s
accounts in the amount of P1,000,000 to Brayden Company as a security for a loan
in the amount of P750,000 and stated interest rate of 10 %. Brayden Company
charges 5 % in relation to the amount borrowed. Nokia Company will continue to
collect the accounts from customers and will remit payment to Brayden Company.

On December 30, of the current year, cash collections on the assigned accounts
amounted to P450,000.

On December 31, Nokia Company remitted in full the amount collected plus
interest due on the outstanding balance of the loan.

Required:
1. Compute for the cash received from assignment.
 2. Prepare the journal entries in relation to the assignment of the accounts
receivables.
3. Compute for the amount of equity over the assigned accounts to be
disclosed on December 31.

SOLUTION:
Required No.1
Notes payable P750,000
Less:Service charges (5% x P750,000) 37,500
Cash received P712,500

Requirement No. 2
Nov.1 Accounts receivable-assigned P1,000,000
Accounts receivable P1,000,000
To separate the accounts

Cash (P750,000 –P37,500) 712,500

Service charge (5 % x P750,000) 37,500
Notes payable-bank 750,000

Dec.30 Cash 450,000

Accounts receivable-assigned 450,000

Dec.31 Notes payable-bank 450,000

Interest expense (10%P750,000 x 2/12) 12,000
Cash 462,500

Requirement No.3
Accounts receivable-assigned (P1,000,000 – P450,000) P550,000
Less: Notes payable (P750,000 – P450,000) 300,000
Equity in assigned accounts to be disclosed in the notes P250,000

Illustration: Assignment – Notification Basis

Canon Company finances some of its current operations by assigning accounts
receivable on a notification basis to Josiah Finance. On July 1 of the current year, it
assigned, under guarantee, specific accounts amounting to P2,000,000. Josiah
Finance shall advance to Canon Company 80 % of the accounts assigned, less a
finance charge of 1% of the total accounts assigned.

On August 1, Canon Company received a statement that Josiah had collected

P1,100,000 of these accounts and had made an additional charge of 1% of the total
outstanding payable as of July 31. This charge is to be deducted at the time of the
first time remittance due to Canon Company from the Josiah Finance.

On September 1, Canon Company received a second statement from Josiah

Finance, together with a check for the amount due. The statement indicated that
the Josiah had collected an additional of P600,000 and had made of further charge
of 1% of the balance outstanding as of August 31.

Required:
 1. Compute for the cash received from assignment.
2. Prepare the entries in relation to the assignment of the accounts receivable.

SOLUTION
Requirement No.1
Notes Payable (P2,000,000 x 80%)
P1,600,000
Less: Finance charges (1 % x P2,000,000) 20,000
Cash received
P1,580,000

Requirement No. 2
July Accounts receivable – assigned P2,000,000
Account receivable P2,000,000
To separate the accounts

Cash 1,580,000
Service Charge 20,000
Notes payable-bank 1,600,000

Aug.1 Notes payable-bank (P1.1 M – P16,000) 1,084,000

Service charge (1% x P1,600,000)16,000
Accounts receivable-assigned 1,100,000
Sep.1 Notes payable-bank (P1.6M – P1,084,000) 516,000
Service charge (1% x P516,000) 5,160
Cash 78,840
Accounts receivable-assigned 600,000

Accounts receivable (P2M – P1M-P600,000) 300,000

Accounts receivable-assigned 300,000

FACTORING
Factoring involves the sale of receivables to a finance company, which is called the
factor. The factor or buyer assumes the risk of collectivity and generally handles the
billing and collection function.

Factoring may either be:

1. Casual Factoring – This is treated as an outright sale of receivable. A gain or
loss is recognized for the difference between the proceeds received and the
net carrying amount of the receivables factored. Casual factoring may either
be with or without resource basis.
2. Regular Factoring –the cost of factoring is debited to appropriate expense
account. Just like in casual factoring, factoring of this kind may either be
with or without resource basis.

Factors holdback
Factors holdback is the portion retained for a purchase price to cover probable sales
return, discount, and allowance. Receivable from factor is presented as current
asset.
Formulas (whether Casual or Regular Basis):
Gross amount of receivable XX
Less: Factoring fee (XX)
Finance charge and interest expense (XX)
Net Selling Price XX
Less: Factors holdback (XX)
Net cash received XX

Gross amount of receivable XX

Less: Factoring fee (XX)
Finance charge and interest expense (XX)
Net Selling Price XX
Less: Recourse obligation (if any ) (XX)
Net proceeds XX
Less: Book Value of Accounts receivable (XX)
Gain (loss) on sale XX

Without recourse With recourse

To record factoring:

Cash xxx Cash Xxx

Allowance for bad debt Xxx Allowance for bad debt Xxx
Loss on factoring Xxx Loss on factoring Xxx
Receivable-factor Xxx Receivable-factor Xxx
Accounts receivable xxx Accounts receivable Xxx
Estd. recourse xxx
obligation

To record the excess cash returned by the factor less sales retrun:
Cash xxx Cash xxx
Sales return Xxx Sales return Xxx
Receivable - factor xxx Receivable - factor xxx
To record transfer of recourse obligation – no further payment was made:
N/A Estimated recourse Xxx
obligation
Gain on recourse xxx
obligation
To record transfer of recourse obligation – additional payment was made :
N/A Loss on factoring xxx
Cash xxx

Regular Factoring : Without Recourse vs With Recourse

Without Recourse With Recourse

To record factoring
 Cash xxx Cash xxx
Allowance for bad dept xxx Allowance for bad dept xxx
Factoring fee (net of xxx Factoring fee (net of xxx
allowance allowance
for bad dept) for bad dept)
Interest expense xxx Interest expense xxx
Receivable – factor xxx Loss on factoring * xxx
Accounts receivable xxx Receivable – factor xxx
Accounts receivable Xxx
Estd. Recourse xxx
obligation
To record the excess cash returned by the factor less sales return:
Cash xxx Cash xxx
Sales return Xxx Sales return Xxx
Receivable - factor xxx Receivable - factor xxx
To record transfer of recourse obligation- no further payment was made:
N/A Estimated recourse xxx
obligation
Gain on recourse obligation xxx

To record transfer of recourse obligation- additional payment was made:

N/A Loss on factoring xxx
Cash xxx

 (equal to estimated recourse obligation )

Statement of Financial Position

Receivable from factor is treated as current asset. Estimated recourse oligation is
treated as current liability.
Illustration: Factoring of Accounts Receivable
Corny Company factored P100,000 of its accounts receivable to Horny Company for
P85,000. An allowance for bad debts equal to P3,000 was previously established for
the account factored. Horny Company withheld 5% of the purchase price as
protection against sales returns and allowance.

Case No.1 : Sales of receivable is without recourse.

Case No.2 : Sale of receivable is with recourse and the recourse obligation has an
estimated fair value of P5,000.

Required:
For each of the above cases, determine the following:
1. Cash received
2. Cost of factoring
3. Journal entry to record the transaction

SOLUTION:
Case No.1 : Factoring without recourse
Requirement No.1
Net Selling price P85,000
Less: Factors holdback (5 % x P85,000) 4,250
Net Cash received P80,750

Requirement No.2
Net Selling Price P85,000
Less: Recourse obligation (if any) 0
Net proceeds 85,000
Less: Book value of Accounts receivable (P100,000 – P3,000) 97,000
Gain (loss) on sale (P12,000)
Cost of factoring is equal to loss on factoring of P12,000.

Requirement No.3 Journal entries

Cash P80,750
Allowance for doubtful accounts 3,000
Loss on factoring 12,000
Receivable-factor 4,250
Accounts receivable P100,000

Case No.2 : Factoring with recourse

Requirement No.1
Net selling price P85,000
Less: Factors holdback (5 % x P85,000) 4,250
Net cash received P80,750

Requirement No.2
Net Selling Price P85,000
Less: Recourse obligation (if any) 5,000
Net proceeds P80,000
Less: Book value of Accounts receivable (P100,000 – P3,000) 97,000
Gain (loss) on sale (P17,000)
Cost of factoring is equal to loss on factoring of P17,000.

Requirement No.3 Journal entries

Cash P80,750
Allowance for doubtful accounts 3,000
Loss on factoring 17,000
Receivable-factor 4,250
Accounts receivable P100,000
Estimated recourse obligation 5,000

Illustration : Factoring of Accounts Receivable

Andrix Company factored P600,000 of its accounts receivable to Sabado Company
on October 1. Control was surrendered by Andriz Company. The factor assessed a
fee of 3% and retained a holdback equal to 5 % of the accounts receivable. In
addition, the factor charged 15 % interest computed on a weighted average time to
maturity of the accounts receivable of 54 days. (Use 365 days in the computation of
the interest)

Required :
1.What is the amount of cash initially received by Andrix Company from the
factoring?
2. If all accounts are collected, what is the cost of factoring the accounts receivable?

SOLUTION:
Requirement No.1
Gross amount of receivable P600,000
Less: Factoring Fee (3 % x P600,000) 18,000
Interest expense (P600,000 x 15 % x 54/365) 13,315
Net Selling Price P568,685
Less: Factors holdback (P600,000 x 5 %) 30,000
Net Cash received P538,685

Requirement No.2
The cost of factoring is equal to:
Factoring fee (3% x 600,000) P18,000
Interest expense (P600,000 x15% x 54/365) 13,315
Total Cost of factoring (P31,315)

Alternatively, the cost of factoring may be computed as follows;

Net Selling price P568,685
Less: Recourse obligation (if any) 0
Net proceeds P568,685
Less: Book value of Accounts receivable 600,000
Less on sale = cost of factoring (P31,685)

DISCOUNTING OF NOTES
Discounting of notes is a sale of the note to a third party, usually a bank. The sale
is usually on with recourse basis which means that upon the default of the debtor,
the seller of the note become liable for its maturity value.

Discounting may either be:

1. Without recourse – endorser avoids future liability even if the maker refuses
to pay the endorsee on the date of maturity.
2. With resource- The endorser shall pay the endorsee if the maker dishonors
the note. This is the contingent or secondary liability of the endorsee.
Discounting with recourse may be accounted as either:
a. Conditional sale recognizing contingent liability
b. Secure borrowing
The following formulas are used in the discounting of note receivable:
1. Proceeds = Maturity value – discount
 2. Maturity value (MV)
a. Interest bearing note = Principal
+Interest
b. Noninterest bearing note = Principal or
Face value

3. Interest to maturity = PRT

Principal = Face Value
T = Entire term of the note
Maturity date = when the note is due and payable
4.Discount = MV X DR X discount period
Discount rate (DR) = rate of interest used by bank in computing discount
Discount period = period from the time of discounting to maturity date
REVIEW QUESTIONS -COMPUTATIONAL
PROBLEM 10-1 Trade and other receivables
On December 31,2018 Jenah Co.’s “Accounts receivable” includes the following

1. Accounts receivable, net of P40,000 credit balance in customer’s accounts,

including P3,000 accounts receivable to customer which is definitely
uncollectible P240,000
2. MasterCard or VISA credit card sale of merchandise to customer
150,000
3. Overpayment to supplier for inventory purchased on account
10,000
4. Accounts payable, net of P30,000 debit balance in supplier’s accounts
130,000
5. Special deposits on contract bids 110,000
6. Dividend receivables
15,000
7. Other trade accounts receivable-unassigned
70,000
8. Advances to or receivables from stockholders (P80,000 is collectible
currently) 300,000
9. Trade accounts receivable-assigned
100,000

Questions:
Based on the above data, determine the following:
1. Trade receivables
a. P170,000 c. P597,000
b. P427,000 d. P497,000
2. Trade and other receivables
a. P427,000 c. P732,000
b. P482,000 d. P427,000

PROBLEM 10-2 Different Freight terms

On January 13,2018, Karell Co. sold on account goods with selling price of
P300,000 with terms of 2/10, n/30. Freight costs amounted to P5,000. The goods
were received by the buyer on January 15,2018. Karell Co. collected the receivable
on January 23,2018.

Questions:
Based on the above data, answer the following:
 1. How much net cash did Karell receive from the buyer if the terms are FOB
destination, freight perepaid?
a. P289,000 c. P299,000
b. P294,000 d.P305,000
2. How much net cash did Karelll receive from the buyer if the terms are FOB
destination, freight collect?
a. P289,000 c. P299,000
b. P294,000 d. P305,000
3. How much net cash did Karell receive from the buyer if the terms are FOB
shipping point, freight prepaid?
a. P289,000 c. P299,000
b. P294,000 d. P305,000
4. How much net cash did Karell receive from the buyer if the terms are FOB
shipping point, freight collect?
a. P289,000 c. P299,000
b. P294,000 d. P305,000

PROBLEM 10-3 Gross Method and Net Method

On January 01,2018, Wackisan Co. sells inventory with a list price of P100,000 ON
ACCOUNT UNDER CREDIT TERMS OF 15 %, 20%,3/10,n/30.

Questions:
Based on the above data, answer the following:
1. Under the gross method, how much should be debited to Accounts receivable
on January 01,2018?
a. P100,000 c. P68,000
b. P85,000 d.P65,960
2. Under the net method, how much should be debited to Accounts receivable
on January 01,2018?
a. P100,000 c. P68,000
b. P85,000 d.P65,960
PROBLEM 10-4 Computation of Percentage of Bad Debts Expense
Since it started its operations in 2015, Valdez Co. carried no allowance for doubtful
accounts. Uncollectible receivables were expensed as written off and recoveries were
credited to income as collected. On March 01,2019 (after the financial statements
were issued), management recognized that Valdez’s accounting policy with respect
to doubtful accounts was not correct, and determined that an allowance for
doubtful accounts was necessary.

Data for five years follow:

Accounts
Credit Sales written off Recoveries
2015 P1,500,000 P20,000 P15,000
2016 2,000,000 40,000 20,000
2017 3,500,000 270,000 15,000
2018 2,000,000 65,000 30,000
2019 3,000,000 85,000 40,000

The year-end balances of accounts Receivable are as follows:

December 31, 2018 P3,000,000
December 31, 2019 P3,400,000

Questions:
Based on the above data, answer the following:
Case No .1 : Bad debts are provided for as percentage of credit sales.
1. The percentage to be used to compute the allowance for bad debtson
December 31,2019 is.
a. 1.50 % c. P3.50 %
b. 3.00% d. P4.00%
2. How much is the doubtful accounts expense for 2019?
a. P45,000 c. P105,000
b. P90,000 d.P120,000
3. Assuming the Allowance for Doubtful accounts on January 01,2019 is
P400,000, how much is the allowance for doubtful accounts December
31,2019.
a. P400,000 c. P460,000
b. P445,000 d.P475,000

Case No.2 : Bad debts are provided for as percentage of credit sales. The
company’s contracts are generally for two years.

4. The percentage to be used to compute the allowance for bad debts on

December 31,2019 is
a. 1.50% c. 3.50%
b. 3.00% d.4.00%
5. How much is the doubtful accounts expense for 2019?
a. P45,000 c. P105,000
b. P90,000 d.P120,000
6. How much is the allowance for doubtful accounts on December 31,2019?
a. P105,000 c. P165,000
b. P115,000 d.P280,000

Case No. 3: Assume that 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 years up to a maximum of five
years.

7. The percentage to be used to compute the allowance for bad debts on

December 31,2019 is
a. 1.50 % c. 3.50%
b. 3.00% d. 4.00%

8. How much is the doubtful accounts expense for 2019?

a. P102,000 c. P45,000
b. P90,000 d.P42,000
9. How much is the allowance for doubtful accounts on December 31,2019?
a. P45,000 c. P102,000
b. P105,000 d.P120,000
PROBLEM 10-5 Aging Based on Outstanding Receivables
Zyrah Co. has the following data relating to its accounts receivable during the
current year:

Catergories
No.of Days Balance %Collectible
0-30 days P500,000 98%
31-60 days P600,000 97%
61-90 days P750,000 95%
(P100,000 definitely uncollectible, balance is 90%
collectible)
Over 91 days 400,000
The beginning balance of the allowance for doubtful accounts is P40,000. During
the year, Zyrah wrote off P23,000 receivables and recovered P12,000 of accounts
previously written off in prior years.

Questions:
Based on the above data, answer the following:
1. How much is the doubtful accounts expense during the current year?
a. P166,500 c. P123,000
b. P95,500 d. P111,000
2. How much is the net realizable value of the accounts receivable at the end of
the current year?
a. P2,054,500 c. P1,983,500
b. P2,150,000 d. P2,027,000

PROBLEM 10-6 Aging Based On Days Past Due

Primadonna Co. sells to different customers but under the same terms of 3/15,
n/30. An analysis of the balance of the accounts receivable on December 31 of the
current year showed the following:
Age in days Balances
0-30 days P450,000
31-60 days 300,000
61-90 days 220,000
91-120 days 150,000
121-150 days 60,000

Primadonna Co. uses aging of receivables method. Based on past experience, the
following estimated percentages are to be used:

Overdue accounts % collectible

For less than 31 days 95%
From 31-60 days 94%
From 61-90 days 92%
From 91- 120 days 85%
For over 121 days 80%

The beginning balance of the allowance for doubtful accounts is P20,000. Then
were no recoveries or accounts written off during the year.
Questions:
Based on the above data, answer the following:
1. How much is the balance of the allowance for doubtful accounts at the end of
the current year?
a. P49,200 c. P40,200
b. P92,600 d. P80,600
2. How much is the doubtful accounts expense during the current year?
a. P29,200 c. P20,200
b. P72,600 d. P60,600

PROBLEM 10-7 Interest-bearing Note with Realistic Interest Rate

On January 01,2018, Josh Co. sold a machine to Groban Co. In lieu of cash
payment, Groban gave Josh a 4-year , P100,000, 10% note. The note required
interest to be paid annually on December 31. The machine has a cost to P500,000
and accumulated depreciation as of January 01,2018 of P350,000. The 10%
interest rate is a realistic rate of interest for a note of this type.

Required:
Compute for the following as of December 31,2018:
1. Gain or loss on sale of machinery
2. Interest income
3. Current portion of the Notes Receivable
4. Noncurrent portion of the Notes Receivable

PROBLEM 10-8 Interest-bearing Note with Unrealistic Interest Rate Interest

Is Payable Annually, One Time Collection of Principal
On January 01,2018, Jima Co. sold office equipment with a cost of P1,000,000 and
accumulated depreciation of P150,000 in exchange for a 3-year. 10% of 2,000,000
note receivable. Principal is due on December 31,2020 but interest is due annually
every December 31. The prevailing interest rate for this type of note is 12%.

Questions:
Based on the above data, answer the following:

1. How much is the gain or loss on sale of office equipment in 2018?

a. P1,903,960 c. P903,960
b. P1,053,960 d. P1,051,730
2. How much is the interest income for 2018?
a. P200,000 c. P235,704
b. P228,475 d. P114,104
3. How much is the carrying amount of the note on December 31,2018?
a. P1,932,435 c. P2,000,000
b. P1,964,327 d. P1,915,834
4. How much is the current portion of the note on December 31,2018?
a. Nil c. P14,950
b. P31,892 d. P1,964,327
5. How much is the noncurrent portion of the note on December 31,2018?
a. Nil c. P14,950
b. P31,892 d. P1,964,327
 PROBLEM 10-9 Interest-bearing Note with Unrealistic Interest Rate,
Interest Is Payable Semi-Annually, One-Time Collection of Principal
On January 01,2018, Fiona Co. sold an office equipment with a cost of
P1,000,000 and accumulated depreciation of P150,000 in exchange for a 3-
year,10%,P2,000,000 note receivable. Principal is due on December 31,2020 but
interest is due annually every July 01 and December 31. The prevailing interest
rate for this type of note is 12 %.

Questions:
Based on the above data, answer the following:
1. How much is the gain or loss on sale of office equipment in 2018?
a. P1,901,730 c. P901,730
b. P1,051,730 d. P1,053,960
2. How much is the interest income for 2018?
a. P200,000 c. P215,847
b. P229,054 d. P232,643
3. How much is the carrying amount of the note on December 31,2018?
a. P1,915,834 c. P2,000,000
b. P1,930,784 d. P1,963,395
4. How much is the current portion of the note on December 31,2018?
a. Nil c. P1,963,395
b. P14,950 d. P1,930,784
5. How much is the noncurrent portion of the note on December 31,2018?
a. Nil c. P1,963,395
b. P14,950 d. P1,930,784

PROBLEM 10-10 Interest-bearing Note with Unrealistic Interest Rate, Uniform

Collection of Principal
On January 01,2018, Czerny Co. sold delivery equipment costing P1,000,000
with accumulated depreciation of P150,000 in exchange for a 3-year, 10 %
P1,800,000 interest-bearing note. Principal is due in equal annual payments,
starting December 31, 2018. Interest is also collectible every December 31. The
prevailing rate of interest for this type of note is 12%.
Questions:
Based on the above data, answer the following:
1. How much is the gain or loss on sale of delivery equipment in 2018?
a. Nil c. P740,234
b. P890,000 d. P1,131,942
2. How much is the interest income for 2018?
a. Nil c. P140,287
b. P208,828 d. P198,194
3. How much is the carrying amount of the note on December 31,2018?
a. P1,169,062 c. P1,620,000
b. P980,136 d. P501,986
4. How much is the current portion of the note on December 31,2018?
a. P20,287 c. P589,349
b. P579,713 d. P10,651
5. How much is the noncurrent portion of the note on December 31,2018?
 a. P589,350 c. P501,896
b. P20,287 d. P478,150

PROBLEM 10-11 Non –Interest –bearing Note with Unrealistic Interest

Rate Non-Uniform Collection of Principal
On January 01,2018, Gale Co. sold delivery equipment costing P1,000,000 with
accumulated depreciation of P150,000 in exchange for a 3-year, P1,800,000
noninterest-bearing note receivable due as follows:

Expected date of Collection Amount of Cash Flow

31-Dec-2018 P1,000,000
31-Dec-2018 600,000
31-Dec-2018 200,000
P1,800,000
The prevailing rate of interest for this type of note is 12%.
Questions:
Based on the above date, answer the following:
1. How much is the gain or loss on sale of delivery equipment in 2018?
a. Nil c. P513,580
b. P663,580 d. P1,513,580
2. How much is the interest income for 2018?
a. Nil c. P83,425
b. P181,580 d. P188,728
3. How much is the carrying amount of the note on December 31,2018?
a. P695,210 c. P178,635
b. 876,008 d. P512,399
4. How much is the current portion of the note on December 31,2018?
a. P600,000 c.P83,425
b. P516,575 d. P178,635
5. How much is the noncurrent portion of the note on December 31,2018?
a. P600,000 c.P83,425
b. P516,575 d. P178,635

PROBLEM 10-12 Noninterest-bearing Note, One-Time Collection of Principa

On January 01,2018, Shierly Co. sold delivery equipment costing P1,000,000
with accumulated depreciation of P150,000 in exchange for a 3-year,
P1,800,000 noninterest-bearing note receivable due on December 31,2020. The
prevailing rate of interest for this type of note is 12%.

Questions:
Based on the above data, answer the following:
1. How much is the gain or loss on sale of delivery equipment in 2018?
a. Nil c. P281,240
b. P431,240 d. P150,000
2. How much is the interest income for 2018?
a. Nil c. P172,199
b. P153,749 d. P600,000
3. How much is the carrying amount of the note on December 31,2018?
a. P1,434,989 c. P1,607,187
b. P1,800,000 d. P1,200,000
 4. How much is the current portion of the note on December 31,2018?
a. P172,199 c. P1,607,187
b. Nil d. P1,434,989
5. How much is the noncurrent portion of the note on December 31,2018?
a. P1,434,989 c. P1,607,187
b. P172,199 d. Nil

PROBLEM 10-13 Computation of Annual Payment or Collection

On January 01,2018, Teresa Company sold an inventory to Maria company for
P1,500,000. A note was received in exchange for the product which provides
that three (3)equal annual installments will be made every December 31,
starting December 31,2018. The effective rate of the notes receivable which is
compounded annually is 12%.

Required:
Compute for the:
1)Annual collection 2) Interest income in 2018

Case No. 1: Based on the given data

Case No. 2: Assume instead that the first payment is made on January
01,2018.

Pag314-315

PROBLEM 10-14
Dayan Company originated a receivable of P250,000 On December 25,2018. It is
accounting its sales under the gross method. The credit term is 3/10, n/30. The
entity, however, estimates that only 40% cash discounts will be availed by the
customer. 50% of the customer paid on January 4,2018.

Required:
Prepare the journal entry from December 25,2017 to January 4,2018 using PAS 18
and PFRS 15.

PROBLEM 10-15
On December 31,2017, Kerwin Co. Sold goods costing P300,000 and with sales
price of P550,000 to Ronnes, Inc. on account. To induce sale, Kerwin Co. Provides
its buyres the right to return goods within 30 days upon purchase if the buyres are
not satisfied with th goods. The company uses perpetual inventory system in
recording its investories.

Required:
Provide all the necessary entries under PAS 18 and PFRS 15 assuming:
1) Kerwin Co. Can reliably estimate that 30% of the goods sold will be returned
within the agreed period of time.on January 5,2018, 45% of the goods were
actually returned and the balance of receivable was collected.
2) Kerwin Co. Cannot reliably estimate future returns. On February 1,2018, the
customer did not return any of the goods.

PROBLEM 10-16-Impairment of Receivable, One-time Collection of Principal

On Jnauary 1,2016, Marcy Co. Received a P16,000,000 note receivable from Lynn
Inc. The principal is due on December 31,2017 while interest at 10% is due
annually at the end of each year for five (5) years.

Lynn Inc. made the required paymenmts during 2016 and 2017. However, during
2018, Lynn Inc. began to experience financial difficulties, requiring Marcy Co. To
reassess the collectibility of the note. Interest was accrued in 2018. On December
31,2018, Marcy Co. Determined that the note has been impaired and projects
future cash flows as follows:
Amount
Expected date of collection of cash flow
December 31,2019 P1,600,000
December 31,2020 3,200,000
December 31,2021 4,800,000

Questions:
Based on the above data answer the following:
Case No.1
1. How much is the loan impairment in 2018?
a. P9,894,720
b. P8,294,720
c. P7,705,280
d. P2,189,440
2. How much is the interest income for 2019?
a. Nil
b. P770,528
c. P687,581
d. P1,600,000
3. How much is the carrying amount of the note on December 31,2019?
a. P4,800,000
b. P6,875,808
c. P4,363,389
d. P8,000,000

Case No.2: Assume instead that on January 1,2016, the loan receivable was issued
at P14,846,080 to yield 12%
4. How much is the loan impairment in 2018?
a. P7,525,643
b. P9,894,720
c. P8,062,314
d. P9,434,603

Case No.3: Assume instead that on January 1,2016, the loan receivable was issued
at P14,846,080 to yield 12% also assume that the interest on December 31,2018
was not accrued.
5. How much is the loan impairmnet in 2018?
a. P7,525,643
 b. P7,834,603
c. P9,353,354
d. P9,434,603

Case No.4: Assume instead that On January 1,2016, the loan receivable was
issued at P14,846,080 to yield 12% and the loan was impaired on December
31,2018 after the receipt of interest on that date.
6. How much is the loamn impairment in 2018?
a. P7,525,643
b. P7,834,603
c. P9,894,720
d. P9,434,603
PROBLEM 10-17 Reeversal of Impairment Loss
On January 1,2015, Ronaldo Co. Received a P1,000,000 note receivable from
Quirante Inc. Principal payments of P200,000 and interest at 10% are due annually
at the end of each year for 5 years. The first payment starts on December 31,2015.

Quirante, Inc. made the required payments during 2015 and 2016. However, during
2017, Quirante Inc. began to experience financial difficulties , requiring Ronaldo
Co. To reassess the collectibility of the note. Interest was accrued in 2017. On
December 31,2017, Ronaldo Co. Determined that the note has been expected future
cash flows are as follows:
Amount
Expexted date of collection of cash flows
December 31,2018 P140,000
December 31,2019 200,000
December 31,2020 260,000

The amount of the impairment loss in 2017 based on these cash flows was
P212,108.
On December 31,2018, Quirante’s credit rating has improved and the loan was then
again restructured. After receiving the scheduled collection on December 31,2018,
the present value of the remaining cash flows on the newly restructured loan is
P654,552.
Immediately before the restructuring on December 31,2018, the loan has a carrying
amount of P396,681. If no impairment loss had been recognized previously, the
loan would have carrying amount of P600,000 as of December 31,2018.
Questions:
Based on the above data, answer the following:
1. How much is the gain on reversal of impairment to be recognized in 2018 in
accordance with PAS 39?
a. P203,319
b. P254,552
c. P212,108
d. P257,871
2. How much is the gain on reversal of impairment to be recognized in 2018 in
accordance with PFRS 9?
a. P203,319
b. P254,552
c. P212,108
 d. P257,871
3. How much is the interest income for 2019 in accordance with PAS 39?
a. P65,455
b. P60,000
c. P39,668
d. P23,635
4. How much is the interest income for 2019 in accordance with PFRS 9?
a. P65,455
b. P60,000
c. P39,668
d. P23,635

PROBLEM 10-18 Pledge of Receivable

On September 1 of the current year, David Company borrowed P900,000 for one
year from Brayden Bank with a stated interest rate of 10%. As a security for the
loan, David Company hypothecated its accounts receivable amounting to
P1,200,000. Brayden Bank deducted the one year interest in advance.
How much cash is received on September 1 as a result of pledging of accounts
receivable?
a. P900,000 c. 870,000
b. 810,000 d. 855,000

PROBLEM 10-18 Pledge of Receivable

On December 1,2018, Belle Company assigned specific accounts receivable totaling
P200,000 as collateral on a P150,000, 12% note from a certain bank. Belle
Company will continue to collect the assigned accounts receivable. In addition to
the interest on the note, the bank also charged a 5% finance fee deducted in
advance on the P150,000 value of the note. The December collections of assigned
accounts receivable amounted to P100,000 less cash discounts of P5,000. On
December 31,2018, Belle Company remitted the collections to the bank in payment
for the interest accrued on December 31,2018 and the note payable.

Questions:
Based on the above data, answer the following:
1. What amount of cash was received from the assignment of accounts
receivable on December 1,2018?
a. P200,000
b. P150,000
c. P190,000
d. P142,500
2. What is the carrying amount of note payable on December 31,2018?
a. P50,000
b. P55,000
c. P56,500
d. P73,000
3. What amount should be disclosed as the equity of Belle Company in
assigned accounts on December 31,2018?
a. P50,000
b. P45,000
c. P43,500
 d. P27,000 (Adapted)

PROBLEM 10-19 Assignment of Accounts Receivable

On December 1, 2018, Belle Company assigned specific accounts receivable totaling
P200,000 as collateral on a P150,000, 12% note from a certain bank. Belle
Company will continue to collect the assigned accounts receivable. In addition to
the interest on the note, the bank also charged a 5% finance fee deducted in
advance on the P150,000 value of the note. The December collections of assigned
accounts receivable amounted to P100,000 less cash discounts of P5,000. On
December 31, 2018, Belle Company remitted the collections to the bank in payment
for the interest accrued on December 31, 2018 and the note payable.

Questions:
Based on the above data, answer the following:
1. What amount of cash was received from the assignment of accounts
receivable on December 1,2018?
a. 200,000
b. 150,000
c. 190,000
d. 142,500
2. What is the carrying amount of note payable on December 31,2018?
a. 50,000
b. 55,000
c. 56,500
d. 73,000
3. What amount should be disclosed as the equity of Belle Company in assigned
accounts on December 31, 2018?
a. 50,000
b. 45,000
c. 43,500
d. 27,000 (Adapted)

PROBLEM 10-20 Factoring of Receivables

On June 30,2018, Blondie Fixtures was considering alternatives to bolster its cash
position. Option One called for transferring P400,000 in accounts receivable to
Dogwood Finance Company without recourse for a 5% fee. Option Two calls for
Blondie to transfer the P400,000 in receivables to Dogwood with recourse.
Dogwood’s charges a 4% fee for receivables factored with recourse.Option two meets
the conditions to be considered a sale, but Blondie estimates a P3,000 recourse
liability.under either option, Dogwood will immediately remit 90% of the factored
receivables to Blondie, and retain 10%. When Dogwood collects the remaining
receivables, it remits the amount, less the fee, to Blondie. Blondie estimates that
the fair value of the final 10% of the receivables is P25,000 (ignoring the factoring
fee).

Questions:
Based on the above data, answer the following:
 1. The necessary journal entry or entries if receivable are factored under Option
One would include
a. Debit cash P335,000
b. Debit to Loss on ale of receivable. P35,000
c. Credit to Estimated resources liability, P3,000
d. Debit to Receivable from Factor, P25,000
2. The necessary journal entry or entries if receivables are factored under
Option Two would include
a. Debit to Cash P335,000
b. Debit to Loss on sale of receivable, P35,000
c. Credit to estimated recourses liability,P3,000
d. Debit to Receivable from Factor, P25,000 (Adapted)

PROBLEM 10-21 Notes Receivable Discounting and Notes Receivable

Dishonored
On Jnauary 16, Sheena Co. Accepted a P600,000, 9%, 90 day note from a
customer. On february 10, the note was discounted at 12%.

Questions:
Based on the above data, answer the following:
Case No.1: Assume that the note was discounted on a without recourse basis.
Computer for the following:
1. Cash received from discounting
a. P613,500.00
b. P600,000.00
c. P600,207.50
d. P595,095.00
2. Gain (or Loss) on notes receivable discounting
a. P3,542.50
b. P207.50
c. P13,500.00
d. P3,750.00
Case No.2:Assume that the note was discounted with recourse and treat the
discounting as a conditional sale recognizing contingent liability. Compute for the
following:
3. Gain (or Loss) on notes receivable discounting
a. P3,542.50
b. P207.50
c. P13,500.00
d. P3,750.00
4. Assume that on April 16, the maturity date of the note , the maker of the
note receivable which is discounted defaulted from payment and the bank
charged Sheena for the maturity value of the note plus a P5,000 protest fe.
How much will be debited to accounts receivable on April 16?
a. P613,500.00
b. P603,750.00
c. P618,500.00
d. P608,750.00
Case No.3: Assume that the note was discounted with recourse and treat the
discounting as a secured borrowing. Compute for the following:
5. Net interest income (or expense) as a result of discounting of notes receivable
a. P3,542.50
b. P207.50
c. P13,500.00
d. P3,750.00
6. Assume that on April 16, the maturity date of the note, the maker of the note
receivable which is discounted defaulted from payment and the bank
charged Sheena for the maturity value of the note plus a P5,000 protest fee.
How much will be debited to accounts receivable on April 16?
a. P613,500.00
b. P603,750.00
c. P618,500.00
d. P608,750.00

PROBLEM 10-22 Discounting “Own”Note

Wenzy Company discounted its own P250,000 one –year note at a bank, at a
discount rate of 12% when the prime rate was 10%.

Questions:
Based on the above data, answer the following:
1. In reporting the note in Wenzy’s statement of finacncial position prior to
maturity, what rate should Wenzy use for the recording of interest expense?
a. 10.0%
b. 10.7%
c. 12.0%
d. 13.6%
2. The journal entry to record the transaction will include a
a. Debit to Cash P250,000
b. Debit to Cash for P220,000
c. Debit to Discount on notes payable, P40,000
d. Credit to Notes payable, P220,000 (Adapted)

COMPREHENSIVE PROBLEMS
PROBLEM 10-23
The Hope Co. Sells direct to retail customers and also to wholesalers.on January
1,2018 the balance of the retail accounts receivable was P418,000 while the
allowance for bad debts with respect to retail customers was a credit of P15,200.

The following summary pertains only to reatil sales since 2015:

Credit sales Bad Debts Bad debts
written off recoveries
2015 P2,220,000 P52,000 P4,300
2016 2,540,000 59,000 7,500
2017 2,930,000 60,000 7,200
2018 3,000,000 62,000 8,400
Bad debts are provided for as a percentage of credit sales. The accountant
calculates the percentage annually by using the experience of the three years prior
to the current year. The formula is bad debts written off less recoveries expressed
as a percentage of the credit sales for the same period. Total collections from
customers amounted to P2,760,400. This amount included P50,000 for which the
goods are to be delivered next year. During the years , the company recorded the
bad debts written off as bad debts expense.

Questions:
Based on the above and the result of your audit, answer the following:
1. The percentage to be used to compute the allowance for bad debts on
December 31,2018 is
a. 2%
b. 2.82%
c. 1.90%
d. 1.88%
2. How much is the doubtful accounts expense for 2018?
a. P60,000
b. P83,190
c. P57,000
d. P59,000
3. The doubtful accounts expense for 2018 is overstated by?
a. None
b. P2,000
c. P1,600
d. P3,000
4. The ledger balance of the accounts receivable after necessary adjustments on
December 31,2018 was a debit of
a. P645,000 c. P595,600
b. P654,600 d. P346,800
5. The ledger balance of the allowance for bad debts after necessary
adjustments on December 31,2018 was a credit of
a. P21,600
b. P44,790
c. P20,600
d. P18,600

PROBLEM 10-24
In December 2018, the Accounts Receivable controlling account on the books of
Stag Co. Showed one debit posting and two credit postings. The debit represents
receivables from December sales of P260,000. One credit was for P156,800, mades
as a result of cash collections on November and December receivables; the second
credit was an adjustment for estimated uncollectibles of P30,000. The December 31
balamnce was P90,000.

When receivables were collected, the bookkeeper credited Accounts Receivable for
the cash collected. All customers who paid accounts during the Decmeber tooko
advantage of the 2% cash discount.
As of Dcemeber 1, debit balances in customers’ subsidiary accounts totaled
P59,000. An adjustment for estimated doubtful accounts of P6,000 had been posted
to the Accounts Receivable controlling acccount at the end of 2017, and no write-
offs were recorded during 2018. In addition, a number of customers had overpaid
their accounts, and as a result, some of the customers’ subsidiary accounts had
credit balances On December 1. No overpayments were made during December.

Additional data relating December sales follow:

a) Sales of P10,000 for customer with creit balances in customers’ accounts
beginningof December wre shipped December 24, terms FOB shipping point.
The company recorded this transaction by a debit to Accounts receivable and
credit to Sales.
b) A P10,000 shipment of goods to a customer on December 29,2018, terms
FOB shipping point, 2/10, n/30, was not recorded as a sale in 2018. The
goods were excluded in the ending inventory in 2018. The freight og P1,000
was prepaid by Stag Co. The company recorded the freight by a debit to
Freight out and credit to Cash.
c) A P15,000 shipment of goods to a customer on December 31,2018, terms
FOB destination, 2/10, n/30, was recorded as a sale in 2018. The goods
were included in the ending inventory in 2018. The freight of P1,000 was
prepaid by Stag Co. The company recorded the freight by a debit to Freight
out and credit to Cash.

Questions:
Based on the above data, compute for the following:
1. Customers’ credit balances at the beginning of December.
a. P21,200 c. P22,800
b. P36,200 d. P31,200
2. Total credit to accounts receivable as a result of collection in December.
a. P160,000 c. P153,664
b. P156,800 d. P163,265
3. Customers’ credit balance at December 31.
a. P21,200 c. P22,800
b. P36,200 d. P31,200
4. Adjusted Net Sales for month of December.
a. P255,000 c. P265,000
b. P256,000 d. P235,000
5. Adjusted Accounts Receivable, December 31
a. P154,000 c. P122,800
b. P155,000 d. P127,800

PROBLEM 10-25
The Accounts Receivable control account balance of Mallig Inc. was P215,300 as of
December 31, 2018. The subsidiary ledger accounts of the company are
summarized below. Credit terms are 60 days net.
Account
No. Date Debit Credit Balance
1 May 31 P5,000 P5,000
July 1 P3,000 2,000
7 5,000 7,000
 Sept 1 3,000 4,000
Nov 1 3,000 9,000
Dec 10 3,000 12,000
2 Aug 8 8,400 8,400
Oct 4 8,400 0
Nov 25 22,000 22,000
3 Jan 1 120,000 120,000 (two month,6%
note)
Mar 1 121,200 (1,200)
Dec 1 100,000 98,800 (two month,6%
note)
4 Feb 3 10,000
Aug 3 10,000 20,000
5 Feb 10 30,000 30,000
Apr 9 30,000 0
May 4 40,000 40,000
July 2 40,000 0
Sept 6 52,780 52,780
Nov 26 2,220 55,000
6 July 17 5,000 5,000
Aug 16 4,440 9,440
Sept 30 7,500 16,940
Oct 15 9,440 7,500
Oct 18 6,000 13,500
Dec 20 6,000 7,500
The provision for Doubtful Account before audit has acredit balance of P5,000. The
provision for Doubtful accounts is to be adjusted to a balance determined as
follows:

Accounts not due ½of 1 percent

Accounts 1-60 days past due 2 percent
Accounts 61-120 days past due 5 percent
Accounts over 120 days past due 50 percent

The provision is to be based only on the trade accopunts. Except where payments
are earmarked, the oldest items are paid first.

Questions:
From the information presented, compute the adjusted balances of the following
accounts:
1. Trade accounts receivable at the end of 2018
a. P215,300 c. P216,500
b. P131,200 d. P116,500
2. Allowance for bad debts at the end of 2018
a. P6,402 c. P7,052
b. P2,052 d. P5,000
3. Bed debts expense in 2018
a. P6,402 b. P2,052
 c. P7,052 d. P5,000
4. Interest income in 2018?
a. P500 c. P1,200
b. P400 d. P1,700
5. Accrued Interest income in 2018?
a. P500 c. P1,200
b. P400 d. P1,700

PROBLEM 10-26 Loan Receivable

Chris Garcia Bank granted a loan to a borrower on January 1,2018. The interest on
the loan is 10% payable annually starting December 31,2018. The loan matures in
three years on December 31,2020. Data related to the loan are:

Prinicipal amount P4,000,000

Origination fees charged against the borrower 342,100
Direct origination cost incurred 150,020

Questions:
Based on the above data, answer the following (Round off present value factors to
four decimal places)
1. The carrying amount of the loan as of January 1,2018 is
a. P3,807,920 c. P4,192,080
b. P4,000,000 d. P4,492,120
2. The effective interest rate of the loan is
a. 9% c. 12%
b. 10% d. 12.19%
3. The interest in come to be recognized in 2018 is
a. P400,000 c. P464,185
b. P456,950 d. P404,291
4. The carrying amount of the loan as of December 31,2018 is
a. P3,864,870 c. P4,000,000
b. P3,872,105 d. P4,496,411
5. The current portion of the loan as of December 31,2018 is
a. Nil c. P63,784
b. P56,950 d. P400,000

PROBLEM 10-27 Loan Impairment

Malone Enterprises reports a loan receivable from Stockton Co, in the amount of
P5,000,000. The initial loan’s repayment terms include a 10% interest rate plus
annual principal payments on December 31 each year of P1,000,000. The loan was
made on January 1,2015. Stockton made the P500,000 interest payment in 2015,
but did not make the P1,000,000 2016 principal payment nor the P500,000 2016
interest payment. Malone is preparing its annual financial statements at December
31,2016. The loan receivable has a carrying value of P5,500,000 including the
P500,000 interest receivable for 2016. Stockton is having financial difficulty, and
Malone has concluded that the loan is impaired. Analysis of Stockton’s financial
conditions indicates the principal and interest currently due can be probably
collected, but it is probable that no further interest can be collected. The probable
amount and timing of the collections is determined to be as follows:
December 31,2017 P1,750,000
December 31,2018 2,000,000
December 31,2019 1,750,000

Questions:
Based on the above and the result of your audit, answer the following(Round
present value factors to four decimal places)
1. The present value of the expected future cash flows as of December 31,2016
is
a. P4,585,500 c. P4,558,500
b. P5,500,000 d. P6,000,000
2. The loan impairment for the year 2016 is
a. P941,500
b. P500,000
c. P558,500
d. P0
3. How much is the interest income for the year 2017, assuming that Malone’s
assessment of the collectibility of the loan has not changed
a. P326,435
b. P455,850
c. P485,650
d. P326,435
4. How much is the interest income for the year 2018, assuming that Malone’s
assessment of the collectibility of the loan has not changed
a. P326,435
b. P455,850
c. P159,078
d. P175,000
5. How much is the carrying amount of the loan receivable as of December
31,2018
a. P3,264,350
b. P4,558,500
c. P1,590,785
d. P1,750,000

PROBLEM 10-28
Dean Company’s balances as at December 31,2018, before year-end adjustments
follow:
Debit Credit
Accounts receivable P300,000
Allowance for doubtful P3,000
accounts, before
adjustments
Merchandise inventory 400,000
Net sales 1,000,000
Cost of sales 800,000

Additional information and data for adjustments follow:

1) The company sells at a markup of 20% based on sales. All customers are
within a four-day delivery area.
 2) On December 27,2018, Dean authorized a customer to return, for full credit,
goods shipped and billed at P30,000 on December 14,2018. The returned
goods were received by Dean on January 4,2019, and a P30,000 credit memo
was issued on the same date. The goods were not included in the ending
inventory.
3) A p40,000 shipment of goods to a customer on December 31,2018, terms
FOB shipping point, 2/10, n/30, was not recorded as asale in 1028. The
goods were excluded in the ending inventory in 2018
4) A P50,000 shipment of goods to acustomer on December 30,2018, terms
FOB destination, 5/10, n/30, was recorded as a sale in 2018. The goods
were excluded in the ending inventory in 2018.
5) A P20,000 shipment of goods to a customer on December 29,2018, terms
FOB shipping point, 3/10, n/30, was recorded as a sale in 2018. The goods
were not included in the ending inventory in 2018.
6) Based on the aging of the accounts receivable, the allowance for doubtful
accounts would be P15,000.

Questions:
Based on the above data, compute the following:
1. Adjusted balance of Accounts receivable as of December 31,2018
a. P350,000
b. P260,000
c. P289,000
d. P290,000
2. Merchandise Inventory as of December 31,2018
a. P376,000
b. P432,000
c. P408,000
d. P440,000
3. Net Sales for the year 2018
a. P990,000
b. P960,000
c. P1,010,000
d. P910,000
4. Cost of sales for the year 2018
a. P808,000
b. P792,000
c. P768,000
d. P824,000
5. Net realizable value of Accounts receivables as of December 31,2018
a. 272,000
b. 270,000
c. 245,000
d. 278,000

PROBLEM 10-29 Comprehensive

Vincent Ocon Company properly reported the following balances on December
31,2017:

Accounts receivable P1,500,000

Allowance for doubtful accounts 90,000
Accrued interest receivable-loan 320,000
Loan receivable 4,000,000
Additional Information:
A. During 2018, Vincent Ocon recorded crdit sales of P9,000,000 and interim
provision for doubtful accounts at 2% of credit sales,
Accounts of P100,000 were written off during the year but accounts of
P20,000 were subsequently recovered.
The balance of accounts receivable on December 31,2018 amounted to
P2,000,000 and aged as follows:
Estimated
Classification Balance Uncollectible
1-60 days P1,000,000 1%
61-120 days 400,000 5%
121-180 days 300,000 10%
181-360 days 200,000 25%
More than one year 100,000 P40,000 is definitely uncollectible
The balance is 80% uncollectible
B. The balance of the loan receivable represents the remaining amount loaned
to LJIV Company on January 1,2016. The total amount loaned in 2016 was
P5,000,000. The terms of the loan require principal payments of P1,000,000
each year for 5 years plus interest 8%. The first principal and interest
payment was due on January 1,2017. LJIV Company made the required
payments during 2017 and 2018. However, during 2018 LJIV Company
began to experience financial difficulties, requiring Vincent Ocon to reassess
the collectibility of the loan. On December 31,2018, Vincent Ocon determines
that the remaining principal payment will be collected but the collection of
the interest is unlikely.

Questions:
Based on the above and the result of your audit, determine the following (Round off
present value factors to two decimal places):
1. Allowance for doubtful accounts of accounts receivable, 12/31/2018
a. P158,000
b. P170,000
c. P198,000
d. P210,000
2. The net realizable value of Accounts receivable, 12/31/2018
a. P1,790,000
b. P1,802,000
c. P1,830,000
d. P1,750,000
3. The over (or under) statement of the recorded doubtful accounts expense
a. P20,000 overstatement
b. P20,000 understatement
c. P8,000 overstatement
d. P8,000 understatement
4. The loan impairment loss on December 31,2018
a. P420,000
b. P210,000
 c. P630,000
d. Nil
5. The interest income for 2019
a. P223,200
b. P143,200
c. P240,000
d. Nil

PROBLEM 10-30 Comprehensive

You obtained directly from Job Corporation, your client, and reviewed a schedule of
accounts receivable as of December 31,2018. The schedule shows that receivable
amounts to P1,660,000. This amount does not agree with the balance in the
accounts receivable general ledger account. The difference may be shown below.
Below are your audit findings:
a. A special goods costing P72,000, fabricated to order for a customer, was
finished and specifically segregated in back part of the shipping room on
December 31,2018. The customer was billed on that date and the goods
excluded from inventory although it was shipped on January 3,2019.
b. A promissory note was issued by a customer to Job Corporation for goods
purchased worth P200,000. The promissory note carries an interest of 12%
per annum with a term of 60 days dated November 30,2018. This was
reflected as part of accounts receivable. No interest was accrued as of year-
end.
c. A review of pertinent records showed that on December 24,2018,P160,000 of
trade accounts receivable was factored without recourse for P152,000. Client
recorded this transaction by debiting Cash and crediting notes payable-
Finace Co. For P152,000
d. A review of sales documents revealed that goods having a selling price of
P100,000 were shipped to a customer FOB shipping point on December
31,2018, but the sale was recorded on Janaury 4,2019. The goods were not
included in the December 31,2018 inventory. Client’s gross profit rate is 40%
of sales.

Job Corporation uses the allowance method and estimates bad debts at 1% of
net sales. After consulting with the credit manager, you believe that this is a
reasonable estimate. Below is a transcript of the allowance for doubtful accounts
in the general ledger.
Allowance for doubtful accounts
11/25/2018 P100,000 Beg.Bal
P30,000 01/01/2018
80,000 GL
12/31/2018

11/25/2018: To write-off the following known worthless accounts.

Allowance for doubtful accounts P30,000
Accounts receivable P30,000
Ben P8,000
Kulas 3,600
Juan 6,400
Natan 3,960
 Janet 6,040
Total P30,000

12/31/2018: To record the doubtful accounts expense for the year ending
December 31,2018, computed as follows:
Balance P100,000
Accounts written off (30,000)
Balance P70,000
Provision for doubtful accounts 80,000
Balance.12/31/2018 (P15M x 1%) P150,000
Doubful accounts expense P80,000
Allowance for doubtful accounts P80,000

On January 10,2019, P6,000 was received from Juan in settlement of his

account.
Questions:
Based on the above and the result of your audit, compute for the following:
1. The amount of Trade Accounts receivable to be reported in the audited
statement of financial position at Dcember 31,2018.
a. P1,660,000 c. P1,408,000
b. P1,402,000 d. P1,400,000
2. The allowance for doubtful accounts to be reported in the audited balance
sheet at December 31,2018 is
a. P223,000 c. P151,000
b. P229,000 d. P221,000
3. The doubtful accounts expense to be reported in the audited income
statement for the year ending December 31,2018 is
a. P229,000 c. P221,000
b. P223,000 d. P151,000
4. The net increase (decrease) in the ending inventory resulting from audit
adjustment is
a. P72,000 c. P60,000
b. P132,000 d. No effect
5. The net increase (decrease) in net sales from audit adjustment is
a. P100,000 c. P120,000
b. P20,000 d. No effect

PROBLEM 10-31 Comprehensive

Purple Company showed the following balances on December 31,2018.
Accounts receivable P2,000,000
Allowance for doubtful accounts (60,000)
The following transactions transpired for Purple Company during the year 2016:
a) On May 1, received a P300,000, six-month, 12% interest bearing note from
MN, a customer, in settlement of an account.
b) On June 30, factored P400,000 of its accounts receivable to a finance
company. The finace company charged a factoring fee of 5% of the accounts
factored and withheld 20% of the amount factored.
c) On August 1, Purple Company discounted the MN note at the bank at 15%
 d) On November 1, MN defaulted on the P300,000 note. Purple Company paid
the bank the total amount due plus a P12,000 protest fee and other bank
charges.
e) On December 31,Purple Company assigned P600,000 of its accounts
receivable to a bank under a non notification basis. The bank advanced 80%
less a service fee of 5% of the accounts assigned. Purple company signed a
promissory note for the loan.
f) On December 31,Purple collected from MN in full including interest on total
amount due at 12% since default date.
g) On December 31,it is estimated that 5% of the outstanding accounts
receivable may prove uncollectible.

Questions:
Based on the above data, compute the following
1. Amount of cash received on June 30 factoring
a. P200,000
b. P300,000
c. P380,000
d. P304,000
2. Amount of cash received on August 1 discounting
a. P300,000
b. Pp318,000
c. P306,075
d. P329,925
3. Amount paid on November 1 default on the P300,000 note
a. P330,000
b. P318,000
c. P312,000
d. P336,600
4. Amount of cash received on December 31 assignment of accounts receivable
a. P480,000
b. P450,000
c. Pp430,000
d. P415,000
5. Amount of cash received on December 31 collection of the account of MN.
a. P330,000
b. P318,000
c. P312,000
d. P336,600
6. The net realizable value of the accounts receivable uis
a. P1,520,000
b. P1,900,000
c. 1,330,000
d. 1,235,000

PROBLEM 10-32 Comprehensive

As part of your engagement to audit the financial statements of San Antonio
Corporation, you have been assigned to examine the accounts receivable. You
gathered the following data from the trial balance a of December 31, 2018:
Accounts receivable P2,000,000
Allowane for doubtful accounts 100,000
You determined the following from the chedule of accounts receivable as of
December 31,2018:
Accounts with debit balances
60 days old and below P1,000,000
61-90 days 500,000
Over 90 days 400,000 P1,900,000
Advances to officers 150,000
Accounts with credit balances (50,000)
Accounts receivables per GL P2,000,000

Additional Information:
 Accounts receivable for ore than ayear totaling to P20,000 should be written
off
 On November 1,2018, goods amounting to P50,000 were shipped to ABC Co.,
FOB shipping point but the same has not been recorded by the company. No
collection has yet been made by the company on this accounty.
 The bank returned onm December 29,2018, a customer’s check for P30,000
marked “No sufficient funds”, but no entry was made. The customer’s invoice
was date and recorded on December 1,2018.
 Confirmation replies received directly from customers disclosed the following
exceptions:
Cust Balance Comments from Audit findings
customer
Tim 10,000 Balance was paid San Antonio received
December 29,2018 mailde check on
January 3,2019. Tim
was billed on December
5,2018.
Tony 14,800 Balance was offset by San Antonio credited
our December 10 accounts payable for
shipment of tires P14,800 to record
purchase of tires. Tony
was billed on October
28,2018.
Boris 32,000 The above balance The payment was
has been paid credited to customer
Parker. Boris was billed
on September 4,2018.
Parker 20,000 Our records show a A new confrmation was
bigger balance, mailed. Parker was
please check billed on November
25,2018
Leonard 47,400 W do not owe San The shipment costing
Antonio on December P20,500 was made on
31 as goods were December 29,2018 but
received in January the goods were included
3,2019 FOB in recording the
destination December 31,2018
 inventory
Danny 30,000 Our deposit of San Antonio had
P90,000 should cover previously credited the
this balance deposit to sales. The
P30,000 worth of
merchandise was
shipped and billed on
December 1,2018.
Kawhi 20,000 Sure we ordered The goods were shipped
P20,000 merchandise FOB shipping point on
on October 10,2018 December 15,2018 and
but San Antonio was billed on the same date.
out-of-stock until
recently. They back-
ordered the goods
and we finally
received them on
January 6,2019.

 Based on your discussion with San Antonio’s Credit Manager, you both
agreed that an allowance for doubtful accounts should be maintained using
the following rates:
60 days old and below 4%
61-90 days 5%
Over 90 days 10%

Questions:
Based on the above and the result of your audit, compute the following:
1. The adjusted balance of accounts receivable in the 60 days and below
category as of December 31,2018
a. P930,000 c. P1,032,600
b. P1,002,600 d. P1,034,600
2. The adjusted balance of accounts receivable as of December 31,2018
a. P1,832,500 c. P1,997,800
b. P1,867,800 d. P2,017,800
3. The adjusted allowance for doubtful accounts as of December 31,2018
a. P102,425 c. P102,444
b. P100,444 d. P103,364
4. The adjusted balance of the doubtful accounts expense for the year ended
December 31,2018
a. P42,425
b. P20,444
c. P22,444
d. P23,364

5. The adjsuting entry to correct the error for customer Danny should include
a. Debit to sales P60,000
b. Debit to accounts receivable, P30,000
c. Credit to advances from customers, P60,000
d. No adjusting journal entry is necessary
PROBLEM 10-33 Comprehensive
You are engaged in the audit of Kaya Co., a new client, on December 31,2018. You
review the following accounts in the general ledger:
Accounts Receivable
Beg.Bal., 1/1/2018 P2,596,000 Balance end
P200,000 1,484,000 collections
Sales in 2018 120,000 Estimated
4,000,000 uncollectible
Total P4,200,000
P4,200,000
Loan Receivable
Loan granted to a customer,1/1/2018 P3,600,000 Balance end
P4,000,000 400,000 Collections in 2018
Total P4,000,000
P4,000,000
Unearned Interest Income
Direct orig. Fees paid P300,000 Direct orig.fees
P11,520 received January
Balance end 1,2018
288,480
Total P300,000
P300,000

Additional information:
A. The beginning balance of the accounts receivable on January 1,2018 was net
of the allowance for doubtful accounts in 2017 amounting to P20,000.
One of the credits in the accounts receivable was made as a result of cash
collections. When receivables were collected, the bookkeeper credited
accounts receivable for the cash collected. Collections of P700,000 accounts
receivable did not avail of the cash discount while the rest took advantage of
the 2% cash discount. The other credit was an adjustment for estimated
uncollectible in 2018. In 2018, Kaya Co. Recorded credit sales of P4,000,000
and interim provision fpor doubtful accounts at 3% of credit sales. You have
agreed that this provision for bad debts is correct. During the year, accounts
of P300,000 were subsequently recovered. This amount was credited to
miscellaneous income.
B. On January 1,2018, Kaya Co. Granted a loan to a borrower, in the amount
of P4,000,000. The interest rate on the loan is 10% payable annually starting
December 31,2018. The loan matures in 5 years. Kaya Co. Incurred and paid
P11,520 of direct origination cost which was debited to unearned ineterest
income. Kaya Co. Charged P300,000 nonrefundable origination fees which
were credited to unearned intyerest income.

Questions:
Based on the above data, answer the following: (Round off present value factors to
four decimal places)
1. Which one of the following is a correct adjusting entry for the accounts
receivable at the end of 2018?
 a. Accounts receivable P20,000
Retained earnings P20,000
b. Sales discount P16,000
Accounts receivable P16,000
c. Bad debts expense P100,000
Allowance for bad debts P100,000
d. Miscellaneous income P20,000
Allowance for bad debts P20,000
2. Which one of the following is a correct adjusting entry for the loan receivable
at the end of 2018?
a. Unearned interest income P11,520
Loan receivable P11,520
b. Loan receivable P300,000
Unearned interest income P300,000
c. Loan receivable P400,000
Interest income P400,000
d. Unearned interest income P470,000
e. Interest income P470,000
3. The adjusted net realizable value of the accounts receivable in 2018 is
a. P2,720,000
b. P2,750,000
c. P2,520,000
d. P2,550,000
4. The adjusted interest income in 2018 is
a. P400,000
b. P470,000
c. P513,235
d. P445,382
5. The carrying amount of the loan receivable at the end of 2018 is
a. P3,756,902
b. P3,807,731
c. P4,390,195
d. P4,070,000

PROBLEM 10-34 Comprehensive

You are engaged in the audit of Flordeliz Co., a new client, at December 31, 2018.
You review the following notes receivable and other related interest income
accounts in the general ledger:

Notes Receivable
Beg.Bal., 1/1/2018 P1,350,000 Balance end
P1,700,000 500,000 04/01/2018
April 1,2018 100,000 2/31/2018
250,000
P1,950,000
P1,950,000
Interest Income
Balance end P180,000 04/01/2018
P180,000
 P180,000
P180,000

Additional information:
A. The beginning balance of the notes receivables is composed of the following:
 Note received from sale of machinery on January 1,2017 costing P800,000
with accumulated depreciation of P450,000. The company receives as
consideration P200,000 and a noninterest bearing note for P300,000 due
annually in equal amounts of P100,000 every December 31, starting
December 31,2017. The prevailing rate of interest for a note of this type is
12%. The company made the following entry on January 1,2017:
Cash P200,000
Notes receivable 300,000
Accumulated depreciation 450,000
Equipment P950,000

The company credited the notes receivable account when it received the
P100,000 annual payment on December 31,2017. The same entry was made
on December 31,2018 regarding the collection.
 Note receivable from sale of plant dated April 1,2017 amounts to P1,500,000
which bears interest at 12% per annum. No gain or loss was realized from
sale. The note is payable in 3 annual installments of P500,000 plus interest
on the unpaid balance every April 1. The initial principal and interest
payment was made on April 1,2018. The company made the following entry:
Cash P680,000
Interest income P180,000
Notes receivable 500,000

You found out that no accrual of interest was made in 2017 and 2018.
B. The entry on April 1,2018 represents the note received when it sells
equipment from the XYZ Corp on April 1,2018. The equipment cost
P1,000,000 and has accumulated depreciation of P400,000 on the date of
sale. The company receives as consideration P350,000 and a noninterest
bearing note for P250,000 due on April 1,2022. The prevailing rate of interest
for a note of this type is 10%. The following entries were made by the
company on April 1,2018:
Cash P350,000
Notes receivable 250,000
Accumulated depreciation 400,000
Equipment P1,000,000

No additional entry was made on December 31, 2018.

Questions:
Based on the above data, compute for the following:
1. The adjustment to retained earnings as of Janury 1,2018
a. Nil
b. P254,002
c. P403,912
d. P375,180
2. The total interest income in 2018
 a. P33,086
b. P155,280
c. P168,086
d. P200,280
3. Current portion of long-term receivables as of December 31,2018
a. P500,000
b. P589,282
c. P655,280
d. P683,556
4. Noncurrent receivables as of December 31,2018
a. P500,000
b. P589,282
c. P655,280
d. P683,556
5. Assuming that none of the errors were detected and corrected in 2018, the
net income in 2018 would be
a. Overstated by P66,444
b. Overstated by P79,250
c. Overstated by P91,164
d. Overstated by P11,912