WEEKLY STUDY PLAN

WEEK
NO. From To TOPIC SUBTOPICS

4 6-Sep 11-Sep MODULE 1 - . Receivables - Nature and Classification

5 13-Sep 18-Sep MODULE 1 - . Accounting for Accounts Receivable
a. Initial Recognition
b. Initial Measurement
b1. Trade Discount
b2. Cash Discount
b3. Credit Card Sales
c. Subsequent Measurement
c1. Accounting for freight charges
c2. Accounting for sales returns
c3. Accounting for sales discounts
c4. Accounting for doubtful accounts
. Accounting for Notes Receivable
a. Short-term notes receivable
a1. Interest bearing short-term NR
a2. Noninterest bearing short-term NR
b. Long-term notes receivable
b1. Interest bearing long-term NR
b2. Noninterest bearing long-term NR
b2-1. Cash sales price is given
b2-2. Cash sales price is not given
. Accounting for Loan Receivable
a. Nature of Loan Receivable
b. Measurement of Loan Receivable
b1. Initial measurement
b2. Subsequent measurement
b3. Origination fees - nature and accounting
b4. Impairment of loan
. Accounting for Receivable Financing
a. Pledge of Accounts Receivable
b. Assignment of Accounts Receivable
c. Factoring of Accounts Receivable
d. Discounting of Notes Receivable
. Disclosure requirements

REFERENCES
REFERENCES:
Intermediate Accounting Volume 1, 2020 Edition by Valix, Peralta, and Valix
Intermediate Accounting Volume 1, 2020 Edition by Robles and Empleo
Intermediate Accounting Volume 1, IFRS Edition by Keiso, Weygant, and Warfield
 NOTES
. Receivables - Nature and Classification
• Any claims held generally against others for money, goods, services or other noncash assets.
• In accounting point of view, it refers to claims for money originated from sales of goods or services performe
the normal course of business, including from those transactions not in the normal course of business
from officers, employees, affiliated companies, and shareholders.
• It represents any legitimate claims from others for money, goods or services.
• In narrower sense and as contemplated in accounting, these represent claims that are expected to be settled

• For accounting purposes, receivables include the following:

1) Amounts collectible from customers and others:
a) arising from sales of merchandise (TRADE RECEIVABLE)
• Accounts Receivable
- The open accounts
- Not evidenced b a promissory notes or time drafts
- Related supporting documents include sales invoices, delivery receipts, and other similar
- If silent, automatic current asset.
• Notes Receivable
- Evidenced by a promissory notes or time drafts
- The debtor is the maker of the promissiory note (Notes Payable and Interest Expense)
- The creditor is the recipient of the promissory note (Notes Receivable and Interest Incom
- Promissory note can either be an non-interest bearing note or an interest bearing note
- Promissory note can either be short-term NR (current asset) or long-term NR (noncur
- If silent, automatic current asset.
• Installment Receivable
- It can either be classified as current asset or non-current asset.

b) claims for money lent

• Loan Receivable (commonly used by financial institutions)
• Notes Receivable
• It can either be classified as current asset or non-current asset.

c) performances of services
• Accounts Receivable
• Notes Receivable
• Installment Receivable
• Rent receivable
• Interest Receivable
• Subscription Receivable
- seller of magazines or reading materials for sale

2) Accrued revenue (Accrued receivable)

• revenue already earned but not yet collected.
AJE:
Receivable x
Income x

• Examples include the following:

- Interest Receivable (Accrued interest receivable or Accrued interest revenue)
- Commission Receivable (Accrued commission receivable or Accrued commission revenue)
- Rent Receivable (Accrued rent receivable or Accrued rent revenue)
 - Subscription Receivable (Accrued subscription receivable or Accrued subscription revenue)
- Dividends Receivable (Acrrued dividend receivable or Accrued dividend revenue)

3) Other items
• Advances to Officers (Receivable from Officers or Due From Officers)
• Advances to Employees (Receivable from Employees or Due From Employees)

• Advances to Affiliates (Receivable from Affiliates or Due from Affiliates)

• Advances to Subsidiary Company (Receivable from Subsidiary Company or Due from Subsidiary Co
• Advances to Parent Company (Receivable from Parent Company or Due from Parent Company)

• Advances to Suppliers - we paid advance the supplier for goods or services to be delivered in the f
JE: Advances to Suppliers xxx
Cash xxx
Upon payment in advance.

JE: Purchases or Inventory xxx

Advances to Suppliers xxx
Upon delivery of goods.

• Claims Receivable from Common Carrier

- Common carriers are companies engaged in transporting people or goods from one place to a
- Examples: (1) by land (trucks, buses, jeepneys); (2) by seas (cargo ships); (3) by air (cargo p

• Claims Receivable from Insurance Company

• Share Subscription Receivable

- This is current asset if collectible within one year.
- This can never be classified as noncurrent asset. If collectible beyond one year, deduct it from
Share Capital under the Shareholders' Equity.
- If silent, automatic current asset.

• Creditor's Account with Debit Balance (Accounts Payable Debit Balance)

Accounts Payable
Purchase Return 100 1,000 Purchases on account
Payment 1,000
1,100 1,000

Balance 100 This is abnormal balance

Accounts Payable
Purchase Return 100 1,000 Purchases on account
Payment 1,000
1,100 1,000

(100) Negative balance

 • Refundable Deposits to Suppliers
- May possibly be applicable to deposit on small or large containers
- in the future, we will receive or the supplier will return to us out cash deposit.
- If the problem is silent, it is normally classified as noncurrent asset based on assumption th

Upon payment of deposit:

Refundable Deposit xxx
Cash xxx

Upon return of deposit to us:

Cash xxx
Refundable Deposit xxx

• Deposit to Guarantee Performance (Payment to cover possible damages or losses)

• Tax Refunds and Rebates

• Receivables classification AS TO ORIGIN (Trade Receivables or Nontrade Receivables)

1) TRADE RECEIVABLES
• These arise from normal course of business (depends nature of business operations like service
- If silent, automatic current asset.
• Classified as current asset if collectible within one year or normal operating cycle

20 days - Receipt Cycle 10 days - Purchasing C

30 days - Sales Cycle

• Examples include the following:

a) Service-oriented business
a1. Accrual of rental - Rent Receivable (PREFERABLY USED ACCOUNTS RECEIVABLE)
a2. Financial institutions like banks - Loan Receivable
b) Trading and manufacturing business (including service)
b1. Accounts Receivable
b2. Installment Receivable
b3. Notes Receivable

NOTES:

Accounts Receivable can be settled by receiving a a promissory note that will result to recogn

Journal Entry:
Notes Receivable xxx
Accounts Receivable xxx
 2) NONTRADE RECEIVABLES
• These arise from sources other than from sale of goods or services in the normal course o
• Can be classified as current asset or noncurrent asset.
• Classified as current asset if collectible within one year, the normal operating cycle notw
• Examples nontrade receivables include the following:
- Accrued revenues
- Advances to Officers
- Advances to Employees
- Advances to Affiliates
- Advances to Subsidiary Company
- Advances to Parent Company
- Advances to Suppliers
- Claims Receivable from Common Carrier
- Claims Receivable from Insurance Company
- Share Subscription Receivable
- Creditor's Account with Debit Balance
- Refundable Deposits to Suppliers
- Deposit to Guarantee Performance
- Tax Refunds and Rebates

• Receivables classification ON A STATEMENT OF FINANCIAL POSITION

1) CURRENT RECEIVABLES
• For trade receivable, collectible within one year or normal operating cycle,
• For nontrade receivable, collectible within one year, the normal operating cycle notwithsta
• Common examples include the following:
TRADE RECEIVABLES
- Accounts Receivable
- Notes Receivable
- Installment Receivable

NONTRADE RECEIVABLES
- Rent Receivable
- Interest Receivable
- Advances to Employees
- Advances to Officers
- Advances to Suppliers
- Subscription Receivable (if collectible beyond one year - deduction from Subscribed Share
- Claims receivable
- Creditor's account with debit balances

2) NONCURRENT RECEIVABLES
• Collectible beyond one year.
• Common examples include the following:
- Advances to Affiliates
- Advances to Subsidiaries

. Accounting for Accounts Receivable

a. INITIAL RECOGNITION
• An entity shall recognize a financial asset in its statement of financial position when and only when, t
to the contractual provision of the instrument.
 • Accounts receivable are recognized simultaneously with the recognition of the related revenue.
a) Sales of goods on credit.
Accounts Receivable xxx
Sales Revenue xxx

a) Sales of services on credit.

Accounts Receivable xxx
Sales Revenue xxx

b. INITIAL MEASUREMENT
b1. TRADE DISCOUNT
• Also called volume or quantity discounts.
• It means converting catalog list price to the price actually charged to the buyer.
• Its purpose is to encourage customers to puchase goods in volume or in large quantity.
• It is granted to customers during sale of goods.
• Its amount is not recorded in the accounting books of both the seller and the buyer.
• It is expressed in percentage.

• Illustration:
A customer was granted a 20% and 10% trade discount of Product Alpha with a total list price of P
amount of sales to be recorded by the seller?

SOLUTION:
a) Long-method of computation:
List Price 50,000
Less: First trade discount
(P 50,000 x 20%) 10,000
First net price 40,000
Less: Second trade discount
(P 40,000 x 10%) 4,000
Net selling price to be recorded 36,000

b2. CASH DISCOUNT

• It is a reduction from the sales price.
• Its purpose is to encourage customers to fully pay the account at an earlier time.
• It is granted to customers upon full payment of accounts.
• Its amount is recorded in the accounting books of both the seller and the buyer.
a) Sales Discount account - seller
- Normal balance is debit
- Contra revenue account (deduction from Sales account)
b) Purchase Discount account - buyer
- Normal balance is credit
- Contra expense account (deduction from Purchases account)
• It is expressed as a fraction.
a) 2/10, n/30
- This is read "two-ten, net thirty".
- A 2% discount is granted if paid within 10 days from the invoice date; gross amount is d
b) 2/10 EOM
- A 2% discount is granted if the invoice is paid within the first 10 days of the next month
• ACCOUNTING METHODS OF RECORDING ACCOUNTS RECEIVABLE
1) Gross Price Method
2) Net Price Method
3) Allowance Method

• Gross Price Method

- The normal and most commonly used method.
-
Cash discount is recorded only when it is taken (accounts are collected from customers w
- Upon sales, no cash discount is recognized in the accounting books.
- Upon collection, cash disount is recognized in the accounting books.

- The pro-forma journal entry for sales discount recognized is as follows:

Cash (net cash receipt) xxx
Sales Discount xxx
Accounts Receivable (gross)

Notes:
If sales Discount is 2%, the net cash receipt amount debited to Cash account is 98% of
collected. Therefore, Accounts Receivable amount collected is 100%.
- If Sales discount is 5% and sales discount amount is P 25,000, therefore, the Accou
500,000(P 25,000 / 5%).
- If Sales discount is 2% and net cash receipt is P 58,800, therefore, the Accounts Re
(P 58,800 / 98%).

- Illustration
• Net Price Method
- Commonly applied in the acquisition of fixed assets.
- Cash discount is recorded upon sale.

- Upon sales, cash discount is recognized in the accounting books.

• Accounts Receivable amount is recorded at net amount.
• Sales revenue account is recorded at net amount.
• Sales discount amount is not recorded.

- Upon collection, cash discount is recognized in the accounting books.

• No recognition of sales discount whether the account is paid or not within the disco
•
If the account is paid beyond the discount period, the discount lost is recorded as c
Forfeited" or "Other Income". The pro-forma journal entry to recognize sales discou

Cash (net cash receipt)

Sales Discount Forfeited
Accounts Receivable (gross)

- Illustration

• Allowance Method
- Upon sales, the cash discount is recognized in the accounting books by using the "Allowa
account.

Related journal entry:

Accounts Receivable (gross) xxx
Allowance for Sales Discount xxx
Sales Revenue (net) xxx

Notes:
 The Allowance for Sales Discount account is presented in the Statement of Financial Pos
the Accounts Receivable account (as contra-asset account).

Accounts Receivable
Less: Allowance for Doubtful Accounts xxx
Allowance for Sales Discount xxx
Net Realizable Value

- Upon collection of accounts receivable:

a) Within the discount period, the Allowance for Sales Discount account is debited.
Related journal entry:
Cash (net amount) xxx
Allowance for Sales Discount xxx
Accounts Receivable (gross amount)

a) Beyond the discount period, the Allowance for Sales Discount account is debited wi
entry to Other Income account.
Related journal entry:
Cash (net amount) xxx
Allowance for Sales Discount xxx
Accounts Receivable (gross amount)
Other Income

- Illustration

• COMPARISON OF THE THREE METHODS

b3. CREDIT CARD SALES
• This involves a national credit card company result in an accounts receivable in the name of the ca
• Credit card fees are usually charged by the credit card company ranging from 1% to 5%.

• Two ways of collecting credit card sales from the credit card company
1) Charge to Accounts Receivable and collect directly from the credit card company
- Credit card sales are debited to Accounts Receivable
- Collection will be directly done from the credit card company
- The related journal entries are as follows:
a) Upon credit card sales:
Accounts Receivable - Credit Card Company
Sales Revenue

b) Upon collection from the credit card company:

Cash (net)
Credi Card Service Charge
Accounts Receivable - Credit Card Company

Notes:
Credit Card Service Charge account is an operating expense reported in the Statem
Income.
 Income.

2) Deposit the credit card drafts/receipts directly to retailer's current account.

- No Accounts Receivable is recorded upon credit card sales. Instead, debit directly to Cas
- The credit card drafts or receipts are deposited directly to retailer's current account bein
company (banks).
- The related journal entry is as follows:
Cash (net)
Credi Card Service Charge
Accounts Receivable - Credit Card Company

c. SUBSEQUENT MEASUREMENT
• After initial recognition, Accounts Receivable shall be measured at AMORTIZED COST.
• Amortized cost is the NET REALIZABLE VALUE of Accounts Receivable.
• In terms of relevance:
1) Net Realizable Value is used for Accounts Receivable
2) Amortized Cost is used for Long-term Notes Receivable

• The net realizable value is the amount expected to be collected or the estimated recoverable amount.
-
The gross amount of Accounts Receivable will be reduced by adjustments within the ordinary cour
- This is based on the stablished principle that assets shall not carried at above their recoverable am
- The following are the usual contra-accounts or deductions from Accounts Receivable to arrive at it
1) Accounting for freight charges
2) Accounting for sales returns
3) Accounting for sales discounts
4) Accounting for doubtful accounts

- Statement of Financial Position Presentation:

Accounts Receivable xxx

Less: Allowance for Doubtful Accounts xxx
Allowance for Freight Charges xxx
Allowance for Sales Returns xxx
Allowance for Sales Discount xxx xxx
Net Realizable Value xxx

• ACCOUNTING FOR FREIGHT CHARGES

-
Freight charges, also known as freight rate, is the amount paid to a carrier company for the transp
point of origin to an agreed location. The freight charge is calculated based on the type of mode o
distance between the pickup place and the place of destination. (https://www.saloodo.com/logistic
- Important shipping terms to remember and understand:
1) FOB Destinattion
2) FOB Shipping Point
- Important freight terms to remember and understand:
1) Freight Collect
2) Freight Prepaid

- Illustration:

Affectionate Company sold merchandise on account for P 500,000. The terms are 3/10, n/30. The
amounted to P 10,000. Assume the account was collected (a) within the discount period, and (b) b

1) FOB Destination, Freight Collect

 ALTERNATIVE RECORDING PROCEDURES
Instead of offsetting from Accounts Receivable the Accounts Payable for freight charges paid
Allowance for Feight Charge account may be used.

2) FOB Destination, Freight Prepaid

3) FOB Shipping point, Freight Collect

 4) FOB Shipping point, Freight Prepaid

• ACCOUNTING FOR SALES DISCOUNT

- This is a provision at the end of the accounting period for the probable availment of customers of
- This is an estimate that may or may not actually happen upon collection of customer's account.
- This is an estimate is based on past experience of the company.
- This is usually provided at the end of the accounting period to present the Accounts Receivable at
- The provision is reversed at the beginning of the next accounting period to normally charge the sa
actual collection from customers.

- Illustration:
• ACCOUNTING FOR SALES RETURNS
- Sales returns involve physical transfer of goods from buyer to seller while sales allowance involves
without the physical transfer of goods from the buyer to seller.
- This is a provision at the end of the accounting period for the probable customer's return of goods
period.
- This is an estimate that may or may not actually happen during the next accounting period.
- This is an estimate is based on past experience of the company.
- This is usually provided at the end of the accounting period to present the Accounts Receivable at
- The provision is reversed at the beginning of the next accounting period to normally charge the sa
actual return of goods by customers.

- Illustration:

• ACCOUNTING FOR DOUBTFUL ACCOUNTS

- Doubtful accounts are the estimated losses from accounts receivable due to noncollection.
- Doubtful accounts are the cost of doing business on credit.
- Doubtful accounts are also called uncollectible accounts or bad debts.
- In Association of Chartered Certified Accountants (ACCA), irrecoverable debts are also referred to
bad debts pertains to accounts written off as far as ACCA is concerned.

- Two accounting methods for doubtful accounts:

1) Allowance Method
2) Direct Write-off Method or Direct Charge-off Method
- Illustration and observations
a) Accounts Receivable using the allowance method is reported at net realizable value which is t
b) Net income using the direct write-off method is higher that makes it acceptable for tax purpo

DOUBTFUL ACCOUNTS EXPENSE

IN THE INCOME STATEMENT
1) Distribution Cost
- if credit is granted by the
sales manager, including
collection management.
2) Administrative Costs
- if credit is granted by the
officer other than sales
manager, including
collection management.

- Two Methods or Basis of Estimating Doubtful Accounts

1) Based on Sales
2) Based on Accounts Receivable
- EXCESSIVE OR INADEQUATE ALLOWANCE FOR DOUBTFUL ACCOUNTS
• It is the percent of sales method of estimating doubtful accounts that may result to excessive
the allowance for doubtful accounts because the basis is sales which are partly collected durin
bad debts.

• The accounting treatment is as follows:

1) If excessive
Allowance for Doubtful Accounts xxx
 Doubtful Accounts Expense xxx

2) If inadequate
Doubtful Accounts Expense xxx
Allowance for Doubtful Accounts xxx

• If there is an excessive Allowance for Doubtful Accounts, offset (credit) it first to the extent o
balance. Any remaining balance of the ADA is credited to Miscellaneous Income.

Allowance for Doubtful Accounts xxx

Doubtful Accounts Expense (extent) xxx
Miscellaneous Income (Excess) xxx

- WRITING-OFF OF ACCOUNTS RECEIVABLE

• Accounts Receivable are written off only if proven to be uncollectible.
• Demand letters are normally sent to customers with past due accounts. If reply was not recei
demand letters have been sent, or the entity is informed of any bankruptcy of the customer,
written off.
• The approval for write off of accounts is the responsibility of the credit department.
• The accounting entry will depend if the entity is using the allowance method or the direct wri
THAT IF THE PROBLEM IS SILENT, THE METHOD NORMALLY APPLIED IS THE ALLOWANCE M

• Illustration:

NOTES:
1) Under the allowance method:
- The Allowance for Doubtful Accounts is debited because the amount to be written o
collection but proven to be uncollectible.
- The Accounts Receivable account is credited because the amount is no longer outst
be collected anymore. It is inappropriate to retain the amouont in the AR balance fo
chance of collection.

2) Under the direct write-off method:

-
The Doubtful Accounts Expense is debited, instead of Allowance for Doubtful Accou
by this method. In effect, the doubtful account expense will be deducted from reve
the sales related to accounst written off occurred in year 2021. THis is a violation o
- RECOVERY OF ACCOUNTS PREVIOUSLY WRITTEN-OFF
• The accounting entry to record the recovery will depend on the accounting period when the w
occurred.
1) If within the same accounting period
- Under Allowance method, re-establish first the Accounts Receivable and the Allowa
Then, collect the accounts.
- Under the direct write-off method, re-establish first the Accounts Receivable and de
Expense account by crediting it. Then, collect the accounts.

2) If from different accounting period

- Under Allowance method, re-establish first the Accounts Receivable and the Allowa
Then, collect the accounts.
- Under the direct write-off method, there is no need to re-establish the Accounts Re
Bad Debts Expense account because the recovery happened in another accounting
Debts Expense was already closed to equity as part of the closing process during th
it was written off.
 - DEBIT BALANCE IN THE ALLOWANCE FOR DOUBTFUL ACCOUNTS
• The normal balance of Allowance for Doubtful Accounts is credit.
• This may happen if the amount of the accounts previously written off is higher that the balan
doubtful accounts.
• Illustration

• Adjusting Entry if the unadjusted Allowance for Doubtful Accounts has a debit balance.
- Add the ADA debit balance (unadjusted abalance) to the ADA required/adjusted balance
the adjusting entry.

ADA, required/adjusted balance xxx

Add: ADA debit balance, unadjusted balance xxx
Doubtful Accounts Expense xxx

• ACCOUNTS RECEIVABLE CREDIT BALANCE

- An individual customer's ledger called Accounts Receivable Subsidiary Ledger may possibly have a
the following:
1) Sales return while the credit sale transaction is fully paid.
2) Overpayment by customers
- Accounting treatment - Classified the Accounts Receivable with credit balance as a current liability
"Customer's Debit Balance" or "Customer's Account with Debit Balance".
- This should not be offset against other Accounts Receivable with debit balances to determine the t
balance as of a certain period. In case it is offset, an adjusting entry is necessary to add back the
Accounts Receivable balance, and a liability is recognize.
 Accounts Receivable balance, and a liability is recognize.

THIS IS WRONG
Customers Balances
Melba Santiago P 5,000
Jen Mariano 11,000
Ronald Magno 6,000
Rod Layug (1,000)
Total AR Balance P 21,000

Required adjusting journal entry:

Accounts Receivable 1,000
Customer's account with credit balance 1,000

The effect of the adjusting entry is as follows:

THIS IS CORRECT
Customers Balances
Melba Santiago P 5,000 Unadjusted
Jen Mariano 11,000 AJE
Ronald Magno 6,000 Adjusted
Total AR Balance P 22,000

. Accounting for Notes Receivable

• NOTES RECEIVABLE are claims supported by formal promises to pay usually in the form of notes.
- A negotiable promissory note is an unconditional promise in writing made by one person to another, sig
engaging to pay on demand or at a fixed determinable future time a sum certain in monty to order or to

- Two parties in a promissory note:

1) Maker - the debtor; records the notes as Notes Payable.
2) Recipient - the creditor; records the notes as Notes Receivable.

- The note may be payable on demand or at a definite future date (the most common).
- If the problem is silent, NOTES RECEIVABLE represents claims arising from sale of goods or services in
business. Therefore, it is classified as TRADE RECEIVABLE.

- Two types of promissory notes:

1) Non-interest bearing notes
- Payable at maturity without interest but only the principal amount
- The maturity value (MV) of the notes is equal to Principal (P).
2) Interest bearing notes
- Payable at maturity with interest aside from the principal amount
- The maturity value (MV) of the notes is equal to Principal (P) plus Interest (I).

• DISHONORED NOTES
- These are promissory notes that mature but unpaid by the maker.
- These notes should be reclassified to Accounts Receivable.
1) If interest-bearing note
Accounts Receivable (P + I+ Other Charges) xxx
Notes Receivable (Principal) xxx
Interest Income xxx
 2) If noninterest-bearing note
Accounts Receivable (Principal) xxx
Notes Receivable (Principal) xxx

- Justification:
• Overdue note has lost part of its status as a negotiable instrument, and now represents as an ordi
maker.

• INITIAL MEASUREMENT
- Conceptually, notes receivable are initially measured ar PRESENT VALUE which is the sum of all future c
the prevailing market rate of interest for similar notes.
1) Short-term Notes Receivable
- measured at FACE VALUE because of immateriality of the effect of discounting.
2) Long-term Notes Receivable
a) If interest-bearing note
- measured at FACE VALUE which is equal to the PRESENT VALUE upon its issuance.
b) If noninterest-bearing note
- measured at PRESENT VALUE
- interest is included in the face amount of the noninterest-bearing note.

• SUBSEQUENT MEASUREMENT
- Short-term notes receivable is subsequently measured at face amount.
- Long-term notes receivable is subsequently measured ar AMORTIZED COST using the EFFECTIVE INTE
accordance with PFRD 9, paragrapg 5.2.1.
- Amortized cost is also called Carrying value or Carrying amount of long-tern motes receivable.

- Amortized Cost can be any of the following:

1) Notes Receivable (principal amount) xxx
Less: Principal Payment xxx
Amortized Cost xxx

2) Notes Receivable (Principal amount) xxx

Add/Less: Initial carrying amount xxx
Less: Principal maturity amount xxx xxx
Amortized Cost xxx

3) Notes Receivable (Principal amount) xxx

Less: Allowance for impairment xxx
Allowance for doubtful accounts xxx xxx
Amortized Cost xxx

Notes regarding normal balance of the abive accounts:

a) Notes Receivable - debit
b) Allowance for Impairment - credit (contra asset account)
c) Allowance for Doubtful Accounts - credit (contra asset account)

4) For noninterest long-term notes receivable:

Notes Receivable (At face amount) xxx
Less:Unamortized Unearned Interest Income
(or Discount on Notes Receivable) xxx
Amortized Cost xxx
 Notes regarding normal balance of the abive accounts:
a) Notes Receivable - debit
b) Unearned Interest Income or Discount on Notes Receivable - credit (contra asset account)
In this case, the Unearned Interest Income cannot stand alone as a liability because it arises
notes receivable. This is the reason why it is deducted from Notes Receivable balance which i
principal amount. Other accounting textbooks is using Discount on Notes Receivable instead o
Income to avoid confusion.

• ACCOUNTING FOR LONG-TERM NOTES RECEIVABLE

- The accounting for long-term notes receivable will depend on the following cases:
1) Case 1 - Interest bearing note (interest is compounded annually)
2) Case 2 - Noninterest bearing note
2a. Cash sales price is given
2a1. Collectible at maturity
2a2. On installment basis
2b. Cash sales price is not given
2b1. No down payment and on installment basis
2b2. With down payment and on installment basis
2b3. No down payment and collectible at maturity date
2b4. With down payment and collectible at maturity date

- Case 1 - Interest bearing note (interest is compounded annually)

• If the item sold is an item of PPE, a gain or loss is recognized.
• The related Accumulated Depreciation of the item of PPE sold must be updated up to the date of s
derecognized in accounting books.
• Notes Receivable is always recorded at its face amount which is the principal.
• Interest is accrued at year end but will be collected at maturity date.
• Interest compounded annually means interest receivable of previous year will also earn interest du
period.
• The related pro-forma journal entry is as follows:
1) Upon sale of PPE on year of sale
Notes Receivable (at face amount) xxx
Accumulated Depreciation (updated) xxx
PPE (specify the item - at cost) xxx
Gain on sale of PPE xxx

OR

Notes Receivable (at face amount) xxx

Accumulated Depreciation (updated) xxx
Loss on sale of PPE xxx
PPE (specify the item - at cost) xxx

2) Accrual of interest every end of the year until the maturity date
Accrued Interest Receivable xxx
Interest Income xxx

3) Collection of principal and interest at maturity date

Cash (P + I) xxx
Notes Receivable (Principal) xxx
Accrued Interest Receivable (prior years) xxx
Interest Income (current year) xxx
 • Computation of compunded interest
1) Year of sale
Interest = Principal x Interest Rate x Time

2) Succeding years until maturity date

Principal amount of notes receivable xxx
Add: Accrued Interest Receivable xxx
Total xxx
Multiply by annual interest rate %
Interest for the current year xxx

- Case 2a - Noninterest bearing note (Cash sales is given/collectible at maturity)

• Since this is a noninterest bearing note and long-term in nature, the initial measurement of Notes
VALUE.
• The CASH SALES PRICE, if given, is already the present value of the date of sale.

• The difference between the Face amount of notes and its Present Value which is the Cash Sales Pr
UNEARNED INTEREST INCOME.

Face amount of notes receivable xxx

Less: Present value of notes receivable xxx
Unearned Interest Income xxx A contra asset account

• Unearned interest income is amortized over the term to recognize gradually the Interest Income.
- Take note that in long-term noninterest bearing note, the amount of interest is already includ
- Unearned interest income is subject to amoritization using any of the following methods of am
be:
1) Straight - line method
2) Outstanding balance method
3) Scientific method

• During amortization of Unearned Interest Income at year end, will

PLAN
SUBTOPICS

btful accounts

short-term NR

long-term NR
rice is given
rice is not given

ature and accounting

S
r noncash assets.
les of goods or services performed (Trade Receivables) in
normal course of business (Non-trade receivables) like

ms that are expected to be settled by the receipt of cash.

elivery receipts, and other similar documents

Payable and Interest Expense)

es Receivable and Interest Income)
ote or an interest bearing note
sset) or long-term NR (noncurrent asset)

nterest revenue)
ccrued commission revenue)
Accrued subscription revenue)
d dividend revenue)

Employees)

mpany or Due from Subsidiary Company)

r Due from Parent Company)

r services to be delivered in the future.

ople or goods from one place to another.

(cargo ships); (3) by air (cargo planes)

e beyond one year, deduct it from Subscribed

Possible reasons for AP debit balance: User:

(a) Over payment Creditor's account with debit balance (REC) 100
Accounts Payable 100
(b) Purchase returns
Upon collection of receivable:
Cash 100
Creditor's account with debit balance (REC) 100
Notes:
If AP has debit balance, the balance is now a RECEIVABLE to be settled by:
(a) collecting the debit balance (in the form of cash)
(b) considering it as advance payment for future deliveries of goods or services.
(in the form of goods or services)

AJE:
Advances to Supplier 100
Accounts Payable 100
out cash deposit.
nt asset based on assumption that these deposits are for large containers.

mages or losses)

of business operations like service, trading, manufacturing)

mal operating cycle, whichever is longer.

10 days - Purchasing Cycle

ED ACCOUNTS RECEIVABLE)

ory note that will result to recognition of Notes Receivable.

rvices in the normal course of business.

normal operating cycle notwithstanding.

rating cycle, whichever is longer.

al operating cycle notwithstanding.

eduction from Subscribed Share Capital)

osition when and only when, the entity becomes a party

 of the related revenue.

to the buyer.
e or in large quantity.

ller and the buyer.

ct Alpha with a total list price of P 50,000. What is the

b) Short-cut method
Net Price = P 50,000 x 80% x 90%
Net Price = P 36,000

JOURNAL ENTRY:
Accounts Receivable 36,000
Sales Revenue 36,000

an earlier time.

and the buyer.

e invoice date; gross amount is due in 30 days.

e first 10 days of the next month.

ts are collected from customers within the discount period).
nting books.
nting books.

ed is as follows:

xxx

bited to Cash account is 98% of the Accounts Receivable

cted is 100%.
is P 25,000, therefore, the Accounts Receivable collected is P

8,800, therefore, the Accounts Receivable collected is P 60,000

unting books.
unt is paid or not within the discount period.

the discount lost is recorded as credit to "Sales Discount

al entry to recognize sales discount forfeited is as follows:

xxx
xxx
xxx

unting books by using the "Allowance for Sales Discount"

n the Statement of Financial Position as a deduction from
nt).

xxx

xxx
xxx

Discount account is debited.

xxx

s Discount account is debited with corresponding credit

xxx
 NOTES:
CASE 1 - PAID WITHIN THE DISCOUNT PERIOD
(a) Sales or Net Sales amounts are the S

NOTES:
CASE 2 - PAID BEYOND THE DISCOUNT PERIOD
(a) Sales or Net Sales amounts are NOT
(b) Net income or Profits are the SAME fo

receivable in the name of the card-issuing company.

anging from 1% to 5%.

redit card company

xxx
xxx

xxx
xxx
t Card Company xxx

g expense reported in the Statement of Comprhensive

rrent account.
es. Instead, debit directly to Cash account.
to retailer's current account being maintained in credit card

xxx
xxx
xxx

ORTIZED COST.

estimated recoverable amount.

stments within the ordinary course of business.

ed at above their recoverable amount.
ccounts Receivable to arrive at its net realizable value:

a carrier company for the transportation of goods from the

ed based on the type of mode of transportation and the
https://www.saloodo.com/logistics-dictionary/freight-charge)
 . The terms are 3/10, n/30. The related freight charge
hin the discount period, and (b) beyond the discount period.
Payable for freight charges paid by the buyer, the
bable availment of customers of sales discount.
ection of customer's account.

sent the Accounts Receivable at net realizable value.

period to normally charge the sales discount account upon
er while sales allowance involves reduction in selling price

bable customer's return of goods during the next accounting

e next accounting period.

sent the Accounts Receivable at net realizable value.

period to normally charge the sales returns account upon

ble due to noncollection.

erable debts are also referred to as ‘bad debts’. Therefore,

rned.
 at net realizable value which is the requirement of GAAP.
makes it acceptable for tax purposes.
unts that may result to excessive or inadequate balance of
s which are partly collected during the time of estimating
set (credit) it first to the extent of Doubtful Accounts
cellaneous Income.

e accounts. If reply was not received after a number of

ny bankruptcy of the customer, the related accounts are

the credit department.

owance method or the direct write-off method. TAKE NOTE
Y APPLIED IS THE ALLOWANCE METHOD.

cause the amount to be written off is no longer doubtful of

se the amount is no longer outstanding because it cannot

he amouont in the AR balance forever if there is a zero

of Allowance for Doubtful Accounts which is not maintained

ense will be deducted from revenue of year 2022 although
n year 2021. THis is a violation of MATCHING PRINCIPLE.
he accounting period when the write-off and the recovery

ounts Receivable and the Allowance for Doubtful Accounts.

t the Accounts Receivable and decrease the Bad Debts

accounts.

ounts Receivable and the Allowance for Doubtful Accounts.

d to re-establish the Accounts Receivable and decrease the

happened in another accounting period. The account Bad
t of the closing process during the accounting period when
ritten off is higher that the balance of the Allowance for

ounts has a debit balance.

e ADA required/adjusted balance to determine the amount

iary Ledger may possibly have a debit balance due to any of

edit balance as a current liability using the account name

ance".
debit balances to determine the total Accounts Receivable
try is necessary to add back the negative balance to
 Accounts Receivable
Debit Credit
21,000

Accounts Receivable
Debit Credit
21,000
1,000
22,000

in the form of notes.

de by one person to another, signer by the maker,
um certain in monty to order or to bearer.

most common).
rom sale of goods or services in the ordinary course of

plus Interest (I).

t, and now represents as an ordinary claim against the

E which is the sum of all future cash flows discounted using

ect of discounting.

T VALUE upon its issuance.

st-bearing note.

COST using the EFFECTIVE INTEREST METHOD. This in

-tern motes receivable.

 credit (contra asset account)
ne as a liability because it arises from noninterest long-term
Notes Receivable balance which is at face amount or
nt on Notes Receivable instead of Unearned Interest

st be updated up to the date of sale, and will be

he principal.

ous year will also earn interest during the next accounting
tible at maturity)
he initial measurement of Notes Receivable is at PRESENT

he date of sale.

Value which is the Cash Sales Price represents the

A contra asset account

gradually the Interest Income.

mount of interest is already included in the face amount.
ny of the following methods of amortization as the case may
N THE DISCOUNT PERIOD
r Net Sales amounts are the SAME for the three methods

D THE DISCOUNT PERIOD

r Net Sales amounts are NOT the same for the three methods.
ome or Profits are the SAME for the three methods.
RECONSTTUCTION OF ACCOUNTS RECEIVABLE

Wha

Accounts Receivable
Debit Credit

Beginning balance xxx Beginning balance

Sales (if silent - credit sales) xxx Sales (credit)
Sales Returns xxx Sales Returns
Sales Allowances xxx Sales Allowances
Collection of accounts xxx Collection of accounts
xxx xxx

Ending balance ? Ending balance

NOTES:
. If the problem is silent, the sales account refers to credit
sales.

STRAIGHT-COMPUTATION:
Accounts Receivable, beginning xxx
Add: Credit Sales xxx
Total accounts receivable xxx
Less: Sales returns xxx
Sales allowances xxx
Collection of acts. xxx xxx
Accounts Receivable, ending xxx
 What if Sales amount is not given?

Accounts Receivable Use the COST OF SALES of the IS John John:

Debit Credit Sales - COS = GP
COS = Sales - GP
Inventory beginning (given) xxx Sales = GP + COS
xxx Purchases (given) xxx
? Goods available for sale xxx
xxx Less: Inventory, ending (given) xxx This may also not be
Cost of Sales (Puhunan sa Benta) xxx given
xxx Add: Mark-up on profit (gross profit) (given) xxx
xxx xxx Sales (Benta = Puhunan + Tubo) xxx

?
If CASH COLLECTED after cash discount (given)
Sales = Cash collected / (100% - Cash Discount rate)

Assume net sales is P 98,000 (net of 2% discount)

CASH COLLECTED = P 98,000 (net of 2% SD)
Sales = P 98,000/ (100% - 2%)
Sales = P 98,000 / 98%
Sales = P 100,000
 What if Cost of Sales is not given?

John John:
Sales - COS = GP
COS = Sales - GP
Sales = GP + COS
GP Basis Computation of Cost of Sales Basis sales
C1 Sales COS = Sales x (100% - GP rate) cos
C2 Cost (COS) COS = Sales / (100% + GP Rate) gp (given)
his may also not be
given Notes: How much is sales if COS is
GP means Gross Profit Answer: Sales = P 200 / 40%
COS means Cost of Sales

GPR (gross profit rate) and Sales are always given. sales John John:
What is the basis of GP? Basis cost ofPsales
240,000 sales given/ (
P 240,000 / 120% = P 2
gp (given)
Notes:
Cost of Sales is the same as Cost of Goods Sold
Notes:
The basis is always 100%
 Amount % Case 1 - Based on Sales
500 100% GPR = 60%
200 40% (500 x 40%) GP based Sales = P 500
on sales
300 60% GPR is based on sales

w much is sales if COS is P 200 while gross profit is 60% (GP based on sales)?
swer: Sales = P 200 / 40% cost rate

John John:
240 120% Case 2 - Based on Cost
GP based on
200
P 240,000 sales 100%+ 20%)
given/ (100% GP = 20%
cost
P 240,000 / 120%
40 = P 200,000
20% Sales = P 240
GPR is based on cost

always 100%
DIY EXERCISE 2-1.1 (Classifying Receivables)

SITUATION 1 (Classifying Receivables)

INSTRUCTIONS: For each individual situation, determine the required amount at reporting date.

COMPUTE
GIVEN As to Origin
No. Information Amount Trade
1 Accounts Receivable 100,000 100,000
Notes Receivable 50,000 50,000
Dividend Receivable 15,000
Advances to Employees 5,000
Advances to Affiliates 500,000
Subscription Receivable (P 50,000 is collectible within 90 days) 150,000
150,000

COMPUTE
GIVEN As to Origin
No. Information Amount Trade
2 Accounts Receivable (net of credit balance of P 2,000) 125,000 127,000
Notes Receivable (P 10,000 is discounted with recourse) 25,000 25,000
Accrued Rent Income 2,500
Claims Receivable 25,000
Accounts Payable (net of debit balance of P 1,000) 100,000
Special Deposits on Contract Bids 1,000,000
152,000

Accounts Receivable - Juan

Credit sales 20,000 2,000 Sales returns
20,000 Collection (over payment)
20,000 22,000

2,000 Credit balance (abnormal balan

This is no longer a receivable bu

Analysis of Accounts Receivable

Customer Balances Correct AR
Juan dela Cruz (2,000)
Jose Rizal 50,000 50,000
Andres Bonifacio 30,000 30,000
Melchora Aquino 47,000 47,000
Total AR 125,000 127,000

AJE TO RECLASSIFY AR DEBIT BALANCE:

Accounts Receivable 2,000
Customer's account with credit balance
 COMPUTE
GIVEN As to Origin
No. Information Amount Trade
3 Accounts Receivable - unassigned 800,000 800,000
Accounts Receivable - assigned 50,000 50,000
Advances to Officers (P 20,000 is due currently) 50,000
Creditor's account with debit balance 3,000
Customer's account with credit balance 2,000
Refundable Deposit on long-term contracts 1,500,000
850,000

COMPUTE
GIVEN As to Origin
No. Information Amount Trade
4 Accounts Receivable (P 10,000 is proven to be uncollectible) 500,000 490,000
Installment Receivable (due in one year) 700,000 700,000
Credit card sale of merchandise to customer 300,000 300,000
Receivable from closed bank - ABC Bank 500,000
Receivable from closed bank - DEF Bank (60% recoverable) 1,500,000
Advances to Subsidiary (P 100,000 is due currently) 300,000
1,490,000

SITUATION 2 (Classifying Receivables)

(Adapted from Intermediate Accounting Textbook)
Dreamer Company reported the "Receivables" account with a debit balance of P 2,000,000 at year-end. The
Allowance for Doubtful Accounts had a credit balance of P 50,000 on same date. Subsidiary details revealed the
following:

Trade Accounts Receivables 775,000

Trade Notes Receivable 100,000
Installments Receivable, normally due 1 year to two years 300,000
Customer's accounts reporting credit balances arising from sales return (30,000)
Advance payments for purchase of merchandise 150,000
Customers' accounts reporting credit balances arising from advance payments (20,000)
Cash advances to subsidiary 400,000
Claims from insurance entity 15,000
Subscription receivable due in 60 days 300,000
Accrued interest receivable 10,000
2,000,000

Required:
A. Prepare one compound entry to reclassify the receivable account.
B. Compute the amount to be presented as "Trade and Other Receivables" under current assets
C.
Indicate the classification and presentation of the other items excluded from "Trade and Other Receivables"

SOLUTION:
A. One compound entry to reclassify the receivable account.
 RECEIVABLES
Debit Credit

Trade Accounts Receivable 775,000

Trade Notes Receivable 100,000
Installments receivable, normally due 1 year to two years 300,000
Customer's act. reporting credit balances arising from SR 30,000
Advance payments for purchase of merchandise 150,000
Customers' act. reporting credit balances arising from
advance payments 20,000
Cash advances to subsidiary 400,000
Claims from insurance entity 15,000
Subscription receivable due in 60 days 300,000
Accrued interest receivable 10,000
2,050,000 50,000

Balance 2,000,000

B. Computation of "Trade and Other Receivables" under current assets

Classification C/NC
Trade Accounts Receivable 775,000 Trade Current TAOR
Trade Notes Receivable 100,000 Trade Current TAOR
Installment Receivable 300,000 Trade Current TAOR
Advances to Suppliers 150,000 Nontrade Current TAOR
Advances to Subsidiary 400,000 Nontrade Noncurrent -
Claims Receivable 15,000 Nontrade Current TAOR
Subscription Receivable 300,000 Nontrade Current TAOR
Accrued Interest Receivable 10,000 Nontrade Current TAOR
Total
Less: Allowance for Doubtful Accounts
TAOR (NET)

Statement of Financial Position:

Current Assets:
Trade and Other Receivables
Trade Receivables:
Trade Accounts Receivable 775,000 John John:
Allowance for Doubtful Accounts (50,000) 725,000 Net realizable valu
Trade Notes Receivable 100,000
Installment Receivable 300,000 1,125,000
Other Receivables:
Advances to Suppliers 150,000
Claims Receivable 15,000
Subscription Receivable 300,000
Accrued Interest Receivable 10,000 475,000
Total 1,600,000

C Classification of Items Excluded from "Trade and Other Receivables"

Items Excluded from TAOR Amount Proper Classification

 Advances to Subsidiary 400,000 Noncurrent asset (Long-term Investment)
Customers' Account with Credit Balance 30,000 Current Liability
Advances from Customers 20,000 Current Liability

RELATED MULTIPLE CHOICE THEORY QUESTIONS:

In relation to the above, answer the following multiple-choice questions. Write your answer on the space provided
before each number. Use only CAPITAL LETTERS.

. The category "trade receivables" includes

A. advances to offices and emloyees
B. income tax refunds receivable
C. claims against insurance companies for casualties sustained
D. none of these

. Which of the following should be recorded in Accounts Receivable?

A. Receivables from officers
B. Receivables from subsidiaries
C. Dividends receivable
D. None of these

. Which of the following elements is not a consideration in determining the classification of receivables as to curre
A. Nature of receivables
B. Source or origin of receivables
C. Expected timing of cash flows
D. Amount of receivables

. Credit balances in accounts receivable arising from customer's advances should be classified as
A. Current liabilities
B. Long-term liabilities
C. Part of accounts payable
D. Deduction from accounts receivable

. Which of the following would be considered part of the category "trade receivables"?
A. Advaces to employees
B. Income tax refunds receivable
C. Dividends receivable
D. Amounts due from customers

. Which of the following receivables is nontrade?

A. Share subscription receivable
B. Tax refunds
C. Claims againts creditors for damaged goods
D. All of the above

. Which of the following transactions is not a common source of receivables?

A. Sales of merchandise
B. Amount lent to others
C. Performance of service
D. Casualty damage, not covered by insurance

. Long-term receivables from subsidiaries and affiliates should be classified as

A. Current assets
 B. Noncurrent assets
C. Either as current or noncurrent depending on the expectation of realizing them within one year or over one
D. Partly current and partly noncurrent

. Which of the following is normally reported as current asset?

A. Advances to subsidiaries
B. Deposit with utility companies
C. Customers' deposit
D. Subscription receivables

.
Where operating cycle exends beyond one year because of long credit terms as in the case of installment sales o
A. It is proper to classify the entire receivables as current assets with disclosure of the amount not realizable w
material.
B. The entire receivables are shown as noncurrent assets.
C. The portion due in one year is shown as current and the balance as noncurrent.
D. The receivable are not recognized.

. Trade receivables are classified as current assets if they are reasonably expectedto be collected
A. within one year
B. within the normaloperating cycle
C. within one year or within the operating cycle, whichever is shorter
D. within one year or within the operating cycle, whichever is longer

. The category "trade receivables" includes

A. advances to officers and employees
B. income tax refunds receivable
C. claims against insurance companies for casualties sustained
D. open accounts resulting from short-term credit extension to the customers

. Which of the following should be recorded in accounts receivable?

A. Receivables from officers
B. Receivables from subsidiaries
C. Dividends receivable
D. Customer's open account

ANSWER KEY TO RELATED MULTIPLE CHOICE THEORY QUESTIONS:

In relation to the above, answer the following multiple-choice questions. Write your answer on the space provided
before each number. Use only CAPITAL LETTERS.

D . The category "trade receivables" includes

A. advances to offices and emloyees
B. income tax refunds receivable
C. claims against insurance companies for casualties sustained
D. none of these

D . Which of the following should be recorded in Accounts Receivable?

A. Receivables from officers
B. Receivables from subsidiaries
C. Dividends receivable
D. None of these
D . Which of the following elements is not a consideration in determining the classification of receivables as to curre
A. Nature of receivables
B. Source or origin of receivables
C. Expected timing of cash flows
D. Amount of receivables

A . Credit balances in accounts receivable arising from customer's advances should be classified as
A. Current liabilities
B. Long-term liabilities
C. Part of accounts payable
D. Deduction from accounts receivable

D . Which of the following would be considered part of the category "trade receivables"?
A. Advaces to employees
B. Income tax refunds receivable
C. Dividends receivable
D. Amounts due from customers

D . Which of the following receivables is nontrade?

A. Share subscription receivable
B. Tax refunds
C. Claims againts creditors for damaged goods
D. All of the above

D . Which of the following transactions is not a common source of receivables?

A. Sales of merchandise
B. Amount lent to others
C. Performance of service
D. Casualty damage, not covered by insurance

C . Long-term receivables from subsidiaries and affiliates should be classified as

A. Current assets
B. Noncurrent assets
C. Either as current or noncurrent depending on the expectation of realizing them within one year or over one
D. Partly current and partly noncurrent

C . Which of the following is normally reported as current asset?

A. Advances to subsidiaries
B. Deposit with utility companies
C. Customers' deposit
D. Subscription receivables

A .
Where operating cycle exends beyond one year because of long credit terms as in the case of installment sales o
A. It is proper to classify the entire receivables as current assets with disclosure of the amount not realizable w
material.
B. The entire receivables are shown as noncurrent assets.
C. The portion due in one year is shown as current and the balance as noncurrent.
D. The receivable are not recognized.

D . Trade receivables are classified as current assets if they are reasonably expectedto be collected
A. within one year
 B. within the normaloperating cycle
C. within one year or within the operating cycle, whichever is shorter
D. within one year or within the operating cycle, whichever is longer

D . The category "trade receivables" includes

A. advances to officers and employees
B. income tax refunds receivable
C. claims against insurance companies for casualties sustained
D. open accounts resulting from short-term credit extension to the customers

D . Which of the following should be recorded in accounts receivable?

A. Receivables from officers
B. Receivables from subsidiaries
C. Dividends receivable
D. Customer's open account
 COMPUTE
As to Origin As to SFP Classification
Nontrade Current Noncurrent
100,000
50,000
15,000 15,000
5,000 5,000
500,000 500,000
150,000 50,000
670,000 220,000 500,000

COMPUTE
As to Origin As to SFP Classification
Nontrade Current Noncurrent
127,000
25,000
2,500 2,500
25,000 25,000
1,000 1,000
1,000,000 1,000,000
1,028,500 180,500 1,000,000

ection (over payment)

edit balance (abnormal balance)

s is no longer a receivable but a CURRENT LIABILITY

Current Liab.
2,000

2,000

2,000 (Current Liability)

 COMPUTE
As to Origin As to SFP Classification
Nontrade Current Noncurrent
800,000
50,000
50,000 20,000 30,000
3,000 3,000

1,500,000 1,500,000
1,553,000 873,000 1,530,000

COMPUTE
As to Origin As to SFP Classification
Nontrade Current Noncurrent
490,000
700,000
300,000
500,000 500,000
900,000 900,000
300,000 100,000 200,000
1,700,000 1,590,000 1,600,000

0 at year-end. The
ry details revealed the

RECEIVABLES
Debit Credit
775,000
100,000
300,000
30,000
150,000
20,000
400,000
15,000
300,000
10,000
2,050,000 50,000

2,000,000

and Other Receivables"

 RECEIVABLES COMPOUND ADJUSTING ENTRY:
Debit Credit
Balance 2,000,000 Trade Accounts Receivable 775,000
AJE 1 775,000 Trade Notes Receivable 100,000
AJE 2 100,000 Installment Receivable 300,000
AJE 3 300,000 Advances to Suppliers 150,000
AJE 4 30,000 Advances to Subsidiary 400,000
AJE 5 150,000 Claims Receivable 15,000
Subscription Receivable 300,000
AJE 6 20,000 Accrued Interest Receivable 10,000
AJE 7 400,000 Receivables
AJE 8 15,000 Customers' account with credit balances
AJE 9 300,000 Advances from Customers
AJE 10 10,000
2,050,000 2,050,000

775,000
100,000
300,000
150,000
-
15,000
300,000
10,000
1,650,000
50,000
1,600,000

John John:
Net realizable value (NRV)

Classification
Long-term Investment)

er on the space provided

fication of receivables as to current or noncurrent?

be classified as
hem within one year or over one year

in the case of installment sales of household appliances:

ure of the amount not realizable within one year, if

dto be collected

er on the space provided

fication of receivables as to current or noncurrent?

be classified as

hem within one year or over one year

in the case of installment sales of household appliances:

ure of the amount not realizable within one year, if

dto be collected
2,000,000
30,000
20,000
INTRODUCTORY DISCUSSION:
Please refer to DIY-E2-1.5

DIY EXERCISE 2-1.2 (Journal Entries and Computation of Balances)

SITUATION
(Adapted from Intermediate Accounting Textbook)
Prepare the journal entries for the following transactions and determine the balances of the following:

. Notes Receivable 220,000

. Accounts Receivable 670,000 NB is debit
. Allowance for Doubtful Accounts 65,000 Contra AR account (NB is credit)
. Net Realizable Value of Accounts Receivable 605,000

No. Transactions Account Names Debit Credit

. Sales on account, P3,600,000 Accounts Receivable 3,600,000

Sales 3,600,000

. Notes received to settle Notes receivable 400,000

accounts, P 400,000 Accounts Receivable 400,000

. Provision for doubtful accounts, Doubtful Accounts Expense 90,000

P 90,000 Allowance for Doubtful Accounts 90,000

. Accounts receivable deemed to Allowance for Doubtful Accounts 25,000

be worthless, P 25,000. Accounts Receivable 25,000

. Merchandise Returned by Sales Returns (SRA) 15,000

customers, P 15,000 Accounts Receivable 15,000
Collections (cash receipts) Cash 2,450,000
. received to settle accounts, P Accounts Receivable 2,450,000
2,450,000.

. Discounts permitted to be taken Sales Discount 40,000

by customers, P 40,000. Accounts Receivable 40,000

. Collections received in Cash 180,000

settlement of notes, P 180,000. Notes receivable 180,000

Cash (collections) 2,450,000

Sales Discount 40,000
Accounts Receivable (100%) 2,490,000

AR is 100,000. Collected within Cash (100,000 x 98%) - collections 98,000

the discount period. Discount is Sales Discount (P 100,000 x 2%) 2,000
2%.
2%. Accounts Receivable (100%) 100,000

Cash (collections) 98,000

Accounts Receivable 98,000

Sales Discount 2,000

Accounts Receivable 2,000
AR account (NB is credit)

Notes Receivable Accounts Receivable Allowance for DA

Debit Credit Debit Credit Debit

. Credit sales 3,600,000

. Settlement of AR by issuing notes 400,000 400,000
. Provision for doubtful accounts
. Write-off of accounts receivable 25,000 25,000
. Sales returns 15,000
. Collection of AR 2,450,000
. Discounts permitted to customers 40,000
. Settlement of notes receivable 180,000
Total balances 400,000 180,000 3,600,000 2,930,000 25,000

Account Balances 220,000 670,000

No. 1 No. 2
Allowance for DA
Credit

90,000

90,000

65,000
No. 3
INTRODUCTORY DISCUSSION:

SHIPPING TERMS

. FOB Destination - The ownership of the goods purchased is vested in the buyer upon
- The seller is responsible for the freight charge up to the point of destination.

. FOB Shipping Point - The ownership of the goods purchased is vested in the buyer upon
- The buyer is responsible for the freight charge from the point of shipment to the poi

WHILE IN TRANSIT AT REPORTING DATE

Goods Freight Recognition in accounting b
TERMS ownership Responsibility Seller

. FOB Destination Seller Seller Sales No

Accounts Receivable No
Freight - out Yes

. FOB Shipping Point Buyer Buyer Sales Yes

Accounts Receivable Yes
Freight - out No

FREIGHT TERMS

. Freight Collect - The freight charge on the goods is not yet paid by the seller.
- The buyer paid the freight charge to the common carrier.
. Freight Prepaid - The freight charge on the goods is not yet paid by the buyer.
- The seller paid the freight charge to the common carrier.

Freight paid by
(abono)

. Freight Collect Buyer

. Freight Prepaid Seller

December 31, 2020 (Reporting Date)

CEBU

CEBU PORT CARGO SHIP

(Shipping Point) (Carrier)
 Dec. 30, 2021 Goods In Transit

Seller

FOB SHIPPING POINT

▪ ownership of goods will be transferred from seller to buyer upon reaching shipping point.
▪ freight should be paid by the BUYER (FREIGHT-IN)
▪ seller will debit AR and credit Sales; exclude the goods from inventory, ending
▪ buyer will debit Purchases and credit AP; include the goods in it inventory, ending
▪ while in transit, the owner of the goods is the buyer (Include the goods in his Inventory, ending)

FOB DESTINATION
▪ ownership of goods will be transferred from seller to buyer upon reaching destination.
▪ freight should be paid by the SELLER (FREIGHT-OUT)

▪ while in transit, the owner of the goods is the seller.

(a) seller has no sales transactions (No JE: Debit - AR, credit - Sales)/include as Inventory, ending
(b) buyer has no purchase transactions (No JE: Debit - Purchases, Credit - AP)

▪ upon reaching destination:

(a) seller has sales transactions
(b) buyer has purchase transactions

(b) buyer has purchase transactions

 DIY EXERCISE 2-1.3 (Shipping and Freight Terms)

SITUATION 1
Bravery Company sold merchandise on account for P 300,000. The terms a
e buyer upon receipt thereof. amounted to P 5,000. The account was collected within the discount period.
e point of destination.
Required:
e buyer upon shipment thereof. Prepare journal entries to record the transactions under the following freight
he point of shipment to the point of destination. . FOB Destination and freight collect. (Be aware of variations in JEs)
(a) Direct Method
T REPORTING DATE (b) Allowance Method
Recognition in accounting book . FOB Destination and freight prepaid.
Buyer . FOB Shipping point and freight collect,
. FOB Shipping point and freight prepaid.
Purchases No
Accounts Payable No DIRECT METHOD
Freight - in No FOB Destination
No. Transactions Account Names

Purchases Yes . Credit Sales. FOB Destination. Accounts Receivable

Accounts Payable Yes
Freight - in Yes
Freight paid by the buyer (but seller Freight-out
is responsible to pay)

Collection of account within the Cash [(P 300,000 - P 9,000) - P

discount period, Sales Discount (P 300,000 x 3%

FOB Destination
No. Transactions Account Names

. Credit Sales. FOB Destination. Accounts Receivable

Freight paid by the seller (the one Freight-out

actually responsible to pay)

Collection of account within the Cash (P 300,00 x 97%)

discount period, Sales Discount (P 300,000 x 3%

FOB Shipping po
No. Transactions Account Names
MANILA
. Credit Sales. FOB shipping point. Accounts Receivable
MANILA PORT
(Destination)
 Jan. 5, 2022 Freight paid by the buyer (the one NO ENTRY
actually responsible to pay)
Buyer
Collection of account within the Cash (P 300,00 x 97%)
discount period, Sales Discount (P 300,000 x 3%

hing shipping point.

FOB Shipping po
ntory, ending No. Transactions Account Names
nventory, ending
in his Inventory, ending) . Credit Sales. FOB shipping point. Accounts Receivable

ng destination. Freight paid by the seller (but buyer Accounts Receivable

is responsible to pay)

Collection of account within the Cash [(P 300,00 x 97%) + P 5,0

nclude as Inventory, ending discount period, Sales Discount (P 300,000 x 3%

SITUATION 2
(Adapted from Applied Auditing Textbook)
On January 13, 2022, Kingsley Corporation sold goods on credit with a selli
2/10, n/30. Freight costs amounted to P 5,000. The goods were received by
Kingsley Corporation collected the receivable on January 23, 2022.

. How much net cash did Kingsley Corporation receive from the buyer i
freight prepaid?
A. P 289,000
B. P 294,000
C. P 299,000
D. P 305,000

. How much net cash did Kingsley Corporation receive from the buyer i
freight collect?
A. P 289,000
B. P 294,000
C. P 299,000
D. P 305,000

ANSWER KEY TO SITUATION 2

(Adapted from Applied Auditing Textbook)
On January 13, 2022, Kingsley Corporation sold goods on credit with a selli
2/10, n/30. Freight costs amounted to P 5,000. The goods were received by
Kingsley Corporation collected the receivable on January 23, 2022.

. How much net cash did Kingsley Corporation receive from the buyer i
freight prepaid?
 How much net cash did Kingsley Corporation receive from the buyer i
freight prepaid?
A. P 289,000
B. P 294,000
C. P 299,000
D. P 305,000

SOLUTION:
Under FOB destination, it is the seller who is responsible to pay and re
Under freight prepaid, it is the seller who is paying the freight cost.
Under this situation (1), it is the seller who paid the freight cost which i
Therefore, the only collection from the buyer on January 23, 2022 is P

. How much net cash did Kingsley Corporation receive from the buyer i
freight collect?
A. P 289,000
B. P 294,000
C. P 299,000
D. P 305,000

SOLUTION:
Under FOB destination, it is the seller who is responsible to pay and re
Under freight collect, it is the buyer who is paying the freight cost.
Under this situation (2), the seller has payable to the buyer regarding
Therefore, the collection from the buyer on January 23, 2022 is P 289
ping and Freight Terms)

on account for P 300,000. The terms are 3/10, n/30. The related freight charge
was collected within the discount period.

transactions under the following freight terms:

ollect. (Be aware of variations in JEs)

DIRECT METHOD ALLOWANCE METHOD (Ind

FOB Destination and freight collect.
Account Names Debit Credit No. Transactions

Accounts Receivable 300,000 . Credit Sales. FOB Destination.

Sales Revenue 300,000

Freight-out 5,000 Freight paid by the buyer (but seller

Accounts Receivable 5,000 is responsible to pay)

Cash [(P 300,000 - P 9,000) - P 5,000] 286,000 Collection of account within the
Sales Discount (P 300,000 x 3%) 9,000 discount period,
Accounts Receivable 295,000

FOB Destination and freight prepaid

Account Names Debit Credit

Accounts Receivable 300,000

Sales Revenue 300,000

Freight-out 5,000
Cash 5,000

Cash (P 300,00 x 97%) 291,000

Sales Discount (P 300,000 x 3%) 9,000
Accounts Receivable 300,000

FOB Shipping point and freight collect

Account Names Debit Credit

Accounts Receivable 300,000

Sales Revenue 300,000
 NO ENTRY

Cash (P 300,00 x 97%) 291,000

Sales Discount (P 300,000 x 3%) 9,000
Accounts Receivable 300,000

FOB Shipping point and freight prepaid

Account Names Debit Credit

Accounts Receivable 300,000

Sales Revenue 300,000

Accounts Receivable 5,000

Cash 5,000

Cash [(P 300,00 x 97%) + P 5,000] 296,000

Sales Discount (P 300,000 x 3%) 9,000
Accounts Receivable 305,000

Textbook)
oration sold goods on credit with a selling price of P 300,000 with terms of
o P 5,000. The goods were received by the buyer on January 15, 2022.
eceivable on January 23, 2022.

ey Corporation receive from the buyer if the terms are FOB destination,

ey Corporation receive from the buyer if the terms are FOB destination,

Textbook)
oration sold goods on credit with a selling price of P 300,000 with terms of
o P 5,000. The goods were received by the buyer on January 15, 2022.
eceivable on January 23, 2022.

ey Corporation receive from the buyer if the terms are FOB destination,
e seller who is responsible to pay and record the freight cost.
seller who is paying the freight cost.
e seller who paid the freight cost which is the right thing to do.
rom the buyer on January 23, 2022 is P 294,000 (P 300,000 x 98%).

ey Corporation receive from the buyer if the terms are FOB destination,

e seller who is responsible to pay and record the freight cost.

uyer who is paying the freight cost.
ller has payable to the buyer regarding freight cost.
the buyer on January 23, 2022 is P 289,000 [(P 300,000 x 98%).- P 5,000]
LOWANCE METHOD (Indirect Deduction from AR)
FOB Destination and freight collect.
Account Names Debit Credit

Accounts Receivable 300,000

Sales Revenue 300,000 John John:
contra account to Accounts Receivable
Freight-out 5,000 or a valuation account.
Allowance for Freight Charge 5,000
Accounts Receivable P 300,000 NB is debit
Allow. For Freight Charges ( 5,000) This is a contra as
Cash [(P 300,00 x 97% ) - P 5,000] 286,000
Net Realizable Value P 295,000
Sales Discount (P 300,000 x 3%) 9,000
Allowance for Freight Charge 5,000
Accounts Receivable 300,000
ccounts Receivable
nt.

P 300,000 NB is debit
harges ( 5,000) This is a contra asset acct. NB is credit
P 295,000
DIY EXERCISE 2-1.4 (Three Methods of Recording Sales)

SITUATION 1
On June 15, 2021, Romel Company sold 20 air-conditioning units. The sale price for each unit is P 40,000. All of sales are subject to
terms 2/10, n/30.

Prepare the journal entries for the given transactions using the Gross Method, Net method and the Allowance Method. Assume the
accounts were collected in full on (1) June 25, 2021; (2) June 30, 2021.

GROSS METHOD NET METHOD

Date Account Names Debit Credit Account Names Debit
2021
Jun 15 Accounts Receivable (gross) 800,000 Accounts Receivable (net) 784,000
Sales (gross) 800,000 Sales (net of SD)
(P 800,000 x 98%)

Case 25 Cash (P 800,000 x 98%) 784,000 Cash 784,000

1 Sales Discount (P 800K x 2%) 16,000 Accounts Receivable
Accounts Receivable 800,000

Case 30 Cash 800,000 Cash (gross of AR) 800,000

2 Accounts Receivable 800,000 Sales Discount Forfeited
Accounts Receivable

INCOME STATEMENT PRESENTATION - CASE 1

GROSS METHOD NET METHOD

Sales 800,000
Less: Sales Discount 16,000
Net Sales 784,000 Sales

INCOME STATEMENT PRESENTATION - CASE 2

GROSS METHOD NET METHOD
Sales 800,000
Less: Sales Discount 0
Net Sales 800,000 Sales

Other Income: 0 Other Income:

Sales Discount Forfeited
Profit 800,000 Profit

SITUATION 2
(Adapted from Comprehensive Reviewer inFinancial Accounting and Reporting Textbook)

INTRODUCTORY DISCUSSION

trade disount illustration:

List price or catalog price is P 50,000. Trade discount is 5%-10%-15%. This was paid within the discount period with
2% discount.

What is the sales revenue to be recorded?

SOLUTION:
Sales Revenue = P 50,000 x 95% x 90% x 85% = P 36,337.50

Journal entry:
Accounts receivable 36,337.50
Sales Revenue 36,337.50
Credit sales.

Cash (P 36,337.50 x 98%) 35,610.75

Sales Discount (P 36,337.50 x 2%) 726.75
Accounts receivable 36,337.50
Collected within the discount period.

MULTIPLE CHOICE QUESTIONS - PROBLEMS

On January 1, 2022, Truman Company sold goods on credit with a list price of P 2,000,000 under credit terms of 10%, 15%, 3/10,
2/15, n/30.
. How much should be debited to Accounts Receivable on January 1, 2022 under the gross method?
A. P 1,484,100
B. P 1,500,000
C. P 1,530,000
D. P 2,000,000

. How much should be debited to Accounts Receivable on January 1, 2022 under the net method?
A. P 1,484,100
B. P 1,500,000
C. P 1,530,000
D. P 2,000,000

. How much should be debited to Accounts Receivable on January 1, 2022 under the allowance method?
A. P 1,484,100
B. P 1,500,000
C. P 1,530,000
D. P 2,000,000

. Assuming the customer settled its account on January 11, what amount should be recognized as sales discount under the gross
A. P 60,000
B. P 45,900
C. P 45,000
D. P 0

. Assuming the customer settled its account on January 11, what amount should be recognized as sales discount under the net me
A. P 60,000
B. P 45,900
C. P 45,000
D. P 0

. Assuming the customer settled its account on January 11, what amount should be recognized as sales discount under the allowa
A. P 60,000
B. P 45,900
C. P 45,000
D. P 0

. Assuming the customer settled its account on January 31, what amount should be recognized as sales discount under the gross
A. P 60,000
B. P 45,900
C. P 45,000
D. P 0

. Assuming the customer settled its account on January 31, what amount should be recognized as sales discount under the net me
A. P 60,000
B. P 45,900
C. P 45,000
D. P 0

. Assuming the customer settled its account on January 31, what amount should be recognized as sales discount under the allowa
A. P 60,000
B. P 45,900
C. P 45,000
D. P 0

. Assuming the customer settled its account on January 31, what amount should be recognized as sales discount forfeited under th
A. P 60,000
B. P 45,900
 C. P 45,000
D. P 0

. Assuming the customer settled its account on January 31, what amount should be recognized as sales discount forfeited under th
A. P 60,000
B. P 45,900
C. P 45,000
D. P 0

. Assuming the customer settled its account on January 31, what amount should be recognized as sales discount forfeited under th
A. P 60,000
B. P 45,900
C. P 45,000
D. P 0

RELATED MULTIPLE CHOICE THEORY QUESTIONS:

In relation to the above, answer the following multiple-choice questions. Write your answer on the space provided
before each number. Use only CAPITAL LETTERS.

. Recording of accounts receivable is closely related to the recognition of

A. expense
B. revenue
C. liability
D. equity

. A discount given to a customer for purchasing a large volume of merchandise is typically referred to as a
A. quantity discount
B. cash discount
C. trade discount
D. size discount

. If the company employs the gross method of recording accounts receivable from customers, then sales
discounts taken should be reported as:
A. a deduction from sales in the income statement
B. an item of "other expense" in the income statement
C. a deduction from accounts receivable in determining the net realizable value of accounts receivable
D. sales discounts forfeited in the cost of sales section of the income statement

. A discount that induces prompt payment is a

A. Cash discount
B. Trade discount
C. Loyalty discount
D. Size discount

. The credit terms of n/30 means

A. no delivery shall be made unless payment are made within 30 days.
B. 30% cash discount shall be given if payment is not late.
C. no discount is granted if payment is made in the 30th day from delivery
D. 30% trade discount shall be granted if payment is made within 30 days.

ANSWER KEY TO MULTIPLE CHOICE QUESTIONS - PROBLEMS

On January 1, 2022, Truman Company sold goods on credit with a list price of P 2,000,000 under credit terms of 10%, 15%, 3/10,
2/15, n/30.

. How much should be debited to Accounts Receivable on January 1, 2022 under the gross method?
A. P 1,484,100
B. P 1,500,000
C. P 1,530,000
D. P 2,000,000

SOLUTION:
P 2,000,000 x 90% x 85% = P 1,530,000
Always report the AR net of trade discount.

. How much should be debited to Accounts Receivable on January 1, 2022 under the net method?
A. P 1,484,100
B. P 1,500,000
C. P 1,530,000
D. P 2,000,000

SOLUTION:
P 2,000,000 x 90% x 85% X 97% = P 1,484,100
It is assumed that the customer will always take the highest cash discount.

. How much should be debited to Accounts Receivable on January 1, 2022 under the allowance method?
A. P 1,484,100
B. P 1,500,000
C. P 1,530,000
D. P 2,000,000

SOLUTION:
P 2,000,000 x 90% x 85% = P 1,530,000
Always report the AR net of trade discount.
The amount of discount is reported using the account "Allowance for Trade Discount" and reported in the SFP as follows:

Accounts Receivable 2,000,000

Less: Allowance for Sales Discount
(P 1,530,000 x 3%) 45,900
Net realizable value at January 1, 2022 1,954,100

. Assuming the customer settled its account on January 11, what amount should be recognized as sales discount under the gross
A. P 60,000
B. P 45,900
C. P 45,000
D. P 0

SOLUTION:
P 1,530,000 x 3% = P 45,900

. Assuming the customer settled its account on January 11, what amount should be recognized as sales discount under the net me
A. P 60,000
B. P 45,900
C. P 45,000
D. P 0

SOLUTION:
Zero because sales discount is not recorded or recognized under net method.
. Assuming the customer settled its account on January 11, what amount should be recognized as sales discount under the allowa
A. P 60,000
B. P 45,900
C. P 45,000
D. P 0

SOLUTION:
Zero because sales discount is not recorded or recognized under allowance method.

. Assuming the customer settled its account on January 31, what amount should be recognized as sales discount under the gross
A. P 60,000
B. P 45,900
C. P 45,000
D. P 0

SOLUTION:
Zero because no discount to be granted because the payment of customers account is beyond the discount period.

. Assuming the customer settled its account on January 31, what amount should be recognized as sales discount under the net me
A. P 60,000
B. P 45,900
C. P 45,000
D. P 0

SOLUTION:
Zero because sales discount is not recorded or recognized under net method.

. Assuming the customer settled its account on January 31, what amount should be recognized as sales discount under the allowa
A. P 60,000
B. P 45,900
C. P 45,000
D. P 0

SOLUTION:
Zero because sales discount is not recorded or recognized under allowance method.

. Assuming the customer settled its account on January 31, what amount should be recognized as sales discount forfeited under th
A. P 60,000
B. P 45,900
C. P 45,000
D. P 0

SOLUTION:
Zero because the gross method does not recognized Sales Discount Forfeited.

. Assuming the customer settled its account on January 31, what amount should be recognized as sales discount forfeited under th
A. P 60,000
B. P 45,900
C. P 45,000
D. P 0

SOLUTION:
P 1,530,000 x 3% = P 45,900

. Assuming the customer settled its account on January 31, what amount should be recognized as sales discount forfeited under th
A. P 60,000
 B. P 45,900
C. P 45,000
D. P 0

SOLUTION:
P 1,530,000 x 3% = P 45,900

ANSWER KEY TO RELATED MULTIPLE CHOICE THEORY QUESTIONS:

In relation to the above, answer the following multiple-choice questions. Write your answer on the space provided
before each number. Use only CAPITAL LETTERS.

B . Recording of accounts receivable is closely related to the recognition of

A. expense
B. revenue
C. liability
D. equity

C . A discount given to a customer for purchasing a large volume of merchandise is typically referred to as a
A. quantity discount
B. cash discount
C. trade discount
D. size discount

A . If the company employs the gross method of recording accounts receivable from customers, then sales
discounts taken should be reported as:
A. a deduction from sales in the income statement
B. an item of "other expense" in the income statement
C. a deduction from accounts receivable in determining the net realizable value of accounts receivable
D. sales discounts forfeited in the cost of sales section of the income statement

A . A discount that induces prompt payment is a

A. Cash discount
B. Trade discount
C. Loyalty discount
D. Size discount

C . The credit terms of n/30 means

A. no delivery shall be made unless payment are made within 30 days.
B. 30% cash discount shall be given if payment is not late.
C. no discount is granted if payment is made in the 30th day from delivery
D. 30% trade discount shall be granted if payment is made within 30 days.
ll of sales are subject to

e Method. Assume the

OD ALLOWANCE METHOD
Credit Account Names Debit Credit John John:
it is presented in SFP as deduction from AR
Accounts Receivable (gross) 800,000
784,000 Sales (P 800,000 x 98%) - at net 784,000 AR P 800,000
Allowance for Sales Discount 16,000 Less: All. For SD 16,000
Net Realizable Val. P 784,000
Cash (P 800,000 x 98%) 784,000
784,000 Allowance for Sales Discount 16,000
Accounts Receivable 800,000 John John:
it does not recognise the account SALES
DISCOUNT. Instead, it used the account
Cash (gross of AR) 800,000
ALLOWANCE FOR SALES DISCOUNT
16,000 Allowance for Sales Discount 16,000
784,000 Accounts Receivable 800,000
Sales Discount Forfeited 16,000

NOTES:
If at year end, the discount period has lapsed and the customer has not
yet paid his account, but the account is considered to be collectible, an
faithful
adjusting entry is made to cancel the related allowance for sales
representation
discount.
of financial
statements
Allowance for Sales Discount xxx
Sales Discount Forfeited xxx

STATEMENT OF FINANCIAL POSITION PRESENTATION:

Accounts Receivable xxx
Less: Allowance for Doubtful Accounts xxx
Allowance for Freight Charges xxx
Allowance for Sales Discounts xxx xxx
Net Realizable Value xxx

ENTATION - CASE 1
OD ALLOWANCE METHOD

784,000 Sales 784,000

ENTATION - CASE 2
OD ALLOWANCE METHOD
 784,000 Sales 784,000

Other Income:
16,000 Sales Discount Forfeited 16,000
800,000 Profit 800,000

iscount period with term is 2/10; AR is P 50,000

5th day - P 20,000 (no cash discount)
10th day = P 30,000 (with cash discount for P 50,000)

s of 10%, 15%, 3/10,

s discount under the gross method?

s discount under the net method?

s discount under the allowance method?

s discount under the gross method?

s discount under the net method?

s discount under the allowance method?

s discount forfeited under the gross method?

s discount forfeited under the net method?

s discount forfeited under the allowance method?

e space provided

y referred to as a

mers, then sales

s of 10%, 15%, 3/10,

the SFP as follows:

s discount under the gross method?

s discount under the net method?

s discount under the allowance method?

s discount under the gross method?

scount period.

s discount under the net method?

s discount under the allowance method?

s discount forfeited under the gross method?

s discount forfeited under the net method?

s discount forfeited under the allowance method?

e space provided

y referred to as a

mers, then sales

P as deduction from AR

P 800,000
16,000
P 784,000

the account SALES

it used the account
LES DISCOUNT
 INTRODUCTORY DISCUSSION:
Year 1 Year 2 Year 3
Year 2020 Year 2021 Year 2022
beginning Merchandise Inventory, January 1 0 5,000 10,000
Add: Purchases (AT COST) 50,000 60,000 65,000
Cost of goods available for sale (GAS) 50,000 65,000 75,000
ending Less: Merchandise Inventory, December 31 5,000 10,000 15,000
Cost of Sales 45,000 55,000 60,000

INCOME STATEMENT:
Net Sales 100,000 120,000 140,000
Less:Cost of Sales 45,000 55,000 60,000
Gross Profit from Sales 55,000 65,000 80,000
Less: Operating Expenses 50,000 55,000 60,000
Net Income (loss) 5,000 10,000 20,000

PERIODIC INVENTORY SYSTEM

A. Purchases on credit Purchases (EXPENSE) xxx
PURCHASES RELATED TRANSACTIONS

(AT COST) Accounts Payable

B. Paid freight-cost. Freight-in (EXPENSE-ADJUNCT) xxx

Cash

B. Return goods to vendor due Accounts Payable xxx

to major defects (Credit Purchase Returns (CONTRA-EXP)
Memo from vendor)

C. A reduction in price is Accounts Payable xxx

granted due to minor defects Purchase Allowance (CONTRA-EXP)
(CM from vendor).

E. Payment of accounts within Accounts Payable xxx

the discount period Purchase Discount (CONTRA-EXP)
Cash

F. Sold goods on credit. Accounts Receivable xxx

(AT SELLING PRICE) Sales Revenue (INCOME)
SALES RELATED TRANSACTIONS

G. Goods were returned by Sales Returns (CONTRA-INC) xxx

customers due to major Accounts Receivable
defects.

H. Sales Allowances (CONTRA-INC) xxx

An reduction in price is Accounts Receivable
granted to customer due to
minor defect of products sold
SALES RELATE
An reduction in price is
granted to customer due to
minor defect of products sold

I. Collection of customer's Cash (net of discount) xxx

account within the discount Sales Discount (CONTRA-INC) xxx
period Accounts Receivable

Accounts Receivable
Debit Credit
Beginning bal. xxx
Credit sales xxx xxx Sales returns
xxx Sales allowances
xxx Sales discount
xxx Cash collection from AR (net of SD)
xxx Write-off (worthless accounts)
xxx xxx

Ending bal. xxx

FORMULA FOR ACCOUNTS RECEIVABLE:

Accounts receivable, beginning xxx
Add: Credit Sales xxx
Total accounts receivable during the period xxx
Less: Decreases
Sales returns xxx
Sales allowances xxx
Sales discount xxx
Cash collection from AR (net) xxx
Write-off (worthless accounts) xxx xxx
Accounts receivable, ending xxx

J. Establishment or setting up Merchandise Inventory, ending (A) xxx

of inventory at year-end Income Summary
through physical
YEAR-END PROCEDURES

counting.

K. Inventory shortage (actual NO ENTRY

physicial count of inventory
versus inventory stock cards
balance).

L. Inventory overage (actual NO ENTRY

physicial count of inventory
versus inventory stock cards
balance).

DIY EXERCISE 2-1.5 (Reconstruction of Accounts Receivables)

From each of the following independent situations, prepare the requirements in good form.

SITUATION 1 (Computation of Accounts Receivable Ending Balance)

Certain information relative to the operation of Julian Company follows:

Accounts receivable, January 1 800,000

Account receivable collected 2,600,000
Cash sales 500,000
Inventory, January 1 1,200,000
COS

Inventory, December 31 1,100,000

Purchases 2,000,000
I.S. Gross profit on sales 900,000

What is the accounts receivable balance at December 31?

SOLUTION:
Accounts Receivable
Debit Credit
Accounts receivable, January 1 (given) 800,000
Account receivable collected (given) 2,600,000
Credit sales (missing figure) 2,500,000
Total 3,300,000 2,600,000

Accounts Receivable, December 31 700,000

Supporting computation FOR CREDIT SALES:

Inventory, January 1 (given) 1,200,000
Add: Purchases (given) 2,000,000
Goods available for sale 3,200,000
Less: Inventory, December 31 (given) 1,100,000
Cost of Sales 2,100,000
Add: Gross profit on sales (GIVEN) 900,000
Total Sales (cash sales & credit sales) 3,000,000
Less: Cash Sales (given) 500,000
Credit Sales (ON ACCOUNT) 2,500,000

CHECKING
Accounts Receivable, January 1 800,000
Credit sales (See supporting comp.) 2,500,000
Collection of AR (2,600,000)
Accounts Receivable, December 31 700,000

SITUATION 2 (Determining Accounts Receivable and NRV)

Presented below are the selected account balances from the accounting records of Mighty Company, Inc.
for the month of December 2021:

Credit Sales 5,000,000

Cash Sales 500,000
> than 100% Cash receipts from collection of customers’ accounts 4,500,000
 Accounts Receivable, December 1, 2021 350,000
Sales Returns and allowances 15,000
discount rate Sales Discount 10,000
Allowance for Doubtful Accounts, December 31, 2020 5,000

Required:
A. What is the Accounts Receivable balance at December 31, 2020?
B.
What is the estimated realizable value (ERV) of Accounts Receivable at December 31, 2020?

SOLUTION - REQUIREMENT (A)

Accounts Receivable
Debit Credit
Accounts Receivable, December 1, 2021 350,000
Cash receipts from collection of
customer's accounts (net of discount) 4,500,000
Sales Returns and allowances 15,000
Sales Discount 10,000
Credit sales 5,000,000
Total 5,350,000 4,525,000

Accounts Receivable, December 31 825,000

STRAIGHT-COMPUTATION FOR REQ. A

Accounts Receivable, December 1, 2020 350,000
Credit sales 5,000,000
Cash receipts from collection of cust. Acts. (4,500,000)
Sales Returns and allowances (15,000)
Sales Discount (10,000)
Accounts Receivable, December 31 825,000

Cash 4,500,000
Sales Discount 10,000
Accounts Receivable 4,510,000

SOLUTION - REQUIREMENT (B)

Accounts Receivable, 12/31/2020 825,000 From requirement A
Less: Allowance for D/A, 12/31/2020 5,000 Given
Estimated Realizable Value, 12/1/2020 820,000

SITUATION 3 (Computation of Accounts Receivable Shortage)

The following information from Jumbo Company’s first year of operations is to be used in treating the
accuracy of Accounts Receivable. The December 31, 2020 balance is P 360,000.

a. Collection from customers, P 720,000.

 b. Merchandise purchased, P 980,000

COS
c. Ending merchandise inventory, P 235,000.
d. Goods sell at 50% (Gross Profit Rate) above cost (Basis)
e. All sales are on account.

Required:
A. Compute the balance that Accounts Receivable should show.
B. Determine the amount of any shortage or overage.

SOLUTION - REQUIREMENT (A)

Accounts Receivable
Debit Credit
Credit sales 1,117,500
Collection from customers 720,000
Total 1,117,500 720,000

Accounts Receivable, December 31 397,500

COS Acts. Rec.

Merchandise purchased (given)/GAFS 980,000
Less: Ending merchandise inventory (given) 235,000
Cost of sales - 100% 745,000
Multiply by 100% + mark-up rate of 50% 150%
Sales Revenue (on account)/Credit sales 1,117,500 1,117,500
Less: Collection from customers 720,000
Accounts Receivable per audit, 12/31/2020 397,500

Cost of Sales 100% 745,000

Add: Gross profit (P 745,000 x 50%) 50% 372,500
Sales 150% 1,117,500

SOLUTION - REQUIREMENT (B)

Accounts Receivable, per audit, 12/31/2020 397,500 accountability (should be)

Less: Accounts Receivable, per book, 12/31/2020 360,000 given
Accounts Receivable shortage 37,500

Possible cases why there is AR shortage:

(a) Not all sales invoices are recorded in accounting books. (CREDIT SALES)
(b) Over recording of amount regarding collections and sales returns and allowances
 NOTES:
COST means PUHUNAN
Freight-in is also called Transportation-in or Inward Transportation
Freight-out is also called Transportation-out or Outward Transportation

UNSOLD
SOLD (PUHUNAN SA BENTA)

KITA SA BENTA
PUHUNAN SA BENTA
BUONG TUBO SA BENTA

NATIRANG KITA (LUGI)

SYSTEM PERPETUAL INVENTORY SYSTEM

Merchandise Inventory xxx
xxx Accounts Payable xxx

Merchandise Inventory xxx

xxx Cash xxx

Accounts Payable xxx

xxx Purchase Returns xxx

Accounts Payable xxx

xxx Purchase Allowance xxx

Accounts Payable xxx

xxx Purchase Discount xxx
xxx Cash xxx

Accounts Receivable (at selling price) xxx

xxx Sales Revenue (at selling price) xxx

Cost of Sales (at cost) xxx

Merchandise Inventory (at cost) xxx

Sales Returns xxx

xxx Accounts Receivable xxx

Merchandise Inventory xxx

Cost of Sales xxx

Sales Allowances xxx

xxx Accounts Receivable xxx
 Cash xxx
Sales Discount xxx
xxx Accounts Receivable xxx

Regular AR Transactions:
A. Beginning balance of AR, unless year 1
B. Credit sales during the accounting period
C. Collection of AR

from AR (net of SD) Other transactions in T-account for AR not regular transactions:
hless accounts) A. Sales returns
B. Sales Allowances
C. Write-off
D. Recovery of accounts previously written-off

NO ENTRY
xxx

Inventory Shortage xxx

Merchandise Inventory xxx

Merchandise Inventory xxx

Inventory Overage xxx
od form.

Mighty Company, Inc.

e at December 31, 2020?

used in treating the

00.
ccountability (should be)

d allowances
DIY EXERCISE 2-1.6 (Allowance Method Versus Direct Write-off Method)

SITUATION
The following transactions of Hardworking Company took place during January 2021:

. Credit sales, P 500,000. Terms: 2/10, n/30

. Collection of accounts of P 350,000 within the discount period.
. Collection of accounts of P 70,000 beyond the discount period.
. Sales returns and allowances, P 5,000.
. Accounts written off, P 2,000.
. Recovery of accounts previously written off, P 1,500.
a. Assuming the write-off was made during the PREVIOUS year
b. Assuming the write-off was made during the CURRENT year

The December 31, 2020 (same as 1/1/2021 beginning) balances of selected accounts are as follows: Accounts Receiva

Required:
. Journalize the above transactions for January 2021 using the Allowance Method and the Direct Write-off Method
. Compute the balance of Accounts Receivable at January 31, 2021 for the two methods (USE CASE A).
. Compute the balance of Allowance for Doubtful accounts before any adjustment at January 31, 2021 for the the
. What is the doubtful accounts rate during December 2020?
. Prepare the journal entry to record the provision for doubtful accounts using the allowance method and the dire
of financial position approach. Based on annual review, the doubtful accounts rate for January 2021 is the same
. What is the net realizable value of accounts receivable under the allowance method as at January 31, 2021?

SOLUTIONS:
. Journalize the above transactions for January 2021 using the Allowance Method and the Direct Wr

ALLOWANCE METHOD
No. Transactions Account Names Debit
. Credit sales, P 500,000. Accounts Receivable 500,000
Terms: 2/10, n/30 Sales Revenue

. Collection (AR credit) of Cash (P 350,000 x 98%) 343,000

accounts of P 350,000 within Sales Discount (P 350,000 x 2%) 7,000
the discount period. Accounts Receivable

. Collection of accounts of P Cash 70,000

70,000 beyond the discount Accounts Receivable
period.
. Sales returns and allowances, Sales Returns and Allowances 5,000
P 5,000. Accounts Receivable

. Accounts written off, P 2,000. Allowance for Doubtful Accounts 2,000

Accounts Receivable

6a. Recovery of accounts Accounts Receivable 1,500

Allowance for Doubtful Accounts
NDING ON THE ASSUMPTION

previously written off, P

1,500. (Assuming the (Re-establishment of AR)/Reverse
write-off was made Cash 1,500
during the PREVIOUS Accounts Receivable
year) (Collection of AR prev. written off)
 DEPENDING ON THE ASSUMPTI
6b. Recovery of accounts Accounts Receivable 1,500
previously written off, P Allowance for Doubtful Accounts
1,500. (Assuming the (Re-establishment of AR)/RJE
write-off was made Cash 1,500
during the CURRENT Accounts Receivable
year) (Collection of AR prev. written off)

. Prepare the journal entry to record the provision for doubtful accounts using the allowance metho
determined using the statement of financial position approach (based on AR). Based on annual rev
as in December 2020.

ALLOWANCE METHOD
No. Transactions Account Names Debit
. Provision for doubtful Doubtful Accounts Expense 4,880
accounts for January 2021 Allowance for Doubtful Accounts

Supporting computation:
Adjusted or Required Allowance for D/A, 1/31/2020:
Accounts Receivable, 1/31/2020 123,000
Multiply by DA rate (SEE NO 4) 6%
Less: Allowance for D/A, 1/31/2021, unadj. (NO. 3)
Doubtful accounts expense

. What is the net realizable value of accounts receivable under the allowance method as at January

Accounts Receivable
Less: Allowance for Doubtful Accounts, adjusted
Net Realizable Value

RELATED MULTIPLE CHOICE THEORY QUESTIONS:

In relation to the above, answer the following multiple-choice questions. Write your answer on the space provided
before each number. Use only CAPITAL LETTERS.

. Net realiazabe means

A. sales discounts
B. allowance for doubtful accounts
C. allowance for doubtful accfounts and other special valuation allowance
D. special valuation allowance

. Which method of estimating bad debts loss is not consistent with accrual accounting?
 A. Allowance method
B. Direct write-off method
C. Percent of sales method
D. Percent of accounts receivable method

. Which method of recording bad debt loss is not consistent with accrual accounting?
A. Allowance method
B. Direct write-off method
C. Percent of sales method
D. Percent of accounts receivable method

. A method of estimating uncollectible accounts that emphasize asset valuation rather than income
measurement is the allowance method based on:
A. Aging the receivables
B. Direct write-off
C. Gross sales
D. Credit sales less returns and allowances

. A method of estimating bad debts that focuses on the income statement rather than the statement of
financial position is the allowance method based on
A. Direct write-off
B. Aging the accounts receivable
C. Credit sales
D. The balance in the trade receivable accounts.

. When allowance method of recognizing bad debt expense is used, the entries at the time of collection of a
small account previously written off would
A. increase net income
B. have n effect on total assets
C. increase working capital
D. decrease total current liablities

. When allowance method of recognizing bad debt expense is used, the allowance for doubtful accounts
would decrease when
A. specific accounts receivable is collected
B. accounts previously wriiten off is collected
C. accounts previously wriiten off becomes collectible
D. specific uncollectible account is written off

. A method of estimating uncollectible accounts that emphasizes asset avaluation rather than income
measurement is the allowance method based on
A. aging the receivables
B. direct write-off
C. gross sales
D. credit sales less returns and allowances

. Which method of recording uncollectible accounts expense is consistent with accrual accounting?
A. Allowance method - YES; Direct write-off method - YES
B. Allowance method - YES; Direct write-off method - NO
C. Allowance method - NO; Direct write-off method - YES
D. Allowance method - NO; Direct write-off method - NO

. When the allowance method of recognizing uncollectible accounts is used, the entry to record the write-off
of a scientific account
 of a scientific account
A. decreases both accounts receivable and the allowance for uncollectible accounts
B. decreases accounts receivable and increases the allowance for uncollectible accounts
C. increases the allowance for uncollectible accounts and decreases net income
D. decreases both accounts receivable and net income

. A company uses the allowance method to recognize uncollectible account expense. What is the effect at
the time of the collection of an account previously written off on each of the following accounts?
A. Allowance for Uncollectible Accounts - NO EFFECT; Uncollectible Accounts Expense - DECREASE
B. Allowance for Uncollectible Accounts - INCREASE; Uncollectible Accounts Expense - DECREASE
C. Allowance for Uncollectible Accounts - INCREASE; Uncollectible Accounts Expense - NO EFFECT
D. Allowance for Uncollectible Accounts - NO EFFECT; Uncollectible Accounts Expense - NO EFFECT

. Which of the following is/are correct pertaining to direct write-off method of recording uncollectibles?
A.
The uncollectible account is recorded by debiting bad debt expense and crediting accounts receivable.
B. This method is in accordance with the matching principle.
C. This method is not acceptable for tax computation purposes.
D. All of the given statements are correct.

. Which of the following is correct when an account receivable is written off?

Accounting Element Affected Allowance Method Direct write-off Method
A. Income Decrease Increase
B. Loss None Increase
C. Income None None
D. Loss Increase none

ANSWER KEY TO RELATED MULTIPLE CHOICE THEORY QUESTIONS:

In relation to the above, answer the following multiple-choice questions. Write your answer on the space provided
before each number. Use only CAPITAL LETTERS.

C . Net realiazable means

A. sales discounts
B. allowance for doubtful accounts
C. allowance for doubtful accfounts and other special valuation allowance
D. special valuation allowance

B . Which method of estimating bad debts loss is not consistent with accrual accounting?
A. Allowance method
B. Direct write-off method
C. Percent of sales method
D. Percent of accounts receivable method

B . Which method of recording bad debt loss is not consistent with accrual accounting?
A. Allowance method
B. Direct write-off method
C. Percent of sales method
D. Percent of accounts receivable method

A . A method of estimating uncollectible accounts that emphasize asset valuation rather than income
measurement is the allowance method based on:
 measurement is the allowance method based on:
A. Aging the receivables
B. Direct write-off
C. Gross sales
D. Credit sales less returns and allowances

C . A method of estimating bad debts that focuses on the income statement rather than the statement of
financial position is the allowance method based on
A. Direct write-off
B. Aging the accounts receivable
C. Credit sales
D. The balance in the trade receivable accounts.

B . When allowance method of recognizing bad debt expense is used, the entries at the time of collection of a
small account previously written off would
A. increase net income
B. have n effect on total assets
C. increase working capital
D. decrease total current liablities

D . When allowance method of recognizing bad debt expense is used, the allowance for doubtful accounts
would decrease when
A. specific accounts receivable is collected
B. accounts previously wriiten off is collected
C. accounts previously wriiten off becomes collectible
D. specific uncollectible account is written off

A . A method of estimating uncollectible accounts that emphasizes asset avaluation rather than income
measurement is the allowance method based on
A. aging the receivables
B. direct write-off
C. gross sales
D. credit sales less returns and allowances

B . Which method of recording uncollectible accounts expense is consistent with accrual accounting?
A. Allowance method - YES; Direct write-off method - YES
B. Allowance method - YES; Direct write-off method - NO
C. Allowance method - NO; Direct write-off method - YES
D. Allowance method - NO; Direct write-off method - NO

A . When the allowance method of recognizing uncollectible accounts is used, the entry to record the write-off
of a scientific account
A. decreases both accounts receivable and the allowance for uncollectible accounts
B. decreases accounts receivable and increases the allowance for uncollectible accounts
C. increases the allowance for uncollectible accounts and decreases net income
D. decreases both accounts receivable and net income

C . A company uses the allowance method to recognize uncollectible account expense. What is the effect at
the time of the collection of an account previously written off on each of the following accounts?
A. Allowance for Uncollectible Accounts - NO EFFECT; Uncollectible Accounts Expense - DECREASE
B. Allowance for Uncollectible Accounts - INCREASE; Uncollectible Accounts Expense - DECREASE
C. Allowance for Uncollectible Accounts - INCREASE; Uncollectible Accounts Expense - NO EFFECT
D. Allowance for Uncollectible Accounts - NO EFFECT; Uncollectible Accounts Expense - NO EFFECT
A . Which of the following is/are correct pertaining to direct write-off method of recording uncollectibles?
A.
The uncollectible account is recorded by debiting bad debt expense and crediting accounts receivable.
B. This method is in accordance with the matching principle.
C. This method is not acceptable for tax computation purposes.
D. All of the given statements are correct.

B . Which of the following is correct when an account receivable is written off?

Accounting Element Affected Allowance Method Direct write-off Method
A. Income Decrease Increase
B. Loss None Increase
C. Income None None
D. Loss Increase none
 as follows: Accounts Receivable, P 50,000; Allowance for Doubtful Accounts, P 3,000.

the Direct Write-off Method. Use the solution guide below.

ods (USE CASE A).
January 31, 2021 for the the allowance method.

owance method and the direct write-off method. The provision is determined using the statement
or January 2021 is the same as in December 2020.
as at January 31, 2021?

Method and the Direct Write-off Method. Use the solution gudie below. . Compute the balance of

DIRECT WRITE-OFF METHOD

Credit Account Names Debit Credit
Accounts Receivable 500,000
500,000 Sales Revenue 500,000
December 31, 2020, beg.
Cash (P 350,000 x 98%) 343,000 . Credit sales, P 500,000. T
Sales Discount (P 350,000 x 2%) 7,000 . Collection of accounts of P
350,000 Accounts Receivable 350,000 . Collection of accounts of P
. Sales returns and allowan
Cash 70,000 . Accounts written off, P 2,0
70,000 Accounts Receivable 70,000 . Recovery of accounts prev
6.1
Sales Returns and Allowances 5,000 6.2
5,000 Accounts Receivable 5,000

Bad Debts Expense 2,000 January 31, 2021 balan

2,000 Accounts Receivable 2,000

NO ENTRY
1,500
(No re-establishment of AR) . Compute the balance of Al
Cash 1,500 provision - AJE) at January
1,500 Other Income 1,500
(Collection of AR prev. written off)
 Accounts Receivable 1,500
1,500 Bad Debts Expense 1,500
(Re-establishment of AR)/RJE December 31, 2020, balan
Cash 1,500 . Credit sales, P 500,000. T
1,500 Accounts Receivable 1,500 . Collection of accounts of P
(Collection of AR prev. written off) . Collection of accounts of P
. Sales returns and allowan
. Accounts written off, P 2,0
. Recovery of accounts prev
6a.
6b.
ing the allowance method and the direct write-off method. The provision is
AR). Based on annual review, the doubtful accounts rate for January 2021 is the same
January 31, 2021 balan

DIRECT WRITE-OFF METHOD

Credit Account Names Debit Credit
NO ENTRY
4,880

ADA
/31/2020: ending ADA, 1/31/2021, unadj 2,500

7,380 Doubtful accounst expense 4,880

2,500 ending ADA, 1/31/2020 (adj.) 7,380
4,880

ce method as at January 31, 2021?

123,000 (Refer to number 2)

7,380 (Refer to Number 5)
115,620

the space provided

 than income

n the statement of

time of collection of a

doubtful accounts

her than income

l accounting?

to record the write-off

What is the effect at
ng accounts?
nse - DECREASE
se - DECREASE
se - NO EFFECT
nse - NO EFFECT

ng uncollectibles?

ng accounts receivable.

Direct write-off Method

Increase
Increase
None
none

the space provided

than income
n the statement of

time of collection of a

doubtful accounts

her than income

l accounting?

to record the write-off

What is the effect at

ng accounts?
nse - DECREASE
se - DECREASE
se - NO EFFECT
nse - NO EFFECT
ng uncollectibles?

ng accounts receivable.

Direct write-off Method

Increase
Increase
None
none
Compute the balance of Accounts Receivable at January 31, 2021 for the two methods (USE CASE A).

Allowance Method Direct Write-off Method

Accounts Receivable Accounts Receivable
Debit Credit Debit

December 31, 2020, beg. balance (do not forget this balance) 50,000 50,000
Credit sales, P 500,000. Terms: 2/10, n/30 500,000 500,000
Collection of accounts of P 350,000 within the discount period. 350,000
Collection of accounts of P 70,000 beyond the discount period. 70,000
Sales returns and allowances, P 5,000. 5,000
Accounts written off, P 2,000. 2,000
Recovery of accounts previously written off, P 1,500. (Case 6a)
Re-establishment of accounts 1,500
Collection of accounts previously written off 1,500
551,500 428,500 550,000

January 31, 2021 balance 123,000 123,000

Compute the balance of Allowance for Doubtful accounts before any adjustment (unadjusted or before any
provision - AJE) at January 31, 2021 for the the allowance method.

Allowance Method
 Allowance for D/A
Debit Credit
(decrease) (increase)
December 31, 2020, balance (do not forget this balance) 3,000
Credit sales, P 500,000. Terms: 2/10, n/30
Collection of accounts of P 350,000 within the discount period.
Collection of accounts of P 70,000 beyond the discount period.
Sales returns and allowances, P 5,000.
Accounts written off, P 2,000. 2,000
Recovery of accounts previously written off, P 1,500.
Re-establishment of accounts 1,500
Collection of accounts previously written off
2,000 4,500

January 31, 2021 balance (unadjusted) 2,500

Direct Write-off Method
Accounts Receivable
Credit
Notes:
Always check if the accounts recovered is
included in the collections given in the
350,000 problem, or it is reported separately as
70,000 collection of AR previously written off.
5,000
2,000

427,000

d or before any . What is the doubtful accounts rate during December 2020?

GIVEN:
The December 31, 2020 balances of selected accounts are as
follows: Accounts Receivable, P 50,000; Allowance for Doubtful
Accounts, P 3,000.
The December 31, 2020 balances of selected accounts are as
follows: Accounts Receivable, P 50,000; Allowance for Doubtful
Accounts, P 3,000.

SOLUTION:
Doubtful Accounts Rate Allowance for D/A, 12/31/2020 John John:
= if DAE is based on AR, the comp
at 12/31/2020 Accounts Receivable, 12/31/2020
already the ADA, adjusted.

3,000 ADA, adjusted = AR, end x DA R

=
50,000 6 =2 x3

= 6% Therefore:
DA Rate = ADA, adjusted / AR,
3 = 6/2
ohn John:
DAE is based on AR, the computed amount is
ready the ADA, adjusted.

DA, adjusted = AR, end x DA Rate

6 =2 x3

herefore:
A Rate = ADA, adjusted / AR, end
3 = 6/2
INTRODUCTORY DISCUSSION

Accounts written off:

Recovery of accounts pre

Provision fof doubtful ac

BASIS OF COMPUTATION OF DAE UNDER ALLOWANCE METHOD:

. Based on Sales
. Based on Accounts Receivable
2a. Based on AR ending balance (Composite rate) - SEE DIY-E2-1.6 (No. 5)
2b. Based on Aging of AR
▪ the most reliable of all basis

DIY EXERCISE 2-1.7 (Computation of Doubtful Accounts using Allowance Method)

From each of the following independent situations, prepare the requirements in good form.

SITUATION 1 (Based on Sales)

Kelvin Company provides for doubtful accounts expense at the rate of 3 percent of credit sales. The
following data are available for last year:

Allowance for Doubtful Accounts, January 1 27,000

Accounts written off as uncollectible 30,000
Collection of accounts written off 7,500
Credit sales, year-ended December 31 1,500,000
Required:
. Determine the amount of doubtful accounts expense for the year.
. What would be the adjusting journal entry for provision for doubtful accounts at December 31?
. What would be the adjusted allowance for doubtful accounts balance at December 31?

SOLUTION:
. Determine the amount of doubtful accounts expense for the year.

SOLUTION:
The problem states that Doubtfl Accounts Expense is based in credit sales.

Credit sales, year-ended December 31 1,500,000

Multiply by DA Expense rate 3%
Doubtful accounts expense 45,000 This is the provision for DAE/AJE

Notes:
If DAE is based on sales, the amount computed is already the Doubtful Accounts Expense.

. What would be the adjusting journal entry for provision for doubtful accounts at December 31?

SOLUTION:
Doubtful Accounts Expense 45,000
Allowance for Doubtful Accounts 45,000

. What would be the adjusted allowance for doubtful accounts balance at December 31?

SOLUTION:
STRAIGHT COMPUTATION - EQUATION

Allowance for Doubtful Accounts, January 1 27,000

Accounts written off as uncollectible (30,000)
Recovery of accounts previously written off 7,500
Provision for doubtful accounts for the year (See No. 2) 45,000
Allowance for Doubtful Accounts, December 31, adjusted 49,500

SITUATION 2 (Based on Aging of Accounts Receivable)

Based on the aging of its accounts receivable at December 31, Lassy Company determined that the net realizable
value of the receivables at that date is P304,000. Additional information is as follows:

Accounts receivable at December 31 384,000

Allowance for bad debts at January 1 51,200 (cr.)
Accounts written off as uncollectible during the year 35,200

QUESTION:
Lassy's Bad Debt Expense (DAE) for the year ended December 31 is?
SOLUTION:
STRAIGHT COMPUTATION - EQUATION

Accounts Receivable, December 31 (gross; before deducting ADA)

Accounts receivable, December 31 (net, after deducting ADA), NRV
Allowance for Doubtful accounts at December 31, adjusted
Accounts written off as uncollectible during the year
Allowance for bad debts at January 1 (Credit balance)
Bad Debts Expense for the year ended December 31

SITUATION 3 (Based on Aging of Accounts Receivable)

The Accounts Receivable control account balance of ASPIRING COMPANY was P 67,000 as of December 31, 2021.
Presented below are the subsidiary ledgers of customers. Credit terms are 60 days net (n/60). The ADA, unadjusted
at December 31, 2021 is 1,000.

Customer Dina Susuco

Date Transactions Debit Credit Balance
2021
May 31 Sales 5,000 5,000
Jul. 1 Collection 3,000 2,000
Jul. 7 Sales 5,000 7,000
Sep. 1 Collection 3,000 4,000
Sep. 25 Sales 8,000 12,000
Nov. 1 Collection 3,000 9,000
Dec. 10 Sales 3,000 12,000

Customer Naty Gok

Date Transactions Debit Credit Balance
2021
Feb. 10 Sales 30,000 30,000
Apr. 9 Collection 30,000 0
May 4 Sales 40,000 40,000
Jul. 2 Collection 40,000 0
Sep. 6 Sales 52,780 52,780
Nov. 25 Sales 2,220 55,000

Required:
Determine the estimated doubtful accounts of Dina Susuco and Naty Gok based on the following: (Round off you
answer to the nearest peso)

Accounts not due ½ percent

Accounts 1 to 60 days past due 2 percent
Accounts 61 – 120 days past due 5 percent
Accounts over 120 days past due 50 percent
SOLUTION:
Days Past Due
Customer Balance Not Due 1 to 60 61 to 120 over 120
Dina Susuco 12,000 3,000 8,000 1,000
Naty Gok 55,000 2,220 52,780
Total 67,000 5,220 60,780 1,000 0
D/A Rate 0.50% 2.00% 5.00% 50.00%
ADA, adjusted, 12/31 1,292 26 1,216 50 0
Less: ADA, unadj., 12/31 1,000
DAE in 2021 292

AJE at December 31, 2021:

Doubtful Accounts Expense 292
Allowance for Doubtful Accounts 292

Supporting Analysis:

Customer Dina Susuko Details (FIFO) Exclusive Date

Date Trans. Debit Credit Balance FIFO From
2020
May 31 Sales 5,000 5,000
Jul. 1 Collection 3,000 2,000
Jul. 7 Sales 5,000 7,000 1,000 Jul. 7
Sep. 1 Collection 3,000 4,000
Sep. 25 Sales 8,000 12,000 8,000 Sep. 25
Nov. 1 Collection 3,000 9,000
Dec. 10 Sales 3,000 12,000 3,000 Dec. 10
12,000

Customer Naty Gok Details (FIFO) Exclusive Date

Date Trans. Debit Credit Balance FIFO From
2020
Feb. 10 Sales 30,000 30,000
Apr. 9 Collection 30,000 0
May 4 Sales 40,000 40,000
Jul. 2 Collection 40,000 0
Sep. 6 Sales 52,780 52,780 52,780 Sep. 6
Nov. 25 Sales 2,220 55,000 2,220 Nov. 25

SITUATION 4 (Based on Aging of Accounts Receivable)

The following pertains to the breakdown of the accounts receivable of STOP LOOK LISTEN LEARN Company:
 Gross (net realizable value)
Age Amount Probability of Collection
0 – 60 days 120,000 98% ###
61 – 120 days 30,000 95% ###
120 – 150 days 40,000 90% ###
Over 150 days 20,000 50% ###
210,000

The company’s allowance for bad debts has a beginning balance of P 9,000.

Under the aging method, how much should be recorded as bad debts expense (DAE)

SOLUTION:
100%
Gross (net realizable value) ADA
Age Amount Probability of Collection DA Rate
0 – 60 days 120,000 98% 2%
61 – 120 days 30,000 95% 5%
120 – 150 days 40,000 90% 10%
Over 150 days 20,000 50% 50%
Allowance for Doubtful Accounts, adjusted
Less: Allowance for Doubtful Accounts, unadjusted (given - beginning balance)
Doubtful Account Expense for the current year

Related adjusting journal entry:

Doubtful accounts expense 8,900
Allowance for Bad Debts 8,900 0

What if the question is the NRV of AR?

SOLUTION:
Accounts Receivable 210,000 (total of Amount of AR)
Less:ADA, Adjusted 17,900
Net Realizable Value 192,100

Alternative solution is to use the Probability of collection rate

(AR balance x Probability of collection rate)

Gross (net realizable value)

Age Amount Probability of Collection NRV
0 – 60 days 120,000 98% 117,600
61 – 120 days 30,000 95% 28,500
120 – 150 days 40,000 90% 36,000
Over 150 days 20,000 50% 10,000
Net Ralizable Value of AR 192,100

SITUATION 5 (Computation of Doubtful Accounts Rate)

On January 1, 2021, Marvelous Company reported accounts receivable P 2,070,000 and allowance for doubtful
accounts P 80,000.
 Credit
Year Sales Write-off Recoveries
2018 11,100,000 260,000 22,000
2019 12,250,000 295,000 37,000
2020 14,650,000 300,000 36,000
2021 15,000,000 310,000 40,000 CURRENT YEAR

The collections from customers during 2021 totaled 14 million pesos, excluding recoveries. Doubtful accounts are
provided for as a percentage of credit sales. The entity calculated the percentage annually by using the experience of
the three years prior to the current year.

Required:
. What is the doubtful accounts rate to be used in 2021?
. What amount should be reported as doubtful accounts expense for 2021?

SOLUTION:
. What is the doubtful accounts rate to be used in 2021?

SOLUTION:
BD % = (Write-off less Recoveries) / Credit sales
BD % = (P 855,000 - P 95,000) / P 38,000,000
BD % = P 760,000 / P 38,000,000
BD % = 2%

OR

Credit Sales Write-off Recoveries

Year No. Year
1 2018 11,100,000 260,000 22,000
2 2019 12,250,000 295,000 37,000
3 2020 14,650,000 300,000 36,000
Total 38,000,000 855,000 95,000
Net write-off (BD Exp or DAE) 760,000 (Write-off less recoveries)
Bad Debts Rate 2% (DAE as a percentage of credit sales)

Notes:
DAE as a percentage of sales

WE derive the formula here:

DAE = Sales x Rate (P 760,000 = P 38,000,000 x Rate)
Rate = DAE / Sales
Rate = P 760,000/ P 38,000,000
Rate = 2%

. What amount should be reported as doubtful accounts expense for 2021?

SOLUTION:
DA Expense for 2021 = Credit sales for 2021 x DA Rate for 2021
DA Expense for 2021 = P 15,000,000 x 2%
DA Expense for 2021 = P 300,000
 Credit Sales Write-off Recoveries
3 2018 11,100,000 260,000 22,000
2 2019 12,250,000 295,000 37,000
1 2020 14,650,000 300,000 36,000
Current year 2021 15,000,000 310,000 40,000

RELATED MULTIPLE CHOICE THEORY QUESTIONS:

In relation to the above, answer the following multiple-choice questions. Write your answer on the space
provided before each number. Use only CAPITAL LETTERS.

. A method of estimating bad debts allowance based on the total accounts receivable on the statement
of financial position date.
A. Composite rate method
B. Aging of accounts receivable
C. Required allowance method
D. Credit sales memthod

. A method of estimating doubtful accounts that emphasizes asset valuation rather than income
measurement is the allowance method based on
A. Aging of receivables
B. Direct write-off
C. Gross sales
D. Credi sales less sales returns and allowances

. A method of estimating bad debts that focuses on the income statement rather than the statement of
financial position is the allowance method based on
A. Direct write-off
B. aging the trade receivables accounts
C. credit sales
D. the balance in the trade receivables accounts

. Doubtful accounts rate times credit sales equals

A. Allowance for doubtful accounts, adjusted
B. Allowance for doubtful accounts, unadjusted
C. Doubtful accounts expense
D. Accounts written off

. Doubtful accounts rate time credit accounts receivable ending balance equals
A. Allowance for doubtful accounts, adjusted
B. Allowance for doubtful accounts, unadjusted
C. Doubtful accounts expense
D. Accounts written off

. Which of the following is not deducted in computing net sales to determine doubtful accounts based
on net sales?
A. Sales returns
B. Sales allowances
C. Sales discounts
D. All of the above
 . The basis in estimating doubtful accounts under the allowance method that uses the composite
doubtful accounts rate is:
A. Credit sales
B. Net sales
C. Aging of accounts receivable
D. Accounts receivable ending balance

. Estimating doubtful accounts based on credit sales

A. violates the matching principle
B. provides a scientific computation of the allowance for doubtful accounts
C. is simplier to compute than estimating doubtful accounts based on accounts receivable
D. is not an acceptable basis in determining doubtful accounts expense

. In estimating doubtful accounts using the income statement approach, doubtful accounts rate is
multiplied to
A. Total sales consisting of cash and credit sales
B. Sales less sales returns and allowances and sales discount
C. Credit sales
D. Cash sales

. In estimating doubtful accounts using the statement of financial position approach, doubtful accounts
rate times the outstanding accounts receivable at reporting date equals
A. Allowance for doubtful accounts, adjusted
B. Allowance for doubtful accounts, unadjusted
C. Doubtful accounts expense
D. Accounts written off

ANSWER KEY TO RELATED MULTIPLE CHOICE THEORY QUESTIONS:

In relation to the above, answer the following multiple-choice questions. Write your answer on the space
provided before each number. Use only CAPITAL LETTERS.

A . A method of estimating bad debts allowance based on the total accounts receivable on the statement
of financial position date.
A. Composite rate method
B. Aging of accounts receivable
C. Required allowance method
D. Credit sales memthod

A . A method of estimating doubtful accounts that emphasizes asset valuation rather than income
measurement is the allowance method based on
A. Aging of receivables
B. Direct write-off
C. Gross sales
D. Credi sales less sales returns and allowances

C . A method of estimating bad debts that focuses on the income statement rather than the statement of
financial position is the allowance method based on
A. Direct write-off
B. aging the trade receivables accounts
C. credit sales
D. the balance in the trade receivables accounts
C . Doubtful accounts rate times credit sales equals
A. Allowance for doubtful accounts, adjusted
B. Allowance for doubtful accounts, unadjusted
C. Doubtful accounts expense
D. Accounts written off

A . Doubtful accounts rate time credit accounts receivable ending balance equals
A. Allowance for doubtful accounts, adjusted
B. Allowance for doubtful accounts, unadjusted
C. Doubtful accounts expense
D. Accounts written off

C . Which of the following is not deducted in computing net sales to determine doubtful accounts based
on net sales?
A. Sales returns
B. Sales allowances
C. Sales discounts
D. All of the above

D . The basis in estimating doubtful accounts under the allowance method that uses the composite
doubtful accounts rate is:
A. Credit sales
B. Net sales
C. Aging of accounts receivable
D. Accounts receivable ending balance

C . Estimating doubtful accounts based on credit sales

A. violates the matching principle
B. provides a scientific computation of the allowance for doubtful accounts
C. is simplier to compute than estimating doubtful accounts based on accounts receivable
D. is not an acceptable basis in determining doubtful accounts expense

C . In estimating doubtful accounts using the income statement approach, doubtful accounts rate is
multiplied to
A. Total sales consisting of cash and credit sales
B. Sales less sales returns and allowances and sales discount
C. Credit sales
D. Cash sales

A . In estimating doubtful accounts using the statement of financial position approach, doubtful accounts
rate times the outstanding accounts receivable at reporting date equals
A. Allowance for doubtful accounts, adjusted
B. Allowance for doubtful accounts, unadjusted
C. Doubtful accounts expense
D. Accounts written off
 Accounts written off:
Allowance for Doubtful Accounts 200
Accounts Receivable 200

Before JE After Effect

Accounts receivable 15,000 (200) 14,800 Decrease
Less: Allowance for DA 1,000 (200) 800 Decrease
Net Realizable Value 14,000 0 14,000 No effect

Recovery of accounts previously written-off:

Accounts Receivable 100
Allowance for Doubtful Accounts 100

Cash 100
Accounts Receivable 100

Before JE After Effect

Accounts receivable 20,000 0 20,000 No effect
Less: Allowance for DA 1,000 100 1,100 Increase
Net Realizable Value 19,000 (100) 18,900 Decrease

Provision fof doubtful accounts:

Doubtful Accounts Expense xxx
Allowance for Doubtful Accounts xxx

g Allowance Method)
od form.

credit sales. The

 at December 31?

is the provision for DAE/AJE

nts Expense.

accounts at December 31?

e at December 31?

ADA
27,000
30,000
7,500
45,000
30,000 79,500

49,500

John John:
AR (gross),12/31 ? P 384,000
ADA, 12/31 ? ? (P 384K - P 304k = 80K)
ermined that the net realizable
NRV, 12/31 P 304,000 P 304,000
ws:
 USING T-ACCOUNT

Allowance for DA
Debit Credit
384,000 (Dec.) (Inc.)
(304,000) 51,200 January 1 balance
80,000 Write-off 35,200
35,200 64,000 Bad Debts Expense (workback procedure) / provision
(51,200)
64,000 35,200 115,200

80,000 December 31 balance (adjusted)

7,000 as of December 31, 2021.

net (n/60). The ADA, unadjusted

d on the following: (Round off your

 John John:
July 31 - 7 = 24 days
August = 31 days
September = 30 days
John John: October = 31 days
This is the Financial statement November = 30 days
reporting date December = 31 days
Total = 177 days

Exclusive Date DAYS

To Total Terms Past Due

John John:
Sep. 30 - 25 = 5 days
October = 31days
Dec. 31 177 60 117
November = 30 days
December = 31 days
Dec. 31 97 60 37 Total = 97 days

Dec. 31 21 60 -39

John John:
Exclusive Date DAYS Dec. 31 - 10 = 21 days
To Total Terms Past Due
John John:
Sep. 30 - 6 = 24 days
October = 31days
November = 30 days
December = 31 days
Total = 116 days
Dec. 31 116 60 56
Dec. 31 36 60 -24

John John:
Nov. 30 - 25 = 5 days
December = 31 days
Total = 36 days

EARN Company:
ense (DAE)?

ADA,
Adjusted Computation
2,400 P 120,000 x 2%
1,500 P 30,000 x 5%
4,000 P 40,000 x 10%
10,000 P 20,000 x 50%
17,900
9,000
8,900

0 and allowance for doubtful

overies. Doubtful accounts are
nnually by using the experience of

te-off less recoveries)

wer on the space

ivable on the statement

her than income

er than the statement of

oubtful accounts based

ses the composite

unts receivable

ul accounts rate is

oach, doubtful accounts

wer on the space

ivable on the statement

her than income

er than the statement of

oubtful accounts based

ses the composite

unts receivable

ul accounts rate is

oach, doubtful accounts

edure) / provision
DIY EXERCISE 2-1.8 (Credit Card Transactions)

SITUATION
Sue Milano owns a gift shop at the airport. She accepts only cash or VISA and MasterCard credit cards.
During the last month, the gift shop had a total of P 760,000 in sales. Of this amount, 75% were credit
card sales. The bank charges a 3% fee on net credit card sales. Make the monthly summary entry to
reflect the above transactions.

No. Account Names Debit Credit

1 Cash (P 760,000 x 25%) 190,000
Accounts Receivable - Credit Card Company(P 760,000 x 75%) 570,000
Sales 760,000

2 Cash (P 570,000 x 97%) 552,900

Credit Card Service Charge (P 570,000 x 3%) 17,100
Accounts Receivable - Credit Card Company 570,000
INTRODUCTORY DISCUSSIONS:

NOTES RECEIVABLE can be:

1) Non-interest bearing note
2) Interest-bearing note

KEY TERMS IN ACCOUNTING (POINT OF VIEW OF RECIPIENT OF NOTES):

1) Principal - the face amount of note; also called FACE VALUE
2) Rate - Interest rate (IF interest bearing note); also called STATED RATE or NOMINAL RATE
▪ if silent, interest rate is always per annum.
3) Time - Term of notes (expressed in days or months or years)
4) Interest income - the amount earned from notes receivable (if interest bearing)
▪ Interest = Principal x Rate x Time (I = PRT)
▪ Time if expressed in days, use 360 days to simplify (30 days per month x 12 months)
▪ Time if expressed in month, use 12 months in the computation
5) Maturity date - the end of term of notes
▪ On this date, the maker or customer must pay the principal and the interest, if any.
▪ Otherwise, the note is dishonored and now classified as
6) Maturity value - the amount to be collected from notes receivable at maturity date
▪ If interest bearing note: MV = Principal + Interest
▪ If noninterest bearing notes: MV = Principal

NOTES RECEIVABLE can be classified in the SFP either as:

1) Current asset (short-term notes receivable)
2) Noncurrent asset (long-term notes receivable)

DIY EXERCISE 2-2.1 (Short-term Notes receivable)

(Source: Intermediate Accounting Volume 1 by Robles and Empleo)
Journalize the following transactions:

JOURNAL ENTRIES
Date Transactions Account Names
2021
Aug 5 Notes Receivable (face amount)
Received a 60-day, 9%, P 12,000 promissory Sales
note from ABC Corporation for goods sold.

Oct 4 Collected from ABC Company in settlement of Cash (at maturity value = P + I)
its note dated August 5. Notes Receivable (principal or FV of note)
Interest Revenue (P 12,000 x 9% x 60/360)

10 Received a 30-day, 12%, P 16,000 promissory Notes Receivable

note from DEF Corporation in settlement of an Accounts Receivable
overdue account.

Nov. 6 Received a 120-day, 12%, P 24,000 Notes Receivable

promissory note from GHI Corporation in Accounts Receivable
settlement of an overdue account.

10 DEF Corporation dishonored its note on Accounts Receivable (at maturity value)
maturity date.
Nov.

maturity date. Notes Receivable (principal or FV of note)

Interest revenue (P 16,000 x 12% x 30/360)

30 Cash
Collected the amount due from DEF Accounts Receivable
Corporation on account of its overdue note. An Interest Revenue (P 16,160 x 12% x 21/360)
additional charge for interest at 12% on
maturity value from maturity date is collected.

Dec 31 Year-end adjustment made. Interest Receivable

(Accrued interest income) Interest Revenue (P 24,000 x 12% x 55/360)

Related Multiple Choice Problems

PROBLEM 1:
Miggy Company has a 90-day, 12%, P 100,000 notes receivable dated December 1, 2021.

Questions:
. What is the accrued interest income at December 31, 2021?
A. P 10,000
B. P 3,000
C. P 2,000
D. P 1,000

. The adjusting entry to record the accrued interest income at December 31, 2021 would include
A. Debit - Cash, P 3,000
B. Credit - Interest Income, P 1,000
C. Debit - Interest Receivable, P 2,000
D. Credit - Interest Income, P 3,000

. What is the maturity value of notes receivable?

A. P 101,000
B. P 100,000
C. P 110,000
D. P 103,000

. The journal entry to record the collection of notes receivable on maturity date would include
A. Debit - Cash, P 100,000
B. Credit - Notes Receivable, P 103,000
C. Credit - Interest Income, P 3,000
D. Credit - Notes Receivable, P 97,000

. Assuming the notes receivable is dishonored on maturity date, the journal entry to record the dishonored
note would include
A. Credit - Accounts Receivable, P 103,000
B. Debit - Accounts Receivable, P 103,000
C. Debit - Interest Receivable, P 3,000
D. Credit - Notes Receivable, P 103,000

PROBLEM 2:
(Source: Intermediate Accounting Volume 1, 2020 edition by Valix, Peralta, Valix)
Nova Company reported the folloowing receivables on December 31, 2021:

Accounts receivable of P 4,600,000, net of P 500,000 allowance for doubtful accounts

Interest Receivable, P 190,000
Notes Receivable, P 4,000,000

Additional information:
▪ The notes receivable comprised of the following:
a) P 1,000,000 note dated October 31, 2021 , with principal and interest payable on October 31, 2022.
b) P 3,000,000 note dated March 31, 2021, with principal and 8% interest payable on March 31, 2022.
▪ During 2022, sales revenue totalled P 21,000,000. P 18,000,000 cash was collected from customers, and accounts
receivable of P 600,000 were written off. All sales were made on a credit basis.
▪ Doubtful accounts expense was recorded at year-end by adjusting the allowance account to an amount equal to 10%
year-end accounts receivable.

QUESTIONS:
. What amount should be reported as interest income for 2022?
A. P 110,000
B. P 240,000
C. P 60,000
D. P 80,000

. What amount should be reported as doubtful accounts expense for 2022?

A. P 750,000
B. P 850,000
C. P 600,000
D. P 100,000

ANSWER KEY TO Related Multiple Choice Problems

PROBLEM 1:
Miggy Company has a 90-day, 12%, P 100,000 notes receivable dated December 1, 2021.

Questions:
. What is the accrued interest income at December 31, 2021?
A. P 10,000
B. P 3,000
C. P 2,000
D. P 1,000

SOLUTION:
P 100,000 x 12% x 30/360 = P 1,000

. The adjusting entry to record the accrued interest income at December 31, 2021 would include
A. Debit - Cash, P 3,000
B. Credit - Interest Income, P 1,000
C. Debit - Interest Receivable, P 2,000
D. Credit - Interest Income, P 3,000
 SOLUTION:
Interest receivable 1,000
Interest income 1,000

. What is the maturity value of notes receivable?

A. P 101,000
B. P 100,000
C. P 110,000
D. P 103,000

SOLUTION:
Interest = P 100,000 x 12% x 90/360 = P 3,000
Maturity Value = P 100,000 (principal) + P 3,000 (interest) = P 103,000

. The journal entry to record the collection of notes receivable on maturity date would include
A. Debit - Cash, P 100,000
B. Credit - Notes Receivable, P 103,000
C. Credit - Interest Income, P 3,000
D. Credit - Notes Receivable, P 97,000

SOLUTION:
Cash (at MV) 103,000
Notes Receivable 100,000
Interest Income 3,000

. Assuming the notes receivable is dishonored on maturity date, the journal entry to record the dishonored
note would include
A. Credit - Accounts Receivable, P 103,000
B. Debit - Accounts Receivable, P 103,000
C. Debit - Interest Receivable, P 3,000
D. Credit - Notes Receivable, P 103,000

SOLUTION:
Accounts Receivable 103,000
Notes Receivable 100,000
Interest Income 3,000

PROBLEM 2:
(Source: Intermediate Accounting Volume 1, 2020 edition by Valix, Peralta, Valix)
Nova Company reported the folloowing receivables on December 31, 2021:

Accounts receivable of P 4,600,000, net of P 500,000 allowance for doubtful accounts

Interest Receivable, P 190,000
Notes Receivable, P 4,000,000

Additional information:
▪ The notes receivable comprised of the following:
a) P 1,000,000 note dated October 31, 2021 , with principal and interest payable on October 31, 2022.
b) P 3,000,000 note dated March 31, 2021, with principal and 8% interest payable on March 31, 2022.
▪ During 2022, sales revenue totalled P 21,000,000. P 18,000,000 cash was collected from customers, and accounts
receivable of P 600,000 were written off. All sales were made on a credit basis.
▪ Doubtful accounts expense was recorded at year-end by adjusting the allowance account to an amount equal to 10%
year-end accounts receivable.
 year-end accounts receivable.

QUESTIONS:
. What amount should be reported as interest income for 2022?
A. P 110,000
B. P 240,000
C. P 60,000
D. P 80,000

SOLUTION:
From Notes Receivable (a)
(See the computation below)
(P 1,000,000 x 6% x 10/12) 50,000 (From January 1, 2022 to October 31, 2022)
From Notes Receivable (b)
(P 3,000,000 x 8% x 3/12) 60,000 (From January 1, 2022 to March 31, 2022)
Interest Income for 2022 110,000

Supporting computation - Interest Receivable at december 31, 2021:

Interest receivable, 12/31/2021 190,000 (Total for both notes receivables)
Less: Interest receivable from
notes receivable (b)
(P 3,000,000 x 8% x 9/12) 180,000 (From March 31, 2021 to December 31, 2021)
Interest receivable from NR (a) 10,000 (From October 31, 2021 to December 31, 2021)

Interest rate for NR (a) should be based on P 10,000 Interest Receivable fror 2 months during 2021:
▪ I = PRT
P 10,000 = P 1,000,000 x R x 2/12
P 10,000 = P 166,666.66667R
R = P 10,000 / P 166,666.66667
R = 6%

. What amount should be reported as doubtful accounts expense for 2022?

A. P 750,000
B. P 850,000
C. P 600,000
D. P 100,000

SOLUTION:
ADA, 12/31/2022, adjusted
(See computation of AR below)
(P 7,500,000 x 10%) 750,000
Add: ADA, 12/31/2022, unadjusted 100,000 Debit balance
Doubtful accounts expense for 20 850,000

Supporting computation for AR balance at 12/31/2022:

AR, January 1, 2022 (net) 4,600,000
Add: ADA, January 1, 2022 500,000
AR, January 1, 2022 (gross) 5,100,000
During year 2022:
Credit sales 21,000,000
Cash collection of accounts (18,000,000)
Accounts written off (600,000)
AR, December 31, 2022 7,500,000

Supporting computation for ADA unadjusted balance at 12/31/2022:

ADA, January 1, 2022 500,000
Less: Accounts written off in 2022 600,000
ADA, December 31, 2022 (100,000) Debit balance
IENT OF NOTES):

alled STATED RATE or NOMINAL RATE

eivable (if interest bearing)

o simplify (30 days per month x 12 months)

hs in the computation

the principal and the interest, if any.

w classified as ACCOUNTS RECEIVABLE for unpaid principal and interest.
es receivable at maturity date

ceivable)
nd Empleo)

JOURNAL ENTRIES
Account Names Debit Credit

Notes Receivable (face amount) 12,000.00

12,000.00

Cash (at maturity value = P + I) 12,180.00

Notes Receivable (principal or FV of note) 12,000.00
Interest Revenue (P 12,000 x 9% x 60/360) 180.00

Notes Receivable 16,000.00

Accounts Receivable 16,000.00

Notes Receivable 24,000.00

Accounts Receivable 24,000.00

Accounts Receivable (at maturity value) 16,160.00

 Notes Receivable (principal or FV of note) 16,000.00
Interest revenue (P 16,000 x 12% x 30/360) 160.00

16,273.12
Accounts Receivable 16,160.00
Interest Revenue (P 16,160 x 12% x 21/360) 113.12

Interest Receivable 440.00

Interest Revenue (P 24,000 x 12% x 55/360) 440.00

eivable dated December 1, 2021.

come at December 31, 2021 would include

ceivable on maturity date would include

urity date, the journal entry to record the dishonored

on by Valix, Peralta, Valix)
cember 31, 2021:

0 allowance for doubtful accounts

h principal and interest payable on October 31, 2022.

principal and 8% interest payable on March 31, 2022.
18,000,000 cash was collected from customers, and accounts
ere made on a credit basis.
d by adjusting the allowance account to an amount equal to 10% of

nts expense for 2022?

Problems

eivable dated December 1, 2021.

come at December 31, 2021 would include

 terest) = P 103,000

ceivable on maturity date would include

urity date, the journal entry to record the dishonored

on by Valix, Peralta, Valix)

cember 31, 2021:

0 allowance for doubtful accounts

h principal and interest payable on October 31, 2022.

principal and 8% interest payable on March 31, 2022.
18,000,000 cash was collected from customers, and accounts
ere made on a credit basis.
d by adjusting the allowance account to an amount equal to 10% of
 (From January 1, 2022 to October 31, 2022)

(From January 1, 2022 to March 31, 2022)

ember 31, 2021:

(Total for both notes receivables)

(From March 31, 2021 to December 31, 2021)

(From October 31, 2021 to December 31, 2021)

0 Interest Receivable fror 2 months during 2021:

nts expense for 2022?

Debit balance
at 12/31/2022:

Debit balance
INTRODUCTORY DISCUSSION

LONG-TERM NOTES RECEIVABLE

▪ collectible beyond one year or normal operating cycle, whichever is longer (If trade receivable).
▪ may be collectible on installment basis or at maturity date (one time payment)
▪ if collectible on installment basis, portion of which is classified in the SFP as current asset while o
▪ if collectiblle at maturity date, it is classified as noncurrent asset if the collection will happen beyo
from SFP date; Otherwise, classify as current asset.

POSSIBLE SITUATIONS:
. Interest - bearing note (Stated rate = Effective Rate)
A. Stated rate is given; interest is compounded annually. DIY-E2-2.2
B. Stated rate is given; interest is not compounded annually.

. Interest - bearing note (Stated rate ≠ Effective Rate)

A. Effective rate > Stated Rate (Discount on Notes Receivable) DIY-E2-2.3
B. Effective rate < Stated Rate (Premium on Notes Receivable)

. Non-interest bearing Note (NO stated rate given; Effective rate is available)
A. With cash sales price, no downpayment, installment payment
DIY-E2-2.4
B. with cash sales price, with downpayment, installment payment
C. No cash sales price with downpayment, installment payment
DIY-E2-2.5
D. No cash sales price no downpayment, one time payment

. Other situations" (DIY-E2-2.6)

A. Notes Received for Cash and Other Rights
B. Notes Received with No Interest Rate Stated
C. Stated rate is unreasonable
D. Material difference between face amount of note and the current value of property sold
E. Imputed Interest rate

DIY EXERCISE 2-2.2 (Interest-bearing LTNR)

From each of the following independent situations, prepare the requirements in good form.

SITUATION 1 (Interest is Compounded Annually)

Dynamics Corporation owned a tract of land costing P 1,600,000. On January 1, 2021, it sold this land for P 2,000,000
to Manila Company who issued a 3-year note for P 2,000,000 plus interest of 12% compounded annually.

Required:
Prepare the necessary journal entries for 2021, 2022 and 2023.

Notes:
Sold item is PPE and not inventory because the problem mentioned the PPE item (Tract of land).
Cost land - P 1,600,000
Selling Price - P 2,000,000
Face of note is P 2,000,000
U
SOLUTION: I
o
JOURNAL ENTRIES
Date Transactions Account Names Debit T
T
2021
b
Jan. 1 Sale of tract of land. Notes Receivable (at face amount) 2,000,000 1
Land (cost) 2
Gain on sale of land 3
4
Dec. 31 Accrual of interest Interest Receivable 240,000
(Accrued Income) Interest Income
(P 2,000,000 x 12% x 1 year)

2022
Jan. 1 Reversing Entry Interest Income 240,000
Interest Receivable

Dec. 31 Accrual of interest Interest Receivable 508,800

(Accrued Income) Interest Income

Computation:
Y2021 - P 2,000,000 x 12% x 1 year = P 240,000
Y2022 - P 2,240,000 x 12% x 1 year = P 268,800

2023
Jan. 1 Reversing Entry Interest Income 508,800
Interest Receivable

Dec. 31 Accrual of interest Interest Receivable 809,856

(Accrued Income) Interest Income

Computation:
Y2021 - P 2,000,000 x 12% x 1 year = P 240,000
Y2022 - P 2,240,000 x 12% x 1 year = P 268,800
Y2023 - P 2,508,800 x 12% x 1 year = P 301,056

31 Cash (P 2,000,000 + P 809,856) 2,809,856

Collection of notes receivable Interest Receivable
and interest receivable Notes Receivable

SITUATION 2 (Interest is Payable Annually)

On January 2, 2021, Taal Manufacturing Company, Inc. sells a machinery costing P 1,600,000 and with accumulated
depreciation of P 900,000. As consideration, it receives P 200,000 cash and a 15% interest-bearing note for P 800,000
due on December 31, 2023. The interest is payable annually every December 31. At January 2, 2021, the prevailing rate
of interest for a similar note is 15% (Effective rate)

Required:
Prepare the necessary journal entries for 2021, 2022 and 2023.
SOLUTION:

JOURNAL ENTRIES
Date Transactions Account Names Debit
2021
Jan. 2 Sale of machinery Notes Receivable (at face amount) 800,000
Cash 200,000
Accumulated Depreciation 900,000
Machinery (at cost)
Gain on sale of machinery

Dec. 31 Collection of annual interest Cash 120,000

Interest Income
(P 800,000 x 15% x 1 year)

2022
Dec. 31 Collection of annual interest Cash 120,000
Interest Income
(P 800,000 x 15% x 1 year)

2023
Dec. 31 Collection of annual interest Cash 120,000
Interest Income
(P 800,000 x 15% x 1 year)

31 Collection of principal Cash 800,000

Notes Receivable

SITUATION 3 (Multiple Choice Questions - Problems)

In relation to the above, answer the following multiple-choice questions. Write your answer on the space provided before eac
number. Use only CAPITAL LETTERS.

PROBLEM 1:
Feasible Company sold to another entity a tract of land costing P 5,000,000 for P 7,000,000 on January 1, 2020.

The buyer paid P 1,000,000 and signed a two-year promissory note for the remainder of the purchase price plus 12% interes
compounded annually. The note matures on January 1, 2022.

Based on the foregoing information, answer the following questions:

. How much is the gain on sale of land on January 1, 2020?
A. P 5,000,000
B. P 2,000,000
C. P 1,000,000
D. No gain nor loss

. What amount should be reported as interest income for the year 2020?
A. P 840,000
B. P 720,000
C. P 600,000
D. P 240,000
 . What amount should be reported as interest income for the year 2021?
A. P 1,560,000
B. P 1,440,000
C. P 806,400
D. P 720,000

. What amount should be reported as accrued interest income as of December 31, 2021?
A. P 1,612,800
B. P 1,560,000
C. P 1,526,400
D. P 1,440,000

. How much cash would be received on January 1, 2022 in settlement of notes receivable?
A. P 6,000,000
B. P 6,806,400
C. P 7,440,000
D. P 7,526,000

PROBLEM 2:
Hopeful Company sold to another entity a tract of land costing P 10,000,000 for P 15,000,000 on January 1, 2021.

The buyer paid P 5,000,000 and signed a two-year promissory note for the remainder of the purchase price plus 10%
interest payable annually every December 31. The note matures on January 1, 2023.

Based on the foregoing information, answer the following questions:

. What is the gain (loss) on sale of land on January 1, 2021?
A. P 5,000,000
B. (P 5,000,000)
C. P 10,000,000
D. P 0

. What amount should be reported as accrued interest income as of December 31, 2021?
A. P 1,500,000
B. P 1,000,000
C. P 500,000
D. P 0

. What amount should be reported as accrued interest income as of December 31, 2022?
A. P 1,500,000
B. P 1,000,000
C. P 500,000
D. P 0

. How much cash would be received on January 1, 2023 in settlement of notes receivable?
A. P 15,000,000
B. P 12,000,000
C. P 11,000,000
D. P 10,000,000
ANSWER KET TO SITUATION 3 (Multiple Choice Questions - Problems)
In relation to the above, answer the following multiple-choice questions. Write your answer on the space provided before eac
number. Use only CAPITAL LETTERS.

PROBLEM 1:
Feasible Company sold to another entity a tract of land costing P 5,000,000 for P 7,000,000 on January 1, 2020.

The buyer paid P 1,000,000 and signed a two-year promissory note for the remainder of the purchase price plus 12% interes
compounded annually. The note matures on January 1, 2022.

Based on the foregoing information, answer the following questions:

. How much is the gain on sale of land on January 1, 2020?
A. P 5,000,000
B. P 2,000,000
C. P 1,000,000
D. No gain nor loss

SOLUTION:
Selling price of tract of land on January 1, 2020 7,000,000
Less: Cost of tract of land 5,000,000
Gain on sale of tract of land on January 1, 2020 2,000,000

. What amount should be reported as interest income for the year 2020?
A. P 840,000
B. P 720,000
C. P 600,000
D. P 240,000

SOLUTION:
P 6,000,000 x 12% x 1 year = P 720,000

. What amount should be reported as interest income for the year 2021?
A. P 1,560,000
B. P 1,440,000
C. P 806,400
D. P 720,000

SOLUTION:
(P 6,000,000 x 1.12) x 12% = P 806,400

. What amount should be reported as accrued interest income as of December 31, 2021?
A. P 1,612,800
B. P 1,560,000
C. P 1,526,400
D. P 1,440,000

SOLUTION:
Accrued interest income from year 2020: P 6,000,000 x 12% x 1 year 720,000
Accrued interest income from year 2021: (P 6,000,000 x 112%) x 12% x 1 year 806,400
Accrued interest income as of December 31, 2021 1,526,400

. How much cash would be received on January 1, 2022 in settlement of notes receivable?
 A. P 6,000,000
B. P 6,806,400
C. P 7,440,000
D. P 7,526,000

SOLUTION:
Principal amount of notes receivable (at face value or face amount) 6,000,000
Accrued interest receivable for two years from yar 2020 to year 2021 1,526,400
Total cash to be received on January 1, 2022 7,526,400

ALTERNATIVE SOLUTION (SHORT-CUT):

P 6,000,000 x 1.12 x 1.12 = P 7,526,400

PROBLEM 2:
Hopeful Company sold to another entity a tract of land costing P 10,000,000 for P 15,000,000 on January 1, 2021.

The buyer paid P 5,000,000 and signed a two-year promissory note for the remainder of the purchase price plus 10%
interest payable annually every December 31. The note matures on January 1, 2023.

Based on the foregoing information, answer the following questions:

. What is the gain (loss) on sale of land on January 1, 2021?
A. P 5,000,000
B. (P 5,000,000)
C. P 10,000,000
D. P 0

SOLUTION:
Selling Price of the tract of land on January 1, 2021 15,000,000
Less: Acquisition cost of the tract of land 10,000,000
Gain on sale of tract of land 5,000,000

. What amount should be reported as accrued interest income as of December 31, 2021?
A. P 1,500,000
B. P 1,000,000
C. P 500,000
D. P 0

SOLUTION:
P 10,000,000 x 10% x 1 year = P 1,000,000

. What amount should be reported as accrued interest income as of December 31, 2022?
A. P 1,500,000
B. P 1,000,000
C. P 500,000
D. P 0

SOLUTION:
P 10,000,000 x 10% x 1 year = P 1,000,000

. How much cash would be received on January 1, 2023 in settlement of notes receivable?
A. P 15,000,000
B. P 12,000,000
C. P 11,000,000
D. P 10,000,000

SOLUTION:
The cash to be received on January 1, 2023 in settlement of notes receivable is only P 10,000,000, the face
amount the notes. Take note that interest income is collectible annually every December 31 from year 2021 and
year 2022.
(If trade receivable).
payment)
as current asset while other portion is noncurrent asset.
llection will happen beyond one year

Interest
bearing
notes
(stated
rate is
always
given)

Non-
interest
bearing
note

of property sold

s land for P 2,000,000

annually.

John John:
Interest rate if silent is automatically annual interest rate. The
12% is the stated rate or nominal rate.

This is a one-time payment note (at maturity).

Principal and interests are payable at maturity date (end of 3rd
year)
 This is a one-time payment note (at maturity).
Principal and interests are payable at maturity date (end of 3rd
year)

User:
Interest income earned on P 2M but not yet collected at end
of 2021. In compliance with matching principle.

Credit TAKE NOTE:

The following AJEs may be (optional) reversed at the
beginning of the next accounting period:
1) accrued income or accrued revenue
1,600,000 2) accrued expense
400,000 3) prepaid expense - expense method
4) unearned income or revenue - income method
John John:
240,000 matching principle

Interest Receivable Interest Income

beg. 240,000 240,000 RJE RJE 240,000 508,800 AJE
240,000 AJE 508,800
748,800 240,000 268,800 FOR YEAR 2022

508,800 end 508,800

Interest Receivable Interest Income

beg. 508,800 508,800 RJE RJE 508,800 809,856 AJE
508,800 AJE 809,856 809,856 collection
1,318,656 508,800 301,056 FOR YEAR 2023

809,856 end 809,856

John John:
matching principle

809,856
2,000,000

John John:
nd with accumulated Interest rate if silent is automatically annual interest rate. The
ing note for P 800,000 15% is the stated rate or nominal rate. Effective rate is also
2021, the prevailing rate 15%.

This is a one-time payment note (at maturity).

Principal and interests are payable at maturity date (end of 3rd
year)
 Credit

1,600,000
300,000

120,000

120,000

120,000

800,000

he space provided before each

January 1, 2020.

rchase price plus 12% interest

n January 1, 2021.

rchase price plus 10%

he space provided before each

January 1, 2020.

rchase price plus 12% interest

n January 1, 2021.

rchase price plus 10%

000,000, the face
1 from year 2021 and
INTRODUCTORY DISCUSSION:
COMPUTATION OF PRESENT VALUE FACTOR USING ORDINARY CALCULATOR

EXERCISE 1:
Compute the presenty value factor (PVF). Round off your PV factor to 4 decimal places.

Rate Payment Present Value Factor

No. SR ER Term Term of 1 ord. annuity
1 9% One time 3 years 0.7722
2 10% One time 5 years 0.6209
3 8% Annually 4 years 3.3121
4 10% Annually 6 years 4.3553

EXERCISE 2:
Compute the present value of Notes Receivable.

Rate Payment Face value of

No. SR ER Term Term PV Factor NR
1 6% One time 3 years 0.8396 3,000,000
2 8% One time 10 years 0.4632 5,000,000
3 6% Annually 5 years 4.2124 3,000,000
4 9% Annually 4 years 3.2397 9,600,000

NOTES:
a) If the face value of NR is more than the present value, the difference is DISCOUNT ON NOTES RECEIVABLE or
UNEARNED INTEREST INCOME. This also means that Effective rate is higher than stated rate.

Presentation in the statement of financial position:

a) Discount on Notes Receivable
Notes receivable (AT FACE AMOUNT) xxx Normal balance is DEBIT
Less: Discount on Notes Receivable xxx Contra NR account; Normal balance is CR
Present value of NR xxx (also called carrying amount or amortized

b) If the face value of NR is less than the present value, the difference is PREMIUM ON NOTES RECEIVABLE. This
means that Effective rate is lower than stated rate.

Presentation in the statement of financial position:

b) Premium on Notes Receivable
Notes receivable (at face amount) xxx Normal balance is DEBIT
Add: Premium on Notes Receivable xxx ADJUNCT account to NR; Normal balance
Present value of NR xxx (also called carrying amount or amortized

c) Both Discount and Premium on Notes Receivable is subject to amortization over the term of notes receivab
The amortization methods are the following:
1) Straight-line method of amortization
1a. This provides equal amortization monthly or annually.
1b. Not commonly used for long-term notes receivable.
2) Outstanding balance method
 This is used if the principal amount or face amount of notes receivable is payable on installment basis,
particularly if the cash price of the items sold is given (effective interest rate is not necessary to compu
the present value of notes receivable).
3) Effective interest method
This is used if the cash price of the items sold is not given and requires the use of effective interest rate
determine the present value of the notes receivable.

d) Amortization pro-form entry:

1) Amortization of Discount on Notes Receivable
Discount on Notes Receivable xxx
Interest income xxx

Notes:
Its amortization will cause an increase in interest income aside from actual interest income received fro
notes receivable, if stated rate is given.

2) Amortization of Premium on Notes Receivable

Interest Income xxx
Premium on Notes Receivable xxx

Notes:
Its amortization will cause a decrease in interest income which will be deducted from actual interest inc
received from notes receivable, if stated rate is given.

e) Time Value of Money (TVM)

ASSUMPTIONS:
Date of NR is January 1, 2021, P 6,000,000
Maturity date is December 31, 2023 (3 years term)
Term of payment is at maturity date (one time payment)
Effective interest rate is 10% (THIS IS TO BE USED IN COMPUTING THE PRESENT VALUE OF MONEY a

YEAR 1 YEAR 2 YEAR 3

TODAY - PRESENT

1/1/2021 12/31/2021 12/31/2022

Date of NR
No TVM 6,000,000

TVM 5,384,218 615,782

(Present Value) Discount on Notes Receivable
(Discounted Value) (Subject to Amortization)

Amortization Amortization
DIY EXERCISE 2-2.3 (Interest - bearing note; Stated rate ≠ Effective Rate)
From each of the following independent situations, prepare the requirements in good form.

SITUATION 1 (Effective Rate is Higher Than Stated Rate)

On January 2, 2021, Never Quit Company sold a tract of land it purchased 3 years ago at P 4,000,000. It
received a P 6,000,000 note as payment for this transaction which is payable three annual installments of P
2,000,000 beginning December 31, 2021 plus interest at the rate of 4% based on the outstanding balance.
At January 2, 2021, the prevailing market interest rate for a similar note or obligation is 10% (this is the
effective rate).

Required:
. Compute the following:
a. Present value of notes receivable
b. Discount on Notes Receivable on date of sale (or Unearned interest income)
c. The sales price of the land
d. Gain on sale of land
. Computation of interest income using the effective interest method.
. Journal entries for the years 2021, 2022 and 2023.
. Presentation in the Statement of Financial Position at end of year 2021 and 2022.

SOLUTION:
Requirement 1 - Computations:
a) Present value of notes receivable

Notes:
The present value of notes receivable refers to all future cash flows or cash receipts
which includes the PRINCIPAL and the INTEREST INCOME that would be received in the future
discounted using the time value of money (it means we will use the present value factor), using
the EFFECTIVE INTEREST RATE.

Future Cash Flows

Principal Interest
Annual Annual Total Annual PVF at 10% Present
Year Collection Collection Cash Receipts (PV of 1) Value
TAC PVF TAC x PVF
2021 2,000,000 240,000 2,240,000 0.90909 2,036,362
2022 2,000,000 160,000 2,160,000 0.82645 1,785,132
2023 2,000,000 80,000 2,080,000 0.75131 1,562,725
Total 6,000,000 480,000 6,480,000 5,384,218

Annual interest computation based on outstanding balance (Use stated rate of 4%):
Year 2021: P 6,000,000 x 4% = P 240,000
Year 2022: (P 6,000,000 - P 2,000,000 annual payment) x 4% = P 160,000
Year 2023: (P 4,000,000 - P 2,000,000 annual payment) x 4% = P 80,000

b. Discount on Notes Receivable on date of sale (or Unearned interest income)

Face amount of notes receivable 6,000,000 Higher
Less: Present Value of Notes Receivable 5,384,218 Lower
Discount on Notes Receivable 615,782 May also called "Unearned Interest I
 c. The sales price of the land
The sales price of the land is its present value of NR of P 5,384,218.
Notes: The sales price is adjusted to time value of money.

d. Gain on sale of land

Sales Price of land (Present value) 5,384,218 Higher
Less: Cost of land 4,000,000 Lower
Gain on sale of land 1,384,218

Requirement 2 -Computation of interest income using the effective interest method

No TVM No TVM
Future CF With TVM Future CF
NR Annual Interest Interest Discount
Year Date Collection Income Received Amort.
PV x 10% ER NR x 4% SR Int. inc. - IR
date of sale 2021 Jan. 1
2021 Dec. 31 2,000,000 538,422 240,000 298,422
2022 Dec. 31 2,000,000 368,264 160,000 208,264
maturiy date 2023 Dec. 31 2,000,000 189,096 80,000 109,096
615,782
2,000,000 189,090 80,000 109,090

Requirement 3 -Journal Entries for the year 2021, 2022 and 2023

Date Transactions Account Names

2021
Jan. 2 Sale of tract of land. Notes Receivable (at face amount)
Land (at cost)
Discount on Notes Receivable
Gain on sale of Land

Dec. 31 Amorization of Discount on Discount on Notes Receivable

Notes Receivable (refer to Interest Income
table of amortization)
Annual interest collection Cash
Interest income

31 First installment collection Cash

Notes Receivable

2022
Dec. 31 Amorization of Discount on Discount on Notes Receivable
Notes Receivable (refer to Interest Income
table of amortization)
Annual interest collection Cash
Interest income

31 Second installment collection Cash

 Notes Receivable

2023
Dec. 31 Amorization of Discount on Discount on Notes Receivable
Notes Receivable (refer to Interest Income
table of amortization)
Annual interest collection Cash
Interest income

31 Third and last installment Cash

collection Notes Receivable

Requirement 4 -Presentation in the statement of financial position as of December 31, 2021 and 2022

12/31/2021
Current Assets:
Notes Receivable 2,000,000
Less: Discount on Notes Receivable 208,264
Present Value of Notes Receivable 1,791,736

Non-current Assets:
Notes Receivable 2,000,000
Less: Discount on Notes Receivable 109,096
Present Value of Notes Receivable 1,890,904

but if the question refers to Notes Receivable in total

Notes Receivable 4,000,000
Less: Discount on Notes Receivable 317,360
Present Value of Notes Receivable 3,682,640

SITUATION 2 (Effective Rate is Lower than Stated Rate)

On January 2, 2021, Never Quit Company sold a tract of land it purchased 3 years ago at P 4,000,000. It
received a P 6,000,000 note as payment for this transaction which is payable three annual installments of P
2,000,000 beginning December 31, 2021 plus interest at the rate of 14% based on the outstanding balance.
At January 2, 2021, the prevailing market interest rate for a similar note or obligation is 10% (Effective
rate)

Required:
. Compute the following:
a. Present value of notes receivable
b. Premium on Notes Receivable
c. The sales price of the land
d. Gain on sale of land
. Computation of interest income using the effective interest method.
. Journal entries for the years 2021, 2022 and 2023.
. Presentation in the Statement of Financial Position at end of year 2021 and 2022.
SOLUTION:
Requirement 1 - Computations:
a) Present value of notes receivable

Notes:
The present value of notes receivable refers to all future cash flows or cash receipts
which includes the PRINCIPAL and the INTEREST INCOME that would be received in the future
discounted using the time value of money (it means we will use the present value factor), using
the EFFECTIVE INTEREST RATE.
User:
Use the market rate or effective
Principal Interest
Annual Annual Annual Total PVF at 10% Present
Year Collection Collection Collection (PV of 1) Value
2021 2,000,000 840,000 2,840,000 0.90909 2,581,816
2022 2,000,000 560,000 2,560,000 0.82645 2,115,712
2023 2,000,000 280,000 2,280,000 0.75131 1,712,987
Total 6,000,000 1,680,000 7,680,000 6,410,514

Annual interest computation based on outstanding balance (Use stated rate of 14%
Year 2021: P 6,000,000 x 14% = P 840,000
Year 2022: (P 6,000,000 - P 2,000,000) x 14% = P 560,000
Year 2023: (P 4,000,000 - P 2,000,000) x 14% = P 280,000

b. Premium on Notes Receivable

Face amount of notes receivable 6,000,000 Lower
Less: Present Value of Notes Receivable 6,410,514 Higher
Premium on Notes Receivable (410,514)

c. The sales price of the land

The sales price of the land is its present value of P 6,410,514.
Notes: The sales price is adjusted to time value of money.

d. Gain on sale of land

Sales Price of land (Present value) 6,410,514 Higher
Less: Cost of land 4,000,000 Lower
Gain on sale of land 2,410,514

Requirement 2 -Computation of interest income using the effective interest method

Without TVM
FUTURE CASH FLOWS
NR Annual Interest Interest Premium
Year Date Payment Received Income Amort.
NR x 14% SR PV x 10% ER Int. inc. - IR
2021 Jan. 1
2021 Dec. 31 2,000,000 840,000 641,051 198,949
2022 Dec. 31 2,000,000 560,000 421,157 138,843
2023 Dec. 31 2,000,000 280,000 207,278 72,722
410,514

2,000,000 280,000 207,272 72,728

Requirement 3 -Journal Entries for the year 2021, 2022 and 2023

Date Transactions Account Names

2021
Jan. 2 Sale of tract of land. Notes Receivable (at face amount)
Premium on Notes Receivable
Land (at cost)
Gain on sale of Land

Dec. 31 Amorization of Premium on Interest Income

Notes Receivable (refer to Premium on Notes Receivable
table of amortization)
Annual interest collection Cash
Interest income

31 First installment collection Cash

Notes Receivable

2022
Dec. 31 Amorization of Premium on Interest Income
Notes Receivable (refer to Premium on Notes Receivable
table of amortization)
Annual interest collection Cash
Interest income

31 Second installment collection Cash

Notes Receivable

2023
Dec. 31 Amorization of Premium on Interest Income
Notes Receivable (refer to Premium on Notes Receivable
table of amortization)
Annual interest collection Cash
Interest income

31 Third and last installment Cash

collection Notes Receivable

Requirement 4 -Presentation in the statement of financial position as of December 31, 2021 and 2022

12/31/2021
Current Assets:
Notes Receivable 2,000,000
Add: Premium on Notes Receivable 138,843
Present Value of Notes Receivable 2,138,843

Non-current Assets:
Notes Receivable 2,000,000
Add: Premium on Notes Receivable 72,722
 Present Value of Notes Receivable 2,072,722

but if the question refers to Notes Receivable in total

Notes Receivable 4,000,000
Add: Premium on Notes Receivable 211,566
Present Value of Notes Receivable 4,211,566
Y CALCULATOR

PV of Notes Discount on
Receivable Notes Rec.
2,518,800 481,200
2,316,000 2,684,000
2,527,440 472,560
7,775,280 1,824,720

DISCOUNT ON NOTES RECEIVABLE or

s higher than stated rate.

rmal balance is DEBIT

ntra NR account; Normal balance is CREDIT
so called carrying amount or amortized cost of NR)

REMIUM ON NOTES RECEIVABLE. This also

rmal balance is DEBIT

JUNCT account to NR; Normal balance is DEBIT.
so called carrying amount or amortized cost of NR)

on over the term of notes receivable.

 vable is payable on installment basis,
nterest rate is not necessary to compute

quires the use of effective interest rate to

om actual interest income received from

ill be deducted from actual interest income

NG THE PRESENT VALUE OF MONEY and not the STATED RATE)

YEAR 3
User:
To compute the present value of NR, we normally use
the EFFECTIVE INTEREST RATE (If given) and its
12/31/2023
related PRESENT VALUE FACTOR for a certain
PERIOD.

Maturity Date of NR
6,000,000

6,000,000
(Future value)
(Face of NR)

Amortization
 ≠ Effective Rate)
n good form.

ears ago at P 4,000,000. It

three annual installments of P
d on the outstanding balance.
bligation is 10% (this is the

ws or cash receipts
e received in the future
sent value factor), using

PV of NR

ate of 4%):

rest income)

y also called "Unearned Interest Income"

nterest method

No TVM With TVM

Notes Rec.
PV of Notes Rec.
Balance
PV + DA - NR Pay.
6,000,000 5,384,218
4,000,000 3,682,640
2,000,000 1,890,904
0 0 last year is always a counterbalancing figure

0 (5)

Debit Credit

6,000,000 Normal balance is DEBIT

4,000,000
615,782 Normal balance is CREDIT (Contra NR account)
1,384,218

298,422
298,422

240,000
240,000

2,000,000
2,000,000

208,264
208,264

160,000
160,000

2,000,000
 2,000,000

109,096
109,096

80,000
80,000

2,000,000
2,000,000

s of December 31, 2021 and 2022

12/31/2022

2,000,000
109,096
1,890,904 This is the same as carrying value of NR or Amortized cost of NR

0
0
0 This is the same as carrying value of NR or Amortized cost of NR

2,000,000
109,096
1,890,904

ears ago at P 4,000,000. It

three annual installments of P
ed on the outstanding balance.
bligation is 10% (Effective
ws or cash receipts
e received in the future
sent value factor), using

User:
Use the market rate or effective rate

PV of NR

ate of 14%):

nterest method

No TVM With TVM

Notes Rec.
PV of Notes Rec.
Balance
PV - PA - NR Pay.
6,000,000 6,410,514
4,000,000 4,211,566
2,000,000 2,072,722
0 0 This is a counterbalacing figure at year end

0 (5)
 Debit Credit

6,000,000 Normal balance is DEBIT

410,514 Normal balance is also DEBIT because Premium on NR is an ADJUCT ACCOUNT
4,000,000
2,410,514

198,949
198,949

840,000
840,000

2,000,000
2,000,000

138,843
138,843

560,000
560,000

2,000,000
2,000,000

72,722
72,722

280,000
280,000

2,000,000
2,000,000

s of December 31, 2021 and 2022

12/31/2022

2,000,000
72,722
2,072,722 This is the same as carrying value of NR or Amortized cost of NR

0
0
 0 This is the same as carrying value of NR or Amortized cost of NR

2,000,000
72,722
2,072,722
DJUCT ACCOUNT
DIY EXERCISE 2-2.4 (Noninterest Bearing LTNR; Cash Sales price is given)

SITUATION 1 (No downpayment; Installment Basis):

Lenovium Manufacturing Corporation manufactures and sells machinery. On January 1, 2021, it sold one unit of
machinery for P 8,000,000 in which its related cost is P 5,600,000. The cash sales price of this machinery is
P 7,000,000. The buyer, Exodus Corporation, signed a noninterest-bearing note for P 8,000,000 payable in four
equal installments every December 31.

Required:
. Prepare the amortization table for unearned interest income (Using Outstanding Balance Method)
. Prepare all the necessary journal entries for 2021, 2022, 2023, and 2024
. Present the notes receivable in the statement of financial position at the end
of the years 2021, 2022 and 2023.

SUPPORTING ANALYSIS AND COMPUTATION:

Interest/year NR Bal./year
250,000 8,000,000 1 Do not use SLM of amortization
under installment basis instead use
250,000 6,000,000 2
the OUTSTANDING BALANCE
250,000 4,000,000 3
METHOD of amortization
250,000 2,000,000 4 John John:
future cash flows (receipts)
Given: that include interest income.
Cost of Sales of Machinery (Inventory) 5,600,000
Selling Price of machinery (this is also the Face Value of NR) 8,000,000 John John:
represents the present v
Cash sales price of machinery 7,000,000
the face amount of note
Face amount of notes receivable (form of collection) 8,000,000 8,000,000.
Type of note Non-interest bearing
Tems of notes (payable annually) 4 years
Annual payment (P 8,000,000 / 4 years) 2,000,000

A. Computation of Discount on Notes Receivable

Face value of notes receivable 8,000,000
Less: Present value of notes receivable:
Cash sales price 7,000,000
Unearned Interest Income 1,000,000

Notes:
The P 1,000,000 may also be credited to DISCOUNT ON NOTES RECEIVABLE.

SOLUTION:
1) Table of Amortization of Unearned Interest Income using the Outstanding Balance Method

Unearned
No. Year Date NR Balance Fraction Amort. Inc. Bal.

2021 Jan. 1 1,000,000

1 2021 Dec. 31 8,000,000 8/20 400,000 600,000
2 2022 Dec. 31 6,000,000 6/20 300,000 300,000
3 2023 Dec. 31 4,000,000 4/20 200,000 100,000
 4 2024 Dec. 31 2,000,000 2/20 100,000 0
20,000,000 1,000,000

2) Journal entries for 2021, 2022, 2023, and 2024

Date Transactions Account Names Debit

2021
Jan. 31 Sale of machinery. Notes receivable 8,000,000
Sales (At Cash Sales Price)
Unearned Interest Income

Dec. 31 Amorization of Discount on Unearned Interest Income 400,000

Notes Receivable Interest Income

31 First installment collection Cash 2,000,000

Notes Receivable

2022
Dec. 31 Amorization of Discount on Unearned Interest Income 300,000
Notes Receivable Interest Income

31 Second installment Cash 2,000,000

collection Notes Receivable

2023
Dec. 31 Amorization of Discount on Unearned Interest Income 200,000
Notes Receivable Interest Income

31 Second installment Cash 2,000,000

collection Notes Receivable

2024
Dec. 31 Amorization of Discount on Unearned Interest Income 100,000
Notes Receivable Interest Income

31 Second installment Cash 2,000,000

collection Notes Receivable

. Statement of financial position presentation as of December 31, 2021, 2022, and 2023.

12/31/2021 12/31/2022
Current Assets:
Notes Receivable 2,000,000 2,000,000
Less: Unearned Interest Income 300,000 200,000
Present Value of Notes Receivable 1,700,000 1,800,000

Non-current Assets:
Notes Receivable 4,000,000 2,000,000
Less: Unearned Interest Income 300,000 100,000
Present Value of Notes Receivable 3,700,000 1,900,000
 but if the question refers to Notes Receivable in total
Notes Receivable 6,000,000 4,000,000
Less: Unearned Interest Income 600,000 300,000
Present Value of Notes Receivable 5,400,000 3,700,000

SITUATION 2 (With downpayment; Installment Basis):

Hexagon Manufacturing Corporation manufactures and sells machinery. On January 1, 2021, it sold one unit of
machinery for P 4,000,000 in which its related cost is P 2,500,000. The cash sales price of this machinery is
P 3,500,000. The buyer, Exodus Corporation, paid P 500,000 and signed a noninterest-bearing note for P
4,000,000 payable in four equal installments every December 31.

Required:
. Prepare the amortization table for unearned interest income (Using Outstanding Balance Method)
. Prepare all the necessary journal entries for 2021, 2022, 2023 and 2024
. Present the notes receivable in the statement of financial position at the end
of the years 2021, 2022 and 2023.

SOLUTION:
A. Computation of Discount on Notes Receivable
Face value of notes receivable 4,000,000
Less: Present value of notes receivable:
Cash sales price 3,500,000
Less: Dowpayment 500,000 3,000,000
Discount on Notes Receivable 1,000,000

Notes:
The P 1,000,000 may also be credited to UNEARNED INTEREST INCOME.

. Table of amortization using the Outstanding balance method

Discount Discount
No. Year Date NR Balance Fraction Amort. Balance

2021 Jan. 1 1,000,000

1 2021 Dec. 31 4,000,000 4/10 400,000 600,000
2 2022 Dec. 31 3,000,000 3/10 300,000 300,000
3 2023 Dec. 31 2,000,000 2/10 200,000 100,000
4 2024 Dec. 31 1,000,000 1/10 100,000 0
10,000,000 1,000,000

. Journal entries for 2021, 2022, 2023 and 2024

Date Transactions Account Names Debit

2021
Jan. 31 Sale of machinery. Notes receivable 4,000,000
Cash 500,000
Sales ( at cash sales price)
Discount on Notes Receivable
 Jan. 31

Dec. 31 Amorization of Discount on Discount on Notes Receivable 400,000

Notes Receivable Interest Income

31 First installment collection Cash 1,000,000

Notes Receivable

2022
Dec. 31 Amorization of Discount on Discount on Notes Receivable 300,000
Notes Receivable Interest Income

31 Second installment Cash 1,000,000

collection Notes Receivable

2023
Dec. 31 Amorization of Discount on Discount on Notes Receivable 200,000
Notes Receivable Interest Income

31 Second installment Cash 1,000,000

collection Notes Receivable

2024
Dec. 31 Amorization of Discount on Discount on Notes Receivable 100,000
Notes Receivable Interest Income

31 Third and last installment Cash 1,000,000

collection Notes Receivable

. Statement of financial position presentation as of December 31, 2021, 2022, and 2023.

12/31/2021 12/31/2022
Current Assets:
Notes Receivable 1,000,000 10,000,000
Less: Discount on Notes Receivable 300,000 200,000
Present Value of Notes Receivable 700,000 9,800,000

Non-current Assets:
Notes Receivable 2,000,000 1,000,000
Less: Discount on Notes Receivable 300,000 100,000
Present Value of Notes Receivable 1,700,000 900,000

but if the question refers to Notes Receivable in total

Notes Receivable 3,000,000 2,000,000
Less: Discount on Notes Receivable 600,000 300,000
Present Value of Notes Receivable 2,400,000 1,700,000
ce is given)

2021, it sold one unit of

ce of this machinery is
8,000,000 payable in four

Balance Method)

John John:
future cash flows (receipts)
that include interest income.

John John:
represents the present value of
the face amount of notes of P
8,000,000.

ding Balance Method

 Credit

7,000,000
1,000,000

400,000

1,000,000

300,000

1,000,000

200,000

1,000,000

100,000

1,000,000

2022, and 2023.

12/31/2023

2,000,000
100,000
1,900,000

0
 2,000,000
100,000
1,900,000

2021, it sold one unit of

ce of this machinery is
t-bearing note for P

Balance Method)

Credit

3,500,000
1,000,000
 400,000

1,000,000

300,000

1,000,000

200,000

1,000,000

100,000

1,000,000

2022, and 2023.

12/31/2023

1,000,000
100,000
900,000

1,000,000
100,000
900,000
DIY EXERCISE 2-2.5 (Noninterest-bearing LTNR; Cash Sales Price is not Given)
From each of the following independent situations, prepare the requirements in good form.

SITUATION 1 (With downpayment; Installment Basis)

On January 1, 2021, Devorak Corporation sold an equipment with a cost of P 500,000 for P 800,000. The
buyer, Limbo Company, made a down payment of P 200,000 and signed a noninterest-bearing note for P
600,000 payable in equal annual installment of P 200,000 every December 31. The prevailing interest rate
for a note of this type is 10%. The present value of an ordinary annuity of 1 for three periods at 10% is
2.4869.

Required:
. Compute the following:
a. Present value of notes receivable
b. Unearned interest income on date of sale (or Discount on NR)
c. The sales price of the equipment
d. Gain on sale of equipment
. Computation of interest income (amortization) using the effective interest method.
. Journal entries for the years 2021, 2022 and 2023.
. Presentation in the Statement of Financial Position at end of year 2021 and 2022.

SUPPORTING ANALYSIS AND COMPUTATION:

Given:
Selling Price of equipment (without TVM) 800,000
Cost of equipment (PPE) 500,000
Downpayment on date of sale 200,000
Non-interest bearing note face amount 600,000 Term is 3
Annual payment 200,000 years (P
Effective interest rate 10% 600/P 200)
PVF of Ordinary Annuity of 1 for 3 periods at 10% 2.4869

Requirement 1 - Computations:
a. Present value of notes receivable

PV of NR = P 200,000 x 2.48685 PVF of 1 = P 497,370

Take note of the computation below (long-method)

NR Annual PVF at 10% Present

Year Date Collection ER Value
2021 Jan. 1
2021 Dec. 31 200,000 0.90909 181,818
2022 Dec. 31 200,000 0.82645 165,290
2023 Dec. 31 200,000 0.75131 150,262
Total 2.48685 497,370

b. Discount on Notes receivable on date of sale (or Unearned Interest Income)

Face value of notes receivable 600,000
Less: Present value of notes receivable 497,370
Discount on Notes Receivable 102,630
 c. The sales price of the equipment
Present value of notes receivable 497,370
Add: Downpayment received 200,000
Sales price of the equipment 697,370

d. Gain on sale of equipment

Sales price of the equipment 697,370
Less: Cost of the equipment 500,000
Gain on sale of equipment 197,370

Requirement 2 - Computation of interest income using the effective interest method

NR Annual Interest Notes Rec.

Year Date Payment Income Balance
PV x 10% ER
2021 Jan. 1 497,370
2021 Dec. 31 200,000 49,737 347,107
2022 Dec. 31 200,000 34,711 181,818
2023 Dec. 31 200,000 18,182 0
102,629

Requirement 3 -Journal Entries for the year 2021, 2022 and 2023

Date Transactions Account Names Debit Credit

2021
Jan. 31 Sale of equipment Notes Receivable 600,000
Cash 200,000
Equipment 500,000
Discount on Notes Receivable 102,630
Gain on sale of Equipment 197,370

Dec. 31 Amorization of Discount on Notes Receivable 49,737

Discount on Notes Interest Income 49,737
Receivable
31 First installment Cash 200,000
collection Notes Receivable 200,000

2022
Dec. 31 Amorization of Discount on Notes Receivable 34,711
Discount on Notes Interest Income 34,711
Receivable
31 Second installment Cash 200,000
collection Notes Receivable 200,000

2023
Dec. 31 Amorization of Discount on Notes Receivable 18,182
Discount on Notes Interest Income 18,182
Receivable
31 Third and last Cash 200,000
installment collection Notes Receivable 200,000
Requirement 4 -Presentation in the statement of financial position as of December 31, 2021 and 2022

12/31/2021 12/31/2022
Current Assets:
Notes Receivable 200,000 200,000
Less: Discount on Notes Receivable 34,711 18,182
Present Value of Notes Receivable 165,289 181,818

Non-current Assets:
Notes Receivable 200,000 0
Less: Discount on Notes Receivable 18,182 0
Present Value of Notes Receivable 181,818 0

but if the question refers to Notes Receivable in total

Notes Receivable 400,000 200,000
Less: Discount on Notes Receivable 52,892 18,182
Present Value of Notes Receivable 347,108 181,818

SITUATION 2 (With downpayment; payable at maturity date)

On January 1, 2021, Techno Corporation sold an equipment costing P 6,000,000 with an accumulated depreciation of P
2,500,000. The buyer, Howard Company, paid P 1,000,000 and issued a P 4,000,000 non-interest bearing note due on
January 1, 2024. The prevailing rate of interest for a note of this type is 10%. The present value of 1 at 10% for 3
years is 0.7513.

Required:
. Compute the following:
a. Present value of notes receivable
b. Discount on Notes Receivable on date of sale
c. The sales price of the equipment
d. Gain on sale of equipment
. Computation of interest income using the effective interest method.
. Journal entries for the years 2021, 2022, and 2023
. Presentation in the Statement of Financial Position at end of year 2021 and 2022.

SOLUTION:
Requirement 1 - Computations:
a. Present value of notes receivable
Face value of notes receivable (the one time payment) 4,000,000
Multiply by PVF of 1 at 30 years for 3 years 0.7513
Present value of notes receivable 3,005,200

b. Discount on Notes Receivable on date of sale

Face value of notes receivable 4,000,000
Less: Present value of notes receivable 3,005,200
Discount on Notes Receivable 994,800
c. The sales price of the equipment
Present value of notes receivable 3,005,200
Add: Cash received from downpayment 1,000,000
Sales price of the equipment 4,005,200

d. Gain on sale of equipment

Sales price of the equipment 4,005,200
Less: Carrying amount of Equipment
Cost of Equipment 6,000,000
Less: Accumulated Depreciation 2,500,000 3,500,000
Gain on sale of equipment 505,200

Requirement 2 - Computation of interest income using the effective interest method

Interest Inc. Unearned
(Amortizatio Interest Present NR without
n) Inc. Value of NR considering
Yr. Date (PV x 10% ER) UII - Int. Inc.
(PV + Int. Inc.) the TVM

0 1/1/2020 994,800 3,005,200 4,000,000

1 12/31/2020 300,520 694,280 3,305,720 4,000,000
2 12/31/2021 330,572 363,708 3,636,292 4,000,000
3 12/31/2022 363,708 0 4,000,000 4,000,000

Interest Discount on PV of Notes

Year Date Income NR Receivable
PV x 10% ER
2021 Jan. 1 994,800 3,005,200
2021 Dec. 31 300,520 694,280 3,305,720
2022 Dec. 31 330,572 363,708 3,636,292
2023 Dec. 31 363,708 0 4,000,000
994,800

. Journal entries for the years 2021, 2022, 2023 and 2024

Date Transactions Account Names Debit

2021
Jan. 31 Sale of equipment Notes Receivable 4,000,000
Cash 1,000,000
Accumulated depreciation 2,500,000
Equipment
Discount on Notes Receivable
Gain on sale of Equipment

Dec. 31 Amorization of Discount on Discount on Notes Receivable 300,520

Notes Receivable Interest Income

2022
Dec. 31 Amorization of Discount on Discount on Notes Receivable 330,572
Notes Receivable Interest Income
 2023
Dec. 31 Amorization of Discount on Discount on Notes Receivable 363,708
Notes Receivable Interest Income

2024
Jan. 31 Amorization of Discount on Cash 4,000,000
Notes Receivable Notes Receivable

SITUATION 3 (Multiple Choice Questions - Problems)

In relation to the above, answer the following multiple-choice questions. Write your answer
on the space provided before each number. Use only CAPITAL LETTERS.

PROBLEM 1:
On January 1, 2021, France Company sold a tract of land that was acquired several years ago for P 1,800,000. France
received a three-year note, non-interest bearing note for P 6,000,000 in exchange for the land. There is no readily available
market value for the land, but the current market rate of interest for comparable notes is 15%. Present value of P 1 for
three periods at 15% is 0.6575. Present value of an annuity of P 1 for three periods at 15% is 2.2832.

QUESTIONS:
. What is the present value of notes receivable at January 1, 2021?
A. P 4,566,400
B. P 2,761,500
C. P 3,196,480
D. P 3,945,000

. What is the discount on notes receivable at January 1, 2021?

A. P 2,803,520
B. P 1,438,500
C. P 2,055,000
D. P 1,115,000

. What is the interest revenue recognized in France's profit and loss for the year 2021?
A. P 900,000
B. P 680,513
C. P 591,750
D. P 630,000

. What is the carrying value of notes receivable at December 31, 2021?

A. P 3,945,000
B. P 5,408,250
C. P 4,200,000
D. P 4,536,750

PROBLEM 2:
On January 1, 2021, Finland Company sold a tract of land that was acquired several years ago for P 1,800,000. France
received a three-year note, non-interest bearing note for P 6,000,000 in exchange for the land. There is no readily available
market value for the land, but the current market rate of interest for comparable notes is 15%. The note is payable in equa
annual installments of P 2,000,000 every December 31. Present value of P 1 for three periods at 15% is 0.6575. Present
value of an annuity of P 1 for three periods at 15% is 2.2832.
QUESTIONS:
. What is the present value of notes receivable at January 1, 2021?
A. P 1,315,000
B. P 4,566,400
C. P 2,761,500
D. P 3,196,480

. What is the discount on notes receivable at January 1, 2021?

A. P 1,115,000
B. P 1,433,600
C. P 2,803,520
D. P 1,438,500

. What is the interest revenue recognized in Finland's profit and loss for the year 2021?
A. P 197,250
B. P 414,225
C. P 479,472
D. P 684,960

. What is the Total carrying value of notes receivable at December 31, 2021?
A. P 5,251,360
B. P 2,777,275
C. P 3,251,360
D. P 1,652,725

PROBLEM 3:
On January 1, 2021, Jamaica Corporation sells equipment costing P 500,000, with a carrying amount of P 80,000, receiving
a non-interest bearing note due on December 31, 2023 with a face amount of P 100,000. There is no established market
value for the equipment. The interest rate on similar obligations is estimated at 12%. The present value of P 1 for three
periods is 0.7118 while the present value of an ordinary annuity of P 1 for three periods is 2.4018.

QUESTIONS:
. What is the present value of notes receivable at January 1, 2021?
A. P 240,180
B. P 100,000
C. P 71,180
D. P 80,060

. What is the discount on notes receivable at January 1, 2021?

A. P 28,820
B. P 19,940
C. P 33,333
D. P 100,000

. What is the gain (loss) on sale of equipment on January 1, 2021?

A. (P 8,820)
B. P 8,820
C. (P 60)
D. P 60

. What is the interest revenue recognized in Denmark's profit and loss for the year 2021?
 A. P 9,607
B. P 12,000
C. P 8,542
D. P 28,822

. What is the carrying value of notes receivable at December 31, 2021?

A. P 79,722
B. P 80,787
C. P 83,180
D. P 100,000

ANSWER KEY TO SITUATION 3 (Multiple Choice Questions - Problems)

In relation to the above, answer the following multiple-choice questions. Write your answer
on the space provided before each number. Use only CAPITAL LETTERS.

PROBLEM 1:
On January 1, 2021, France Company sold a tract of land that was acquired several years ago for P 1,800,000. France
received a three-year note, non-interest bearing note for P 6,000,000 in exchange for the land. There is no readily available
market value for the land, but the current market rate of interest for comparable notes is 15%. Present value of P 1 for
three periods at 15% is 0.6575. Present value of an annuity of P 1 for three periods at 15% is 2.2832.

QUESTIONS:
. What is the present value of notes receivable at January 1, 2021?
A. P 4,566,400
B. P 2,761,500
C. P 3,196,480
D. P 3,945,000

SOLUTION:
Face amount of notes receivable 6,000,000
Multiply by PVF of P 1 for three periods at 15% 0.6575 (one time payment)
Present value of the notes receivable 3,945,000

. What is the discount on notes receivable at January 1, 2021?

A. P 2,803,520
B. P 1,438,500
C. P 2,055,000
D. P 1,115,000

SOLUTION:
Face value of notes receivable at January 1, 2021 6,000,000
Less: Present value of notes receivable at 1/1/2021 3,945,000
Discount on notes receivable at January 1, 2021 2,055,000

. What is the interest revenue recognized in France's profit and loss for the year 2021?
A. P 900,000
B. P 680,513
C. P 591,750
D. P 630,000
 SOLUTION:
Inrerest revenue is the amount of amortization of discount on notes receivable for 2021.
Present value of notes receivable at January 1, 2021 3,945,000
Multiplied by effective rate 15%
Interest revenue for 2021 (the amortization amount) 591,750

. What is the carrying value of notes receivable at December 31, 2021?

A. P 3,945,000
B. P 5,408,250
C. P 4,200,000
D. P 4,536,750

SOLUTION:
Notes Receivable (at face value) 6,000,000
Less: Discount on Notes Receivable at 12/31/2021:
Discount on Notes Receivable before amortization 2,055,000
Less: Amortization for the year 2021 591,750 1,463,250
Carrying amount of Notes Receivable at 12/31/2021 4,536,750

PROBLEM 2:
On January 1, 2021, Finland Company sold a tract of land that was acquired several years ago for P 1,800,000. France
received a three-year note, non-interest bearing note for P 6,000,000 in exchange for the land. There is no readily available
market value for the land, but the current market rate of interest for comparable notes is 15%. The note is payable in equa
annual installments of P 2,000,000 every December 31. Present value of P 1 for three periods at 15% is 0.6575. Present
value of an annuity of P 1 for three periods at 15% is 2.2832.

QUESTIONS:
. What is the present value of notes receivable at January 1, 2021?
A. P 1,315,000
B. P 4,566,400
C. P 2,761,500
D. P 3,196,480

SOLUTION:
Annual payment of notes receivable 2,000,000
Multiply by PVF of P 1 for three periods at 15% 2.2832 (installment payment)
Present value of the notes receivable 4,566,400

. What is the discount on notes receivable at January 1, 2021?

A. P 1,115,000
B. P 1,433,600
C. P 2,803,520
D. P 1,438,500

SOLUTION:
Face value of notes receivable at January 1, 2021 6,000,000
Less: Present value of notes receivable at 1/1/2021 4,566,400
Discount on notes receivable at January 1, 2021 1,433,600

. What is the interest revenue recognized in Finland's profit and loss for the year 2021?
 A. P 197,250
B. P 414,225
C. P 479,472
D. P 684,960

SOLUTION:
Inrerest revenue is the amount of amortization of discount on notes receivable for 2021.
Present value of notes receivable at January 1, 2021 4,566,400
Multiplied by effective rate 15%
Interest revenue for 2021 (the amortization amount) 684,960

. What is the Total carrying value of notes receivable at December 31, 2021?
A. P 5,251,360
B. P 2,777,275
C. P 3,251,360
D. P 1,652,725

SOLUTION:
Notes Receivable (at face value), January 1, 2021 6,000,000
Less: First annual payment 2,000,000
Notes Receivable (at face value), December, 2021 4,000,000
Less: Discount on Notes Receivable at 12/31/2021:
Discount on Notes Receivable before amortization 1,433,600
Less: Amortization for the year 2021 684,960 748,640
Carrying amount of Notes Receivable at 12/31/2021 3,251,360

PROBLEM 3:
On January 1, 2021, Jamaica Corporation sells equipment costing P 500,000, with a carrying amount of P 80,000, receiving
a non-interest bearing note due on December 31, 2023 with a face amount of P 100,000. There is no established market
value for the equipment. The interest rate on similar obligations is estimated at 12%. The present value of P 1 for three
periods is 0.7118 while the present value of an ordinary annuity of P 1 for three periods is 2.4018.

QUESTIONS:
. What is the present value of notes receivable at January 1, 2021?
A. P 240,180
B. P 100,000
C. P 71,180
D. P 80,060

SOLUTION:
Face amount of notes receivable 100,000
Multiply by PVF of P 1 for three periods at 15% 0.7118 (one time payment)
Present value of the notes receivable 71,180

. What is the discount on notes receivable at January 1, 2021?

A. P 28,820
B. P 19,940
C. P 33,333
D. P 100,000
 SOLUTION:
Face value of notes receivable at January 1, 2021 100,000
Less: Present value of notes receivable at 1/1/2021 71,180
Discount on notes receivable at January 1, 2021 28,820

. What is the gain (loss) on sale of equipment on January 1, 2021?

A. (P 8,820)
B. P 8,820
C. (P 60)
D. P 60

SOLUTION:
Selling price of the equipment (at PV of NR) 71,180
Less: Carrying amount of the equipment at 1/1/2021 80,000
Loss on sale of equipment (8,820)

. What is the interest revenue recognized in Denmark's profit and loss for the year 2021?
A. P 9,607
B. P 12,000
C. P 8,542
D. P 28,822

SOLUTION:
Inrerest revenue is the amount of amortization of discount on notes receivable for 2021.
Present value of notes receivable at January 1, 2021 71,180
Multiplied by effective rate 12%
Interest revenue for 2021 (the amortization amount) 8,542

. What is the carrying value of notes receivable at December 31, 2021?

A. P 79,722
B. P 80,787
C. P 83,180
D. P 100,000

SOLUTION:
Notes Receivable (at face value) 100,000
Less: Discount on Notes Receivable at 12/31/2021:
Discount on Notes Receivable before amortization 28,820
Less: Amortization for the year 2021 8,542 20,278
Carrying amount of Notes Receivable at 12/31/2021 79,722
ot Given)
1, 2021 and 2022

ulated depreciation of P
st bearing note due on
ue of 1 at 10% for 3
Credit

6,000,000
994,800
505,200

300,520

330,572
 363,708

4,000,000

or P 1,800,000. France
There is no readily available
Present value of P 1 for
.2832.

or P 1,800,000. France
There is no readily available
The note is payable in equal
15% is 0.6575. Present
 ount of P 80,000, receiving
is no established market
nt value of P 1 for three
18.
or P 1,800,000. France
There is no readily available
Present value of P 1 for
.2832.
or P 1,800,000. France
There is no readily available
The note is payable in equal
15% is 0.6575. Present
 ount of P 80,000, receiving
is no established market
nt value of P 1 for three
18.
DIY EXERCISE 2-2.6 (Situations in Valuation of Notes)
From each of the following independent situations, prepare the requirements in good form.

SITUATION 1 (Notes Received for Cash and Other Rights)

(Source: Financial Accounting Volume 1 by Valencia and Roxas)
On January 1, 2022, Juancho Construction Company accepts a three-year, non-interest bearing note from Glorious
Corporation, plus the privelege to buy 20,000 bricks at a bargain price in exchange for P 50,000 cash. The effective rate o
note with a similar risk is 12%.

Required:
1) How should Juanco Construction Company record the note on January 1, 2022?
2) What is the journal entry to record the exercise of the privilege to purchase at a bargain price?
3) How should the Discount on Notes receivable be amortized over the life of the notes?
4) What is the journal entry to settle the notes receivable at the end of the third year?

Supporting computations:
Face value of the notes 50,000
Less: Present Value of the note
(P 50,000 x 0.7118) 35,590
Discount on Notes Receivable 14,410

Notes:
Supposedly, the cash proceeds in the transaction is only P 35,590 if the trasnaction does not include the right or
privilege to purchase at a bargain price. In this situation, however, the cash proceeds involved is P 50,000. The
excess (cash proceeeds) over the cash proceeds of P 35,590 is presumed to cover the Prepaid Purchases
(assets) thus debiting ADVANCES ON PURCHASES.

The ADVANCES ON PURCHASES and the DISCOUNT ON NOTES RECEIVABLE are different and distinct account
from each other.

Amortization Table of Discount on Notes Receivable

Discount PV of NR
Year Date Amort. on NR
(PV x ER)
2022 Jan. 1 14,410 35,590
2022 Dec. 31 4,271 10,139 39,861
2023 Dec. 31 4,783 5,356 44,644
2024 Dec. 31 5,356 0 50,000

SOLUTION:
Date Transactions Account Names Debit Credit
2022
Jan. 31 Acceptance of 3-year Notes Receivable 50,000
noninterest bearing Advances on Purchases 14,410
note. Cash 50,000
Discount on Notes Receivable 14,410

Dec. 31 Amorization of Discount Discount on Notes Receivable 4,271

on Notes Receivable Interest Income 4,271
 Amorization of Discount
on Notes Receivable

2023
Dec. 31 Amorization of Discount Discount on Notes Receivable 4,783
on Notes Receivable Interest Income 4,783

2024
Dec. 31 Amorization of Discount Discount on Notes Receivable 5,356
on Notes Receivable Interest Income 5,356

31 Exercise of privilege to Purchases (Incentory) 14,410

purchase at a bargain Advances on Purchases 14,410
price
31 Cash collection in Cash 50,000
settlement of notes Notes Receivable 50,000
receivable

SITUATION 2 (Notes Received with No Interest Rate Stated)

(Source: Financial Accounting Volume 1 by Valencia and Roxas)

Missile Corporation sells computers. On January 1, 2022, the company sold 30 sets of computers with a cash selling price
P 25,000 each. The customer paid P 220,000 downpayment and signed a non-interest bearing note with a face amount of
600,000, payable for three equal installments every December 31. The cost of computer is P 20,000 each.

Required:
Prepare the necessary journal entries from year 2022 to year 2024.

SOLUTION:
A. Computation of Discount on Notes Receivable
Face value of notes receivable 600,000
Less: Present value of notes receivable:
Cash sales price 750,000
Less: Dowpayment 220,000 530,000
Discount on Notes Receivable 70,000

Notes:
The P 70,000 may also be credited to UNEARNED INTEREST INCOME.

B. Gross profit from sales of computers

Total cash sales price (30 sets x P 25,000) 750,000
Less: Total Cost of sales (30 sets x P P 20,000) 600,000
Gross profit from sales 150,000

C. Amortization Table of Discount on Notes Receivable using Outstanding Balance Method

Notes Discount Discount

Year Date Receiv. Fraction Amort. on NR
2021 Jan. 1 70,000
2021 Dec. 31 600,000 6/12 35,000 35,000
2022 Dec. 31 400,000 4/12 23,333 11,667
2023 Dec. 31 200,000 2/12 11,667 0
 1,200,000 70,000

Date Transactions Account Names

2022
Jan. 1 Sale of 30 sets of computers with a cash selling price Cash
of P 25,000 each. Notes receivable
Sales (30 sets x P 25,000)
Discount on Notes Receivable

Cost of sales (30 sets x P 20,000)

Inventory

Dec. 31 Amortization of Discount on Notes Receivable Discount on Notes Receivable

(Refer to table of amortization) Interest Income

First installment - collection Cash

Notes Receivable

2023
Dec. 31 Amortization of Discount on Notes Receivable Discount on Notes Receivable
(Refer to table of amortization) Interest Income

Second installment - collection Cash

Notes Receivable

2024
Dec. 31 Amortization of Discount on Notes Receivable Discount on Notes Receivable
(Refer to table of amortization) Interest Income

Third and last installment - collection Cash

Notes Receivable

SITUATION 3 (Stated rate is unreasonable)

(Source: Financial Accounting Volume 1 by Valencia and Roxas)
On December 31, 2021, Samuel Company sold a machine which has been used in the busines. For the total estimated life
five years, the machine has been used in operation for three years. The cost of the machine is P 100,000. The purchaser
issued a note with a face value of P 50,000 and a stated interest rate of 3% annually. The note is payable on December 3
2024. The prevailing market rate at the date of sale is 10%.

Required:
Prepare the necessary journal entries from year 2022 to year 2024.

SOLUTION:
A. Computation of Discount on Notes Receivable
Face value of the notes receivable 50,000
Less: Present value of notes receivable at effective rate
Principal amount (P 50,000 x 0.7513) 37,565
Interest income (P 50,000 x 3% x 2.4868) 3,730 41,295
Discount on Notes Receivable 8,705
B. Gain on sale of machinery
Present value of Notes Receivable 41,295
Less: Carrying cost of machinery
Cost of machinery 100,000
Less: Accumulated Depreciation
(P 100,000 x 3 years /5 years) 60,000 40,000
Gain on sale of machinery 1,295

C. Table of amortization using the effective interest method

Interest Interest Discount

Year Date received Income Amort. PV of NR
PV x ER
2021 Dec. 31 41,295
2022 Dec. 31 1,500 4,130 2,630 43,925
2023 Dec. 31 1,500 4,392 2,892 46,817
2024 Dec. 31 1,500 4,683 3,183 50,000
8,705

Date Transactions Account Names

2021
Dec. 31 Sale of machinery. Notes receivable
Accumulated Depreciation
Machinery
Discount on Notes Receivable
Gain on sale of machinery

2022
Dec. 31 Amortization of Discount on Notes Receivable Discount on Notes Receivable
(Refer to table of amortization) Interest Income

31 Collection of annual interest. Cash

Interest Income (P 50,000 x .3%)

2023
Dec. 31 Amortization of Discount on Notes Receivable Discount on Notes Receivable
(Refer to table of amortization) Interest Income

31 Collection of annual interest. Cash

Interest Income (P 50,000 x .3%)

2024
Dec. 31 Amortization of Discount on Notes Receivable Discount on Notes Receivable
(Refer to table of amortization) Interest Income

31 Collection of annual interest. Cash

Interest Income (P 50,000 x .3%)

31 Collection of notes receivable. Cash

Notes Receivable
SITUATION 4 (Material difference between face amount of note and the current value of p
(Source: Financial Accounting Volume 1 by Valencia and Roxas)
On January 1, 2022, Lambada Corporation sold a piece of land to Maranao Corporation and accepted in exchange a three
year non-interest bearing note having a face value of P 500,000. The land originally cost Lambada P 250,000 and, at the
date of sale, had an appraised fair value of P 350,000.

Required:
Prepare the necessary journal entries from year 2022 to year 2024.

SOLUTION:
A. Computation of Discount on Notes Receivable
Face value of the notes receivable 500,000
Less: Appraised value of the land 350,000
Discount on Notes Receivable 150,000

B. Gain on sale of machinery

Appriased value of the land 350,000
Less: Cost of the land 250,000
Gain on sale of land 100,000

C. Amortization of Discount on Notes Receivable using the SLM

Discount
Year Date Amort. on NR PV of NR
2022 Jan. 1 150,000 350,000
2022 Dec. 31 50,000 100,000 400,000
2023 Dec. 31 50,000 50,000 450,000
2024 Dec. 31 50,000 0 500,000

Date Transactions Account Names

2022
Jan. 1 Sale of land. Notes receivable
Land
Discount on Notes Receivable
Gain on sale of land

Dec. 31 Amortization of discount on notes receivable Discount on Notes Receivable

(Refer to table of amortization) Interest Revenue

2023
Dec. 31 Amortization of discount on notes receivable Discount on Notes Receivable
(Refer to table of amortization) Interest Revenue

2024
Dec. 31 Amortization of discount on notes receivable Discount on Notes Receivable
(Refer to table of amortization) Interest Revenue

31 Collection of Notes Receivable Cash

Notes Receivable
SITUATION 5 (Imputed Interest rate)
(Source: Financial Accounting Volume 1 by Valencia and Roxas)

On December 31, 2021, MaldivesUpholstery Company rendered services and accepted in exchange a long-term promissor
note with a face value of P 300,000, due on December 31, 2024. The stated interest rate of the note is 1% annually. The
fair value of the service is not readily determinable and the note is not readily marketable because of its very minimal stat
interest rate. based on the similar debt instrument, a 10% imputed rate is considered appropriate.

Required:
Prepare the necessary journal entries from year 2021 to year 2024.

SOLUTION:
A. Computation of Discount on Notes Receivable
Face value of the notes receivable 300,000
Less: Present value of notes receivable using imputed rate:
Principal (P 300,000 x 0.75131) 225,393
Interest income ( 300,000 x 1% x 2.48685) 7,461 232,854
Discount on Notes Receivable 67,146

B. Amortization of Discount on Notes Receivable using effective interest method

Interest Interest Discount

Year Date Received Income Amort. on NR PV of NR
PV x ER
2021 Dec. 31 67,146 232,854
2022 Dec. 31 3,000 23,285 20,285 46,861 253,139
2023 Dec. 31 3,000 25,314 22,314 24,547 275,453
2024 Dec. 31 3,000 27,547 24,547 0 300,000

Date Transactions Account Names

2021
Dec. 1 Received notes receivable for services rendered. Notes receivable
Discount on Notes Receivable
Services Revenue

2022
Dec. 31 Amortization of discount on notes receivable Discount on Notes Receivable
(Refer to table of amortization) Interest Revenue

31 Received interest on notes receivable. Cash

Interest Revenue (P 300,000 x 1%)

2023
Dec. 31 Amortization of discount on notes receivable Discount on Notes Receivable
(Refer to table of amortization) Interest Revenue

31 Received interest on notes receivable. Cash

Interest Revenue (P 300,000 x 1%)

2024
Dec. 31 Amortization of discount on notes receivable Discount on Notes Receivable
 (Refer to table of amortization) Interest Revenue

31 Received interest on notes receivable. Cash

Interest Revenue (P 300,000 x 1%)

31 Collection of notes receivable. Cash

Notes Receivable
.

earing note from Glorious

0,000 cash. The effective rate of

ot include the right or

lved is P 50,000. The
paid Purchases

and distinct account

puters with a cash selling price of
ring note with a face amount of P
P 20,000 each.
Names Debit Credit

220,000
600,000
750,000
70,000

600,000
600,000

35,000
35,000

200,000
200,000

23,333
23,333

200,000
200,000

11,667
11,667

200,000
200,000

nes. For the total estimated life of

ne is P 100,000. The purchaser
note is payable on December 31,
Names Debit Credit

50,000
60,000
100,000
8,705
1,295

2,630
2,630

1,500
0,000 x .3%) 1,500

2,892
2,892

1,500
0,000 x .3%) 1,500

3,183
3,183

1,500
0,000 x .3%) 1,500

50,000
50,000
nd the current value of property sold)

d accepted in exchange a three

ambada P 250,000 and, at the

Names Debit Credit

500,000
250,000
150,000
100,000

50,000
50,000

50,000
50,000

50,000
50,000

500,000
500,000
exchange a long-term promissory
of the note is 1% annually. The
because of its very minimal stated
ropriate.

Names Debit Credit

300,000
67,146
232,854

20,285
20,285

3,000
300,000 x 1%) 3,000

22,314
22,314

3,000
300,000 x 1%) 3,000

24,547
 24,547

3,000
300,000 x 1%) 3,000

300,000
300,000
MCQ PROBLEM - SET 1
Presented below are a series of unrelated situations. Answer the following questions relating to each of the
independent situations as requested.

. Bantay Company's unadjusted trial balance at December 31, 2020, included the following accounts:

Debit Credit
Accounts Receivable 1,000,000
Allowance for doubtful accounts 40,000
Sales 15,000,000
Sales returns and allowances 700,000

Bantay Company estimates its bad debt expense to be 1 1/2% of net sales. Determine its bad debt expense for
2020.
A. P 225,000
B. P 214,500
C. P 254,500
D. P 55,000

SOLUTION:
Sales 15,000,000
Less: Sales Returns and Allowances 700,000
Net Sales 14,300,000
Multiply by bad debts rate 1-1/2%
Bad debts expense for 2020 214,500

. An analysis and aging of Burgos Corporation's accounts receivable at December 31, 2020, disclosed the
following:

Amounts estimated to be uncollectible 1,800,000

Accounts receivable 17,500,000
Allowance for doubtful accounts (per books) 1,250,000

What is the net realizable value of Burgos’ receivables at December 31, 2020?
A. P 15,700,000
B. P 16,250,000
C. P 17,500,000
D. P 14,450,000

SOLUTION:
Accounts receivable 17,500,000
Less: Amount estimated to be uncollectible 1,800,000
Net realizable value 15,700,000

. Cabugao Company provides for doubtful accounts based 3% of credit sales. The following data are available for
2020:

Credit sales during 2020

Allowance for doubtful accounts January 1, 2020
 Collection of accounts written off in prior years (Customer credit was re-established)
Customer accounts written off as uncollectible during 2020

What is the balance in allowance for doubtful accounts at December 31, 2020?
A. P 630,000
B. P 500,000
C. P 420,000
D. P 580,000

SOLUTION:
Allowance for doubtful accounts 1/1/2020 170,000
Establishment of accounts written off in prior years 80,000
Customer accounts written off in 2020 (300,000)
Bad debt expense for 2020 (P 21,000,000 X 3%) 630,000
Allowance for doubtful accounts 12/31/2020 580,000

. At the end of its first year of operations, December 31, 2020, Cauayan, Inc reported the following information:

Accounts receivable, net of allowance for doubtful accounts 9,500,000

Customer accounts written off as uncollectible during 2020 240,000
Bad debts expense for 2020 840,000

What should be the balance in accounts receivable at December 31, 2020, before subtracting the allowance for
doubtful accounts?
A. P 10,100,000
B. P 9,740,000
C. P 10,340,000
D. P 10,580,000

SOLUTION:
Bad debt expense for 2020
Less: Customer accounts written off as uncollectible during 2020
Allowance for doubtful accounts, 12/31/2020

Accounts receivable, net of allowance for doubtful accounts

Add: Allowance for doubtful accounts, 12/31/2019 (See above computation)
Accounts receivable, before deducting allowance for doubtful accounts

Notes:
Year 2020 is the first year of operations, therefore, no beginning balance of Allowance for Doubtful accounts.

Allowance for D/A

Debit Credit
Accounts written off in 2020 240,000 0 January 1, 2020 beginning balance
840,000 Bad debts expense in 2020 (given)

600,000 December 31, 2020 ending balance

. The following accounts were taken from Cervantes Inc,'s statement of financial position at December 31, 2020:
 Debit Credit
Accounts Receivable 4,100,000
Allowance for doubtful accounts 100,000
Net credit sales 7,500,000

If doubtful accounts are 3% of accounts receivable, determine the bad debt expense to be reported for 2020:
A. P 123,000
B. P 223,000
C. P 23,000
D. P 225,000

SOLUTION:
Accounts receivable 4,100,000
Multiply by bad debts rate 3%
Bad debt expense before adjustment 123,000
Add: Allowance for doubtful accounts (debit balance) 100,000
Bad debt expense for 2020 223,000

Allowance for D/A

Debit Credit
Unadjusted balance, 12/31/2020 100,000 223,000 Bad debt expense for 2020

123,000 12/31/2020 balance (P 4,100,000 x 3%)

MCQ PROBLEM - SET 2

The adjusted trial balance of Galimuyod Company as of December 31, 2019 shows the following:

Debit Credit
Accounts Receivable 1,000,000
Allowance for doubtful accounts 40,000

Additional Information:
A. Cash sales of the company represent 10% of gross sales.
B. 90% of the credit sales customers do not take advantage of the 2/10, n/30 terms.
C. It is expected that cash discount of P 6,000 will be taken on accounts receivable outstanding at December 31,
2020.
D. Sales returns in 2020 amounted to P 400,000. All returns were from charge sales.
E. During 2020, accounts totalling to P 44,000 were written off as uncollectible; bad debt recoveries during the year
amounted to P 3,000.
F. The allowance for bad debts is adjusted so that it represents certain percentage of the outstanding accounts
receivable at year end. The required percentage at December 31, 2020 is 150% of the rate used on December
31, 2019.

QUESTIONS:
. The accounts receivable as of December 31, 2020 is:
A. P 3,000,000
B. P 333,000
 C. P 300,000
D. P 2,444,000

SOLUTION:
Expected cash discounts 6,000
Divide by percentage of cash discount 0.02
Portion of AR that will be granted cash discounts 300,000
Divide by percentage of total AR estimated to take advantage of the discount 0.10
Accounts receivable, 12/31/2020 3,000,000

. The allowance for doubtful accounts as of December 31, 2020 is:

A. P 20,000
B. P 180,000
C. P 120,000
D. P 146,640

SOLUTION:
Accounts receivable, 12/31/2020 (Requirement 1) 3,000,000
Multiply by bad debt rate [(P40,000/P1,000,000) x 1.5] 0.06
Allowance for doubtful accounts, 12/31/2020 180,000

. The net realizable value of accounts receivable as of December 31, 2020 is:
A. P 307,340
B. P 2,874,000
C. P 2,814,000
D. P 2,291,360

SOLUTION:
Accounts receivable, 12/31/2020 3,000,000
Less: Allowance for doubtful accounts 180,000
Allowance for sales discounts 6,000 186,000
Net realizable value, 12/31/2020 2,814,000

Notes:
It is stated in transaction letter (c) that it is expected that cash discount will be taken. Therefore, an allowance
for sales discount will be set up as computed in Question (1) which is P 6,000.

No allowance for sales returns will be set up because actual sales returns are directly charged to accounts
receivable as stated in Transaction (D).

. The doubtful accounts expense for the year 2020 is:

A. P 181,000
B. P 21,000
C. P 121,000
D. P 147,640

SOLUTION:
Allowance for doubtful accounts, 12/31/2020 180,000
Add: Accounts written off 44,000
Total 224,000
 Less: Allowance for doubtful accounts, 12/31/2019 40,000
Bad debts recoveries 3,000 43,000
Doubtful accounts expense for 2020 181,000

Allowance for D/A

Debit Credit
Accounts written-off in 2020 44,000 40,000 January 1, 2020 balance (given)
3,000 Bad debts recoveries
181,000 Doubtful accountse expense in 2020

180,000 December 31, 2020 balance (req. 2)

STRAIGHT PROBLEM 1 (PHILCPA Adapted)

(Source: Intermediate Accounting Volume 1 - 2020 Edition by Valix, Peralta, Valix)
At the beginning of current year, Rampant Company reported that the allowance for doubtful accounts has a credit
balance of P 170,000.

Bad debts recoveries and bad debts written off in the current year were P 30,000 and P 235,000, respectively.

The allowance account had been previously calculated as a percentage of sales.

It was decided, however, to provide doubtful accounts commencing with the year-end adjusting entry on the basis of
an analysis of the age of the receivables.

The following schedule was prepared:

%
Uncollectible
Not yet due 1,700,000 NIL
1-30 days past due 1,200,000 5
31-60 days past due 100,000 25
6i to 90 days past due 150,000 50
Over 90 days past due 120,000 100
Additional accounts to be written off 30,000

Required:
1) What is the required allowance for doubtful accounts at year-end?
2) How much would be the doubtful accounts expense for the current year?
3) What is the adjusting entry for the doubtful accounts expense for the current year?
4) What is the net realizable value of accounts receivable at year-end?

SOLUTION:
1) What is the required allowance for doubtful accounts at year-end?

%
Uncollectible ADA, adjusted
Not yet due 1,700,000 NIL 0
1-30 days past due 1,200,000 5% 60,000
31-60 days past due 100,000 25% 25,000
6i to 90 days past due 150,000 50% 75,000
 Over 90 days past due 120,000 100% 120,000
Required ADA at year-end 280,000

2) How much would be the doubtful accounts expense for the current year?

Allowance for DA
Debit Credit
Allowance for doubtful accounts, beginning 170,000
Bad debts recoveries during the year 30,000
Recoveries during the year 235,000
Additional accounts to be written off 30,000
Provision for doubtful accounts expense 345,000

Allowance for doubtful accounts, ending (adjusted) 280,000

ALTERNATIVE SOLUTION USING FORMULA:

Allowance for doubtful accounts, ending (adjusted) 280,000
Recoveries during the year 235,000
Bad debts recoveries during the year (30,000)
Additional accounts to be written off 30,000
Allowance for doubtful accounts, beginning (170,000)
Provision for doubtful accounts expense 345,000

3) What is the adjusting entry for the doubtful accounts expense for the current year?

Account Names Debit Credit

Doubtful Accounts Expense 345,000

Allowance for Doubtful Accounts 345,000

4) What is the net realizable value of accounts receivable at year-end?

Accounts receivable, end of year

Not yet due 1,700,000
1-30 days past due 1,200,000
31-60 days past due 100,000
6i to 90 days past due 150,000
Over 90 days past due 120,000 3,270,000
Less: Allowance for doubtful accounts, adjusted 280,000
Net realizable value at year end 2,990,000

STRAIGHT PROBLEM 2 (AICPA Adapted)

(Source: Intermediate Accounting Volume 1 - 2020 Edition by Valix, Peralta, Valix)
From inception of operatyions, Savvy Company carried no allowance for doubtful accounts.

Uncollectible receivables were expensed as written off and recoveries were credited to income as collateral.
During the current year, management recognized that the accounting policy with respect to doubtful accounts was not
correct, and determined that an allowance for doubtful accounts was necessary.

A policy was established to maintain an allowance for doubtful accounts based on historical bad debts loss percentage
applied to year-end accounts receivable.

The historical bad debtsl loss percentage is to be recomputed each year based on all available past years up to a
maximum of five years.

Accounts
Year Credit Sales written off Recoveries
2017 1,500,000 15,000 0
2018 2,200,000 40,000 2,000
2019 3,000,000 50,000 3,000
2020 3,300,000 65,000 5,000
2021 4,000,000 88,000 10,000

Accounts receivable balance were P 1,250,000 and P 2,000,000 on January 1, 2021 and December 31, 2021,
respectively.

Required:
1) Prepare journal entry to set-up the allowance for doubtful accounts on January 1, 2021.
2) Compute the doubtful accounts expense for the current year.
3) Determine the net realizable value of accounts receivable on December 31, 2021.

SUPPORTING ANALYSIS:
Savvy Company is using the Direct write-off in prior years because it is stated in the problem that uncollectible
receivables were expensed as written off and recoveries were credited to income as collected.

In establishing the allowance for doubtful accounts during the year 2021, it is stated in the problem that the basis is
the year-end accounts receivable. This refers to December 31, 2020 accounts receivable which is also the January 1,
2021 accounts receivable balance of P 1,250,000.

It is also stated in the problem that the doubtful accounts percentage to be used in year 2021 in establishing the
allowance for doubtful accounts is based on past years experience up to a amximum of five years. In the problem, the
current year is year 2021 and the available past years given include years 2020, 2019, 2018, and 2017, or four years.
Therefore, the doubtful accounts rate based on these past four years can be computed as follows:

Accounts
Year Credit Sales written off Recoveries Year Credit Sales
2017 1,500,000 15,000 0 2017 1,500,000
2018 2,200,000 40,000 2,000 2018 2,200,000
2019 3,000,000 50,000 3,000 2019 3,000,000
2020 3,300,000 65,000 5,000 2020 3,300,000
Total 10,000,000 170,000 10,000 2021 4,000,000
Total 14,000,000

Total accounts written off 170,000 Total accounts written off

Less: Recoveries 10,000 Less: Recoveries
Net write-off (actual bad debts) 160,000 Net write-off (actual bad debts)
Divide by credit sales 10,000,000 Divide by credit sales
 Doubtful accounts rate for 2020 1.6% Doubtful accounts rate for 2021

SOLUTION:
1) Journal entry to set-up the allowance for doubtful accounts on January 1, 2021.

Account Names Debit Credit

Retained Earnings 20,000

Allowance for Doubtful Accounts 20,000

Supporting computation:
Accounts receivable, January 1, 2021 1,250,000
Multiply by doubtful accounts rate (past 4 years) 1.6%
Allowance for doubtful accounts, January 1, 2021 20,000

Notes:
The debit entry is the Retained Earnings account because the setting up of ADA is actually for December 31,
2020. The doubtful accounts expense that is supposed to be the account to be debited is a real account and
already closed to Retained Earnings at December 31, 2020. This account and its balance is forwarded to the next
accounting period as the beginning balance.

2) Computation of the doubtful accounts expense for the current year.

Allowance for doubtful accounts, January 1, 2021

During the year 2021:
Accounts written off
Recovery of accounts written off
Allowance for doubtful accounts, December 31, 2021, unadjusted
Less: Allowance for doubtful accounts, December 31, 2021, adjusted
Accounts receivable, December 31, 2021 (given) 2,000,000
Multiply by doubtful accounts rate for 2021 1.7%
Doubtful accounts expense for 2021

ALTERNATIVE SOLUTION USING T-ACCOUNT:

Allowance for DA
Debit Credit
Allowance for doubtful accounts, January 1, 2021 20,000
Accounts written off 88,000
Recovery of accounts written off 10,000
Provision for doubtful accounts for the year 2021 92,000

Allowance for doubtful accounts, January 1, 2021 34,000

3) Net realizable value of accounts receivable on December 31, 2021.

Accounts receivable, December 31, 2021 2,000,000

Less: Allowance for doubtful accounts, december 31, 2021, adjusted 34,000
Net realizable value, december 31, 2021 1,966,000
MCQ PROBLEM - SET 3 (AICPA Adapted)
(Source: Intermediate Accounting Volume 1 - 2020 Edition by Valix, Peralta, Valix)
From inception of operations, Comprehensive Company provided for uncollectible accounts expense under the
allowance method using the percentage of sales method.

No year-end adjustments to the allowance for doubtful accounts were made.

The balance in the allowance for doubtful accounts was P 1,000,000 on Januay 1, 2021.

During the current year, credit sales totaled P 20,000,000, interim provisions for doubtful accounts were made at 2%
of credit sales, bad debts of P 200,000 were written off, and recoveries of accounts previously written off amounted to
P 50,000.

An aging of accounts receivable was made for the first time on december 31, 2021:

Aging Balance Uncollectible

0 - 60 6,000,000 10%
61 - 180 2,000,000 20%
181 - 360 1,500,000 30%
Over 360 500,000 50%

Based on the review of collectibility of the account balances in the "over 360 days" aging category, additional accounts
totaling P 100,000 are to be written off on December 31, 2021.

Effective wit the year ended december 31, 2021, the entity adapted a new accounting method for estimating the
allowance for doubtful accounts at the amount indicated by the year-end aging of accounts receivable.

QUESTIONS:
. What is the balance of the allowance for doubtful accounts on December 31, 2021 before adjustment?
A. p 1,100,000
B. P 1,150,000
C. P 1,250,000
D. P 1,200,000

SOLUTION:
Allowance for doubtful accounts, January 1, 2021 1,000,000
Interim provision for doubtful accounts
(P 20,000,000 credit sales x 2% DA rate) 400,000
Accounts written off during the year (200,000)
Recovery of accounts previously written off 50,000
Additional accounts written off from over 360 days past due (100,000)
Allowance for doubtful accounts, December 31, 2021, unadjusted 1,150,000

. What is the required allowance for doubtful accounts on December 31, 2021?
A. P 1,650,000
B. P 1,950,000
C. P 1,700,000
D. P 1,450,000
 SOLUTION:
Allowance for doubtful accounts, 12/31/2021, adjusted

Age of AR Balance Uncollectible ADA, adjusted

0 - 60 6,000,000 10% 600,000
61 - 180 2,000,000 20% 400,000
181 - 360 1,500,000 30% 450,000
Over 360 400,000 50% 200,000
1,650,000

Notes:
Over 360 days past due is P 400,000 because of additional write off from this group.
P 500,000 original balance - P 100,000 additional write-off = P 400,000 as adjusted balance.

. What amount should be reported as doubtful accounts expense for the current year?
A. P 1,200,000
B. P 1,650,000
C. P 900,000
D. P 950,000

SOLUTION:
Allowance for doubtful accounts, December 31, 2021, adjusted 1,650,000
Less: Allowance for doubtful accounts, December 31, 2021, unadjusted 1,150,000
Doubtful accounts expense for the current year 2021 based on aging 500,000
Add: Doubtful accounts expense as interim provision based on credit sales
(P 20,000,000 credit sales x 2% DA rate) 400,000
Doubtful accounts expense for the current year 2021 900,000

. What is the year-end adjustment to the allowance for doubtful accounts on December 31, 2021?
A. P 900,000 debit
B. P 900,000 credit
C. P 500,000 debit
D. P 500,000 credit

SOLUTION:
Doubtful Accounts expense 500,000
Allowance for Doubtful Accounts 500,000

. What is the net realizable value of accounts receivable on December 31, 2021?
A. P 9,900,000
B. P 8,250,000
C. P 8,350,000
D. P 8,200,000

SOLUTION:
Age of AR Balance
0 - 60 6,000,000
61 - 180 2,000,000
181 - 360 1,500,000
Over 360 400,000
 AR, December 31, 2021 9,900,000
Less: ADA, December 31, 2021, adjusted 1,650,000
Net Realizable Value of AR, 12/31/2021 8,250,000

MCQ PROBLEM - SET 4 (AICPA Adapted)

(Source: Intermediate Accounting Volume 1 - 2020 Edition by Valix, Peralta, Valix)
Sky Company provided the following information at year-end:

Year 2021 Year 2020

Accounts receivable 880,000 800,000
Allowance for doubtful accounts (10,000) (15,000)
Allowance for sales returns (20,000) (25,000)
Net realizable value 850,000 760,000

The entity reported doubtful accounts expense in 2020 of P 30,000 and had products returned for credits totaling P
15,000 at sale price. Gross sales for 2021 amounted to P 6,150,000.

QUESTIONS:
. What amount of accounts receivable was written off during 2021?
A. P 35,000
B. P 30,000
C. P 15,000
D. P 10,000

SOLUTION:
Allowance for DA
Debit Credit
January 1, 2021 balance 15,000
Accounts written-off during 2021 35,000
Provision for DAE in 2021 30,000

December 31, 2021 balance 10,000

Alternative solution:
ADA, January 1, 2021 balance 15,000
Add: Accounts written off in 2021 30,000
Total 45,000
Less: ADA, December 31, 2021 10,000
Accounts written off in 2021 35,000

. What amount was collected from customers during 2021?

A. P 6,035,000
B. P 6,070,000
C. P 6,020,000
D. P 6,100,000

SOLUTION:
Accounts Receivable
 Debit Credit
January 1, 2021 balance 800,000
Gross sales during 2021 6,150,000
Sales returns during the year 2021 15,000
Accounts written-off (See No. 1) 35,000
Collection from customers in 2021 6,020,000

December 31, 2021 balance 880,000

Alternative solution:
Accounts receivable, January 1, 2021 balance 800,000
Add: Gross sales during 2021 (credit sales) 6,150,000
Total 6,950,000
Less: Sales returns during the year 2021 15,000
Accounts written-off (See No. 1) 35,000
AR, December 31, 2021 balance 880,000 930,000
Collection from customers in 2021 6,020,000

. What amount was recorded as estimated sales returns during 2021?

A. P 10,000
B. P 15,000
C. P 20,000
D. P 5,000

SOLUTION:
Allowance for Sales Returns
Debit Credit
January 1, 2021, balance 25,000
Actual sales returns in 2021 15,000
Estimated sales returns in 2021 10,000 To Income Statement

December 31, 2021, balance 20,000

Alternative solution:
Allowance for sales returns, 12/31/2021 20,000
Add: Actual sales returns in 2021 15,000
Total 35,000
Less: Allowance for sales returns, 1/1/2021 25,000
Estimated sales returns during 2021 10,000 To Income Statement

. What amount was reported as net sales for 2021?

A. P 6,150,000
B. P 6,140,000
C. P 6,100,000
D. P 6,135,000

SOLUTION:
Gross sales during 2021 6,150,000
Less: Estimated sales returns during 2021 10,000
Net sales for 2021 6,140,000
 to each of the

ng accounts:

its bad debt expense for

20, disclosed the

ng data are available for

21,000,000
170,000
 80,000
300,000

e following information:

acting the allowance for

840,000
240,000
600,000

9,500,000
600,000
10,100,000

for Doubtful accounts.

eginning balance
e in 2020 (given)

20 ending balance

n at December 31, 2020:

o be reported for 2020:

se for 2020

ce (P 4,100,000 x 3%)

nding at December 31,

recoveries during the year

outstanding accounts
rate used on December
Therefore, an allowance

harged to accounts
alance (given)

ntse expense in 2020

20 balance (req. 2)

l accounts has a credit

000, respectively.

ting entry on the basis of

me as collateral.
 doubtful accounts was not

bad debts loss percentage

e past years up to a

ember 31, 2021,

m that uncollectible
d.

roblem that the basis is

ch is also the January 1,

1 in establishing the
years. In the problem, the
and 2017, or four years.
llows:

Accounts
written off Recoveries
15,000 0
40,000 2,000
50,000 3,000
65,000 5,000
88,000 10,000
258,000 20,000

258,000
20,000
ual bad debts) 238,000
14,000,000
rate for 2021 1.7%

ally for December 31,

is a real account and
e is forwarded to the next

20,000

(88,000)
10,000
(58,000)

34,000
92,000

(P 2,000,000 x 1.7%)
xpense under the

counts were made at 2%

ly written off amounted to

egory, additional accounts

od for estimating the

eceivable.

ore adjustment?
AJE
ed for credits totaling P
MCQ 1
On January 1, 2020, Savage Company sold goods to another entity. The buyer signed a non-
interest-bearing note requiring payment of P 600,000 annually for seven years. The first
payment was made on January 1, 2020. The prevailing rate of interest for this type of note at
date of issuance was 10%.

Periods PV of 1 at 10% PV of OA 1 at 10%

6 0.56 4.36
7 0.51 4.87

What amount should be reported as sales revenue?

A. P 3,216,000
B. P 2,922,000
C. P 2,616,000
D. P 2,142,000

SOLUTION:
Annual payment for six years 600,000
Multiply by PV of OA 1 at 10% for 6 periods 4.36
Present value of notes for six years 2,616,000
Add: First payment on 1/1/2020, date of sale 600,000
Sales revenue to be reported 3,216,000

MCQ 2
On December 31, 2020, Humility Company sold a machine to another entity in exchange for a
non-interest-bearing note requiring ten annual payments of P 500,000. The buyer made the
first payment on December 31, 2020.

Periods PV of 1 at 10% PV of OA 1 at 10%

9 0.50 6.25
10 0.46 6.71

On December 31, 2020, what is the carrying amount of notes receivable?

A. P 2,250,000
B. P 2,300,000
C. P 3,125,000
D. P 3,355,000

SOLUTION:
Annual paymnt for 9 years 500,000
Multiply by PV of OA 1 at 8% for 9 periods 6.25
Present value of notes for six years 3,125,000

MCQ 3
On December 31, 2020 Jovial Company received two P 1,000,000 notes receivable from
customers in exchange for services rendered.

On both notes, interest is calculated on the outstanding principal balance at the annual rate of
The note from Zeta Company made under customary trade terms, is due in nine months and
the note from Yola Company is due in five years.

The market interest rate for similar notes on December 31, 2019 was 8%.

The present value of 1 due in nine months is 0.944 and the present value of 1 due in five years is 0.68.

QUESTIONS:
. At what amount should the note receivable from Zeta Company to be reported on December 31, 2020?
A. P 1,000,000
B. P 944,000
C. P 965,200
D. P 972,320

SOLUTION:
P 1,000,000 because this should be at face value because the notes is due in nine months,

. At what amount should the note receivable from Yola Company be reported in December 31, 2020?
A. P 1,000,000
B. P 782,000
C. P 932,000
D. P 680,000

SOLUTION:
Face value of notes from Yola Company 1,000,000
Interest annually (P 1,000,000 x 3% x 5 years) 150,000
FV of notes and interest payable at maturity 1,150,000
Multiply by PFVF of 1 due in five years at 8% 0.68
Carrying value of NR from Yola at 12/31/20 782,000

MCQ 4
Persevere Company is a dealer in equipment. On December 31, 2019, the entity sold an
equipment in exchange for a noninterest bearing note requiring five annual payments of P
500,000. The first payment was made on December 31, 2020.

The market interest rate for similar notes was 8%.

PV of 1 at 8% for 5 periods 0.68

PV of an ordinary annuity of 1 at 8% for 5 periods 3.99

QUESTIONS:
. On December 31, 2019, what is the carrying amount of notes receivable?
A. P 2,500,000
B. P 1,995,000
C. P 1,700,000
D. P1,495,000

SOLUTION:
Annual payment for five years 500,000
PV of an ordinary annuity of 8% for 5 periods 3.99
Carrying amount of notes receivable 1,995,000
 . What amount of interest should be reported for 2020?
A. P 505,000
B. P 101,000
C. P 159,600
D. P 119,600

SOLUTION:
Present value of notes receivable, 12/31/2019 1,995,000
Multiply by effective rate 8%
Interest Income 159,600

Yr. Date Collection Interest Principal PV

PV x 8% ER Coll'n - Int. PV - Prin.
0 12/31/2019 1,995,000
1 12/31/2020 500,000 159,600 340,400 1,654,600
2 12/31/2021 500,000 132,368 367,632 1,286,968
3 12/31/2022 500,000 102,957 397,043 889,925
4 12/31/2023 500,000 71,194 428,806 461,119
5 12/31/2024 500,000 38,881 461,119 0

. What is the carrying amount of the notes receivable on December 31, 2020?
A. P 1,654,000
B. P 2,154,000
C. P 2,000,000
D. P 1,495,000

SOLUTION:
Preset value of notes receivable, 12/31/2019 1,995,000
Less: Principal payment
Annual payment for 2020 500,000
Interest income (P 1,995,600 x 8%) 159,648 340,352
Carrying amount of Notes Receivable, 12/31/2020 1,654,648

. What is the amount of interest income that should be reported for 2021?
A. P 132,368
B. P 172,368
C. P 160,000
D. P 200,000

SOLUTION:
Present value of notes receivable, 12/31/2020 1,654,600
Multiply by effective rate 8%
Interest Income 132,368 Letter A

MCQ 5
Persevere Company is a dealer in equipment. On December 31, 2020, the entity sold an
equipment in exchange for a noninterest bearing note requiring five annual payments of P
500,000. The first payment was made on December 31, 2021.
The prevailing interest rate for this type of note at date of issuance is 12%.

PV of 1 at 12% for 10 periods 0.322

PV of an ordinary annuity of 1 at 12% for 10 periods 5.650

QUESTIONS:
. On December 31, 2020, what is the carrying amount of notes receivable?
A. P 5,000,000
B. P 2,175,000
C. P 1,610,000
D. P 2,825,000

SOLUTION:
Annual payment for 10 years 500,000
Multiply by PVF of an ordinary annuity of 1 at 12% for 10 periods 5.650
Carrying amount of notes receivable at 12/31/2020 2,825,000 Letter D

. What is the gain on sale of equipment to be recognized in 2020?

A. P 3,000,000
B. P 2,175,000
C. P 825,000
D. P 0

SOLUTION:
Present value of notes receivable at date of sale, 12/31/2020 2,825,000
Less: Carrying costs of equipment (given in the problem) 2,000,000
Gain on sale of equipment 825,000 Letter C

. What amount of interest income should be recognized for 2021?

A. P 600,000
B. P 339,000
C. P 319,000
D. P 300,000

SOLUTION:
Present Value of notes receivable, 12/31/2021, date of sale 2,825,000
Multiply by effective rate 12%
Interest income for the year 2021 339,000 Letter B

. What is the carrying amount of the notes receivable on December 31, 2021?
A. P 2,325,000
B. P 4,500,000
C. P 2,825,000
D. P 2,664,000

SOLUTION:
PV of notes receivable 12/31/2020, date of sale 2,825,000
Less: Principal payments made:
Annual payment for 2021 500,000
Less: Interest income for 2021 (See no. 3) 339,000 161,000
Carrying amount of notes receivable at 12/31/2020 2,664,000 Letter D
Yr. Date Collection Interest Principal PV
PV x 12% ER Coll'n - Int. PV - Prin.
0 12/31/2020 2,825,000
1 12/31/2021 500,000 339,000 161,000 2,664,000
2 12/31/2022 500,000 319,680 180,320 2,483,680
3 12/31/2022 500,000 298,042 201,958 2,281,722
4 12/31/2022 500,000 273,807 226,193 2,055,528
5 12/31/2022 500,000 246,663 253,337 1,802,192
6 12/31/2022 500,000 216,263 283,737 1,518,455
7 12/31/2022 500,000 182,215 317,785 1,200,669
8 12/31/2022 500,000 144,080 355,920 844,749
9 12/31/2022 500,000 101,370 398,630 446,119
10 12/31/2022 500,000 53,881 446,119 0
er 31, 2020?
MCQ 1
Moderate Bank granted a loan to a borrower on January 1, 2020. The interest on the loan is 10% payable annually
starting December 31, 2020. The loan matures in three years on December 31, 2022.

Principal amount 5,000,000

Direct origination costs incurred 100,000
Indirect origination costs incurred 50,000
Origination fees charged against the borrower 340,000

After considering the origination fee received from the borrower and the direct origination cost incurred, the effective
rate on the loan is 12%.

QUESTIONS:
. What is the carrying amount of the loan receivable on January 1, 2020?
A. P 4,760,000
B. P 5,000,000
C. P 4,810,000
D. P 4,660,000

SOLUTION:
Principal amount of loan 5,000,000
Less: Unearned Interest Income, January 1, 2020
Origination fees charged against the borrower 340,000
Less: Direct origiation costs incurred 100,000 240,000
Carrying value of loan receivable, January 1, 2020 4,760,000

. What is the interest income for 2020?

A. P 571,200
B. P 500,000
C. P 476,000
D. P 547,200

SOLUTION:
Carrying value of loan receivable, January 1, 2020 4,760,000
Multiply by effective rate 12%
Interest Income for 2020 571,200

. What is the carrying amount of the loan receivable on December 31, 2020?
A. P 5,000,000
B. P 4,760,000
C. P 4,831,200
D. P 4,910,944

SOLUTION:
Carrying value of loan receivable, January 1, 2020 4,760,000
Add: Amortization of unearned interest income
Interest income (See number 2) 571,200
Less: Interest received (P 5,000,000 x 10% x 1 year) 500,000 71,200
Carrying value of loan receivable, January 1, 2020 4,831,200

MCQ 2
Solid Bank loaned P 5,000,000 to a borrower on January 1, 2018. The terms of the loan require principal payments of
P 1,000,000 each year for 5 years plus interest at 8%.

The first principal and interest payment are due on January 1, 2019. The borrower made the required payments during
2019 and 2020. However, during 2020 the borrower began to experience financial difficulties, requiring the bank to
reassess the collectability of the loan.

On December 31, 2020, the bank has determined that the remaining principal payment will be collected as originally
scheduled but the collection of the interest is unlikely.

The bank did not accrue the interest on December 31, 2020.

Present valueof 1 at 8%:

For one period 0.926
For two pweriosa 0.857
For three periods 0.794

QUESTIONS:
. What is impairment loss for 2020?
A. P 423,000
B. P 217,000
C. P 222,000
D. P 0

SOLUTION:
Face value of loan on January 1, 2018 5,000,000
Less: Payments made prior to default:
On January 1, 2019 (for year 2018) 1,000,000
On January 1, 2020 (for year 2019) 1,000,000
On Jauary 1, 2021 (fo year 2020) 1,000,000 3,000,000
Carrying value or present value at December 31, 2020 2,000,000
Less: Present value of expected future cash flows - principal:
On January 1, 2022 (P 1,000,000 x 0.926) - For year 2021 926,000
On January 1, 2023 (P 1,000,000 x 0.857) - For year 2022 857,000 1,783,000
Impairment loss for 2020 217,000

. What is the interest income for 2021?

A. P 126,160
B. P 142,640
C. P 240,000
D. P 0

SOLUTION:
Interest income for 2021 = P 1,783,000 PV at 12/31/2020 x 8% = P 142,640

. What is the carrying amount of the loan receivable on Decenver 31, 2021?
A. P 2,000,000
B. P 1,925,640
C. P 1,640,000
D. P 1,783,000

SOLUTION:
Loan Receivable, 12/31/2021 2,000,000
Less: Allowance for Loan Impairment
 Allowance for Loan Impairment, 12/31/2020 217,000
Less: Amortization during 2021 (P 1,783,000 x 8%) 142,640 74,360
Impairment Loss 1,925,640

MCQ 3
Oblation Bank loaned P 9,000,000 to a borrower on January 1, 2018. The terms of the loan were payment in full on
January 1, 2023, plus annual interest payment at 12%.

The interest payment was made as scheduled on January 1, 2019. However, due to financial setbacks, the borrower
was unable to make the 2020 interest payment.

The bank considered the loan impaired and projected the cash flows from the loan on December 31, 2020.

The bank accrued the interest on December 31, 2019 but did not continue to accrue interest for 2020 due to the
impairment of the loan. The projected cash flows are:

Amount Projected on
Date of Cash Flows December 31, 2020
December 31, 2021 1,500,000
December 31, 2022 2,000,000
December 31, 2023 2,500,000
December 31, 2024 3,000,000

The present value of 1 at 12% is 0.89 for one period, 0.80 for two periods, 0.71 for three periods, and 0.64 for four
periods.

QUESTIONS:
. What is the loan impairment loss for 2020?
A. P 2,370,000
B. P 3,450,000
C. P 6,630,000
D. P 2,450,000

SOLUTION:
Face value of loan on January 1, 2018 9,000,000
Less: Payments made prior to default 0
Face value at December 31, 2020 9,000,000
Add: Accrued interest receivable for 2019 (P 9,000,000 x 12%) 1,080,000
Carrying value of loan receivable at December 31, 2020 10,080,000
Less: Present value of expected future cash flows:
On December 31, 2021 (P 1,500,000 x 0.89) 1,335,000
On December 31, 2022 (P 2,000,000 x 0.80) 1,600,000
On December 31, 2023 (P 2,500,000 x 0.71) 1,775,000
On December 31, 2024 (P 3,000,000 x 0.64) 1,920,000 6,630,000
Impairment Loss for 2020 3,450,000

. What is the interest income for 2021?

A. P 795,600
B. P 900,000
C. P 180,000
D. P 0

SOLUTION:
 Interest income for 2021 = P 6,630,000 PV of Loan receivable x 12% = P 795,600

. What is the carrying amount of the loan receivable on December 31, 2021?
A. P 5,925,600
B. P 4,845,600
C. P 6,330,000
D. P 7,600,000

SOLUTION:
Loans Receivable, 12/31/2020 9,000,000
Less: Collection on December 31, 2021 1,500,000
Carrying amount of loan receivable, 12/31/2021 7,500,000
Less: Allowance for Loan Impairment, 12/31/2021
Allowance for Loan Impairment, 12/31/2020* 2,370,000
Less; Amortization during 2020 (P 6,630,000 x 12%) 795,600 1,574,400
Carrying amount of Loan Receivable, 12/31/2021 5,925,600

* Allowance for loan Impairment, unadjusted, 12/31/2020 3,450,000

Less: Accrued Interest Receivable for 2019 1,080,000
Allowance for Loan Impairment, adjusted, 12/31/2020 2,370,000

The relate djournal entry on December 31, 2020 is:

Impairment Loss 2,450,000
Allowance for Loan Impairment 2,370,000
Interest Receivable 1,080,000

MCQ 4
On December 31, 2020, Oregon Bank recorded an investment of P 5,000,000 in a loan granted to a client.

The loan has a 10% effective interest rate payable annually every December 31. The principal is due in full at maturity
on December 31, 2023.

Unfortunately, the borrower is experiencing significant financial difficulty and will have difficult time in making full
payment.

The bank projected that the entire principal will be paid at maturity and 4% interest or P 200,000 will be paid annually
on December 31 of the next three years. There is no accrued interest on December 31, 2020.

The present value of 1 at 10% for three periods is 0.75 and the present value of an ordinary annuity of 1 at 10% for
three periods is 2.49.

QUESTIONS:
. What is the impairment loss of 2020?
A. P 752,000
B. P 600,000
C. P 250,000
D. P 748,000

SOLUTION:
Face value of loan on December 31, 2020 5,000,000
Less: Payments made prior to default 0
Face value at December 31, 2020 5,000,000
 Add: Accrued interest receivable for 2020 0
Carrying value of loan receivable at December 31, 2020 5,000,000
Less: Present value of expected future cash flows:
Principal - P 5,000,000 x 0.75 3,750,000
Interest - P 200,000 x 2.49 498,000 4,248,000
Impairment Loss for 2020 752,000

The related journal entry is:

Impairment Loss 752,000
Allowance for Loan Impairment 752,000

. What is the Interest Income for 2021?

A. P 200,000
B. P 424,800
C. P 224,800
D. P 500,000

SOLUTION:
Amortization of Allowance for Loan Impairment for 2021:
Present value of Loan Receivable, 12/31/2020 4,248,000
Multiply by effective interest rate 10% 424,800
Less: Interest received in principal for year 2021 200,000
Amortization or Allowance for Loan Impairment 224,800

The related journal entry is:

Cash 200,000
Allowance for Loan Impairment 224,800
Interest Income 424,800

. What is the carrying amount of the loan receivable on December 31, 2021?
A. P 5,000,000
B. P 3,750,000
C. P 4,472,800
D. P 4,672,800

SOLUTION:
Loan Receivable, 12/31/2020 5,000,000
Less: Allowance for Loan Impairment
Allowance for Loan Impairment, 12/31/2020 (Req. 1) 752,000
Less: Amortization during 2020 (Req. 2) 224,800 527,200
Carrying amount of Loan Receivable, 12/31/2020 4,472,800

MCQ 5
On December 31, 2020, London Bank granted a P 5,000,000 loan to a borrower with 10% stated rate payable annually
and maturing in 5 years. The loan was discounted at the market interest rate of 12%.

Unfortunately, the financial condition of the borrower worsened because of the lower revenue.

On December 31, 2022, the bank determined that the borrower would pay back only P 3,000,000 of the principal at
maturity.

However, it was considered likely that interest would continue to be paid on the P 5,000,000 loan.
The present value of 1 at 12% is 0.57 for five periods and 0.71 for three periods.

The present value of an ordinary annuity of 1 at 12% is 3.60 for five periods and 2.40 for three periods.

QUESTIONS:
. What is the amount of cash paid to the borrower on December 31, 2020?
A. P 4,400,000
B. P 4,500,000
C. P 5,000,000
D. P 4,650,000

SOLUTION:
Present value of principal amount
(P 5,000,000 x 0.57 PVF) 2,850,000
Present value of annual interest collection:
(P 5,000,000 x 10% stated rate x 3.60 PVF) 1,800,000
Present value/Cash paid to borrower on 12/31/2020 4,650,000

Face amount of principal 5,000,000

Less: Present value of all future cash flows 4,650,000
Unearned Interest Income 350,000

The related journal entry upon granting of loan:

Loan Receivable (at face amount) 5,000,000
Unearned Interest Income 350,000
Cash 4,650,000

. What is the carrying amount of the loan receivable on December 31, 2022?
A. P 4,650,000
B. P 4,790,000
C. P 4,772,960
D. P 4,720,000

SOLUTION:
Interest Interest Amortization
Received at Income at of Unearned CA/PV of
Date 10% SR 12% ER Int. Inc Loan Rec.
(a) (b) (c) = (b) - (a)
12/31/2020 4,650,000
12/31/2021 500,000 558,000 58,000 4,708,000
12/31/2022 500,000 564,960 64,960 4,772,960

Interest received = P 5,000,000 face amount x 10% SR = P 500,000

Interest income for 2021 = P 4,650,000 x 12% = P 558,000
Amortization for 2021 = P 558,000 interest income - P 500,000 interest received = P 58,000
PV of LR at 12/31/2021 = P 4,650,000 previous PV + P 58,000 amortization = P 4,708,000

Interest income for 2022 = P 4,708,000 x 12% = P 564,960

Amortization for 2022 = P 564,960 interest income - P 500,000 interest received = P 64,960
PV of LR at 12/31/2022 = P 4,708,000 previous PV + P 64,960 amortization = P 4,772,960

. What is the impairment loss on loan receivable to be recognized for 2022?

 A. P 2,000,000
B. P 1,442,960
C. P 1,992,960
D. P 1,670,000

SOLUTION:
Carrying value at December 31, 2022 4,772,960
Less: Present value of expected futurecash flows:
Principal = P 3,000,000 x 0.71 PVF 2,130,000
Interest = P 500,000 x 2.40 PVF 1,200,000 3,330,000
Impairment Loss for 2020 1,442,960

MCQ 6
Entity X provided the following information regarding its Notes Receivable at December 31, 2020:

Gross
Carrying 12-month
Note Amount Lifetime ECL ECL Credit Risk Assessment
A 3,000,000 300,000 50,000 Low credit risk
B 2,000,000 400,000 40,000 31-days past due
C 1,000,000 500,000 60,000 Credit impaired

. The loss allowance that Entity X should recognize at December 31, 2020 is:
A. P 1,200,000
B. P 950,000
C. P 900,000
D. P 590,000

SOLUTION:
Gross
Carrying 12-month
Note Amount Lifetime ECL ECL Credit Risk Assessment Stage
A 3,000,000 300,000 50,000 Low credit risk 1
B 2,000,000 400,000 40,000 31-days past due 2
C 1,000,000 500,000 60,000 Credit impaired 3
 Loss
Allowance,
12/31/2020
50,000
400,000
500,000
950,000
MCQ 1
On December 1, 2020, Solvent Company assigned specific accounts receivable totaling P 5,000,000 as collateral on a P
4,000,000 12% note from a certain bank. The entity 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 assigned
accounts.

The December collections of assigned accounts receivable amounted to P 2,000,000 less cash discount of P 200,000.

On December 31, 2020, the entity remitted the collections to the bank in payment for the interest accrued on December 31,
2020 and the notes payable.

The entity accepted sales returns of P 100,000 on the assigned accounts and wrote off assigned accounts of P 300,000.

QUESTIONS:
. What amount of cash was received from the assignment of accounts receivable on December 1, 2020?
A. P 4,000,000
B. P 3,800,000
C. P 4,750,000
D. P 3,750,000

SOLUTION:
Cash received on 12/1/2020 = Borrowings amount – Finance fee deducted in advance
Cash received on 12/1/2020 = P 4,000,000 borrowings – (P 5,000,000 AR assigned x 5% finance fee)
Cash received on 12/1/2020 = P 4,000,000 – P 250,000
Cash received on 12/1/2020 = P 3,750,000 (Letter D)

. What is the carrying amount of notes payable on December 31, 2020?

A. P 1,840,000
B. P 2,140,000
C. P 2,240,000
D. P 2,200,000

SOLUTION:
Notes Payable original balance, 12/1/2020 4,000,000
Less: Payment made during 2020:
Accounts Receivable assigned collected 2,000,000
Less: Sales Discount 200,000
Net cash collected 1,800,000
Less: Interest expense (P 4,000,000 x 12% x 1/12) 40,000 1,760,000
Notes Payable balance, 12/31/2020 2,240,000

.
What amount should be disclosed as the equity of Solvent Company in the assigned accounts on December 31, 2020?
A. P 260,000
B. P 400,000
C. P 360,000
D. P 760,000

SOLUTION:
Accounts Receivable - Assigned balance, 12/1/2020 5,000,000
 Less: Collections during 2020 2,000,000
Sales returns during 2020 100,000
Accounts written off during 2020 300,000 2,400,000
Accounts Receivable - Assigned balance, 12/31/2020 2,600,000
Less: Notes Payable balance, 12/31/2020 2,240,000
Equity in the Assigned Accounts, 12/31/2020 360,000

MCQ 2
Brawny Company factored P 8,000,000 of accounts receivable to a finance entity at the beginning of the current year. Control
was surrendered by Brawny Company.

The factor assessed a fee of 5% and retained a holdback equal to 10% of the accounts receivable.

In addition, the factor charged 15% interest computed on a weighted average time to maturity of the accounts receivable of
30 days. (Hint: use 365 days)

QUESTIONS:
. What amount was initially received by Brawny Company from factoring?
A. P 6,701,370
B. P 6,800,000
C. P 7,501,370
D. P 6,700,000

SOLUTION:
Accounts Receivable factored 8,000,000
Less: Factoring Fee (5% x P 8,000,000) 400,000
Factor’s Holdback (10% x P 8,000,000) 800,000
Interest computed on a weighted average time:
(P 8,000,000 x 15% x 30/365) 98,630 1,298,630
Amount initially received from factoring 6,701,370

. Assuming all accounts receivable are collected, what is the loss on factoring?
A. P 400,000
B. P 498,630
C. P 898,630
D. P 98,630

SOLUTION:
Cash amount received from factoring 6,701,370
Add: Receivable from factoring (for future collection) 800,000
Total cash inflows 7,501,370
Less: Accounts Receivable Factored 8,000,000
Loss on factoring -498,630

MCQ 3
Crater Company factored with recourse P 2,000,000 of accounts receivable with a bank.

The finance charge is 5% and 10% was retained to cover sales discounts, sales returns and sales allowances.

The transactions met the condition to be considered as sale subject to recourse for non-payment. The factor estimated the
recourse obligation at P 50,000.
What amount should be recognized initially as loss on factoring?
A. P 200,000
B. P 100,000
C. P 150,000
D. P 250,000

SOLUTION:
Factoring Fee (5% x P 2,000,000) 100,000
Add: Recourse Liability 50,000
Loss on factoring 150,000

MCQ 4
Zeus Company factored P 6,000,000 of accounts receivable to a finance entity at the beginning of the current year. Control
was surrendered by Zeus Company.

The factor accepted the accounts receivable subject to recourse for nonpayment the fair value of the recourse obligation is P
100,000.

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 account receivable of 54
days. (Hint: Use 365 days)

QUESTIONS:
. What is the amount of cash initially received from the factoring?
A. P 5,296,850
B. P 5,836,850
C. P 5,476,850
D. P 5,556,850

SOLUTION:
Accounts Receivable factored 6,000,000
Less: Factoring Fee (3% x P 6,000,000) 180,000
Factor’s Holdback (5% x P 6,000,000) 300,000
Interest computed on a weighted average time:
(P 6,000,000 x 15% x 54/365) 133,150 613,150
Amount initially received from factoring 5,386,850

. If all accounts receivables are collected, what is the loss on factoring the accounts receivable?
A. P 313,150
B. P 180,000
C. P 433,150
D. P 613,150

SOLUTION:
Factoring Fee (3% x P 6,000,000) 180,000
Add: Interest computed on a weighted average time: 133,150
Loss on factoring 313,150

. If all accounts receivables are not collected, what is the loss on factoring?
A. P 713,150
B. P 100,000
C. P 413,150
D. P 313,150
 SOLUTION:
Factoring Fee (3% x P 6,000,000) 180,000
Interest computed on a weighted average time: 133,150
Recourse obligation 100,000
Loss on factoring 413,150

MCQ 5
During the second year of operations, Fauna Company found itself in financial difficulties. The entity decided to use accounts
receivable as a means of obtaining cash to continue operations.

On July 1, 2020, the entity sold P 1,500,000 of accounts receivable for cash proceeds of P 1,390,000. No bad debt allowance
was associated with these accounts.

On December 15, 2020, the entity assigned the remainder of the accounts receivable, P 5,000,000 as of that date, as
collateral on a P 2,500,000, 12% annual interest loan.

The entity received P 2,500,000 less a 2% finance charge. None of the assigned accounts had been collected by the end of
the year.

Allowance for bad debts before adjustment, 12/31/2020

Estimated uncollectible, 12./31/2020 10% of accounts receivable
Accounts receivable, not including factored and assigned accounts, 12/31/2020
Accounts receivable-assigned
Accounts receivable-factored

QUESTIONS:
. What is the total amount of cash received from the financing of accounts receivable during the year?
A. P 3,840,000
B. P 1,390,000
C. P 3,890,000
D. P 3,540,000

SOLUTION:
Cash proceeds from sale of accounts receivable 1,390,000
Add: Cash proceeds from assignment of accounts receivable:
Gross cash receipts 2,500,000
Less: Finance Charge (2% x P 2,500,000) 50,000 2,450,000
Total cash received from accounts receivable financing 3,840,000

. What amount of accounts receivable should be reported as currenta ssets on December 31, 2020?
A. P 6,000,000
B. P 1,000,000
C. P 5,000,000
D. P 7,500,000

SOLUTION:
Accounts Receivable - unassigned 1,000,000
Accounts Receivable - assigned 5,000,000
Total 6,000,000

. What is the bad debts expense for the current year?

A. P 600,000
B. P 500,000
C. P 650,000
 D. P 750,000

SOLUTION:
Allowance for Doubtful Accounts, 12/31/2020, adjusted
(P 6,000,000 X 10%) 600,000
Less: Allowance for Doubtful Accounts, 12/31/2020, unadjusted 100,000
Bad Debts Expense for the current year 2020 500,000

MCQ 6
Foremost Company received from a customer a one-year P 500,000 note bearing annual interest of 8%. After holding the
note for six months, the entity discounted the note at the bank at an effective interest rate of 10%.

QUESTIONS:
. What amount of cash was received from the bank?
A. P 540,000
B. P 523,810
C. P 513,000
D. P 495,238

SOLUTION:
Face of notes receivable 500,000
Add: Interest Income at maturity date (P 500,000 x 8% x 1 year) 40,000
Maturity Value 540,000
Less: Discount (P 540,000 x 10% x 6/12) 27,000
Amount of cash received from the bank 513,000

. What is the loss on notes receivable discounting?

A. P 20,000
B. P 13,000
C. P 7,000
D. P 0

SOLUTION:
Net Proceeds 513,000
Less: Carrying amount:
Principal 500,000
Accrued Interest Income (P 500,000 x 8% x 6/12) 20,000 520,000
Loss on Notes Receivable Discounting -7,000

ALTERNATIVE SOLUTION - BY JOURNAL ENTRY:

Cash 513,000
Loss on Notes Receivable Discounting (squeeze figure) 17,000
Notes Receivable Discounted (silent - with recourse) 500,000
Interest Income (P 500,000 x 8% x 6/12) 20,000

MCQ 7

On July 1, 2020, Jolly Company sold goods in exchange for P 2,000,000, 8-month, non-interest-bearing note receivable.

At the time of the sale, the note’s market rate of interest was 12%. The note was discounted at 10% on September 1, 2020.
QUESTIONS:
. What amount was received from the note receivable discounting?
A. P 1,940,000
B. P 1,938,000
C. P 1,900,000
D. P 1,880,000

SOLUTION:
Face of notes receivable 2,000,000
Add: Interest Income at maturity 0
Maturity Value 2,000,000
Less: Discount (P 2,000,000 x 10% x 6/12) 100,000
Amount of cash received from the bank 1,900,000

. What is the loss on notes receivable discounting?

A. P 100,000
B. P 125,000
C. P 25,000
D. P 0

SOLUTION:
Net Proceeds 1,900,000
Less: Carrying amount 2,000,000
Loss on Notes Receivable Discounting -100,000

ALTERNATIVE SOLUTION - BY JOURNAL ENTRY

Cash 1,900,000
Loss on Notes Receivable Discounting 100,000
Notes Receivable Discounted (silent - with recourse) 2,000,000

MCQ 8
Tender Company accepted from a customer a P 4,000,000, 90-day, 12% note dated August 31, 2020.

On September 30, 2020, the entity discounted without recourse the note at 15%. However, the proceeds were not received
until October 1, 2020.

QUESTIONS:
. What amount was received from the note receivable discounting?
A. P 4,017,000
B. P 4,120,000
C. P 4,103,000
D. P 3,965,500

SOLUTION:
Face of notes receivable 4,000,000
Add: Interest Income at maturity (P 4,000,000 x 12% x 90/360) 120,000
Maturity Value 4,120,000
Less: Discount (P 4,120,000 x 15% x 60/360) 103,000
Amount of cash received from the bank 4,017,000

. What amount should be reported as loss on note receivable discounting?

A. P 17,000
B. P 23,000
C. P 40,000
 D. P 0

SOLUTION:
Net proceeds 4,017,000
Less: Carrying amount:
Principal 4,000,000
Add: Accrued Interest Receivable (P 4,000,000 x 12% x 1/12) 40,000 4,040,000
Loss on Notes Receivable Discounting -23,000

ALTERNATIVE SOLUTION - BY JOURNAL ENTRY

Cash 4,017,000
Loss on Notes Receivable Discounting 23,000
Interest Income 40,000
Notes Receivable 4,000,000

MCQ 9
On April 1, 2019, Aljean Company discounted without recourse a 9-month, 10% note dated January 1, 2019 with face of P
6,000,000. The bank discount rate is 12%. The discounting transaction is accounted for as a conditional sale with recognition
of contingent liability.

On October 1, 2019, the maker dishonored the note receivable. The entity paid the bank the maturity value of the note plus
protest fee of P 50,000.

On December 31, 2019, the entity collected the dishonored note receivable in full plus 12% annual interest on the total
amount due

QUESTIONS:
. What amount was received from the note receivable discounting on April 1, 2019?
A. P 6,063,000
B. P 6,450,000
C. P 6,150,000
D. P 5,963,000

SOLUTION:
Face of notes receivable 6,000,000
Add: Interest Income at maturity (P 6,000,000 x 10% x 9/12) 450,000
Maturity Value 6,450,000
Less: Discount (P 6,450,000 x 12% x 6/12) 387,000
Amount of cash received from the bank 6,063,000

. What amount should be recognized as loss on note receivable discounting?

A. P 450,000
B. P 387,000
C. P 87,0000
D. P 63,000

SOLUTION:
Net proceeds 6,063,000
Less: Carrying amount:
Principal 6,000,000
Add: Accrued Interest Receivable (P 6,000,000 x 10% x 3/12) 150,000 6,150,000
Loss on Notes Receivable Discounting -87,000

ALTERNATIVE SOLUTION - BY JOURNAL ENTRY

 Cash 6,063,000
Loss on Notes Receivable Discounting 87,000
Interest Income 150,000
Notes Receivable 6,000,000

. What is the total amount collected from the customer on December 31, 2019?
A. P 6,450,000
B. P 6,500,000
C. P 6,695,000
D. P 6,662,500

SOLUTION:
Maturity value (principal amount in discounting) 6,450,000
Add: Protest Fee 50,000
Total payments made to bank 6,500,000
Add: Interest on total amount due (P 6,500,000 x 12% x 3/12) 195,000
Amount collected from customer 6,695,000

. If the discounting is secured borrowing, what is incpuded in the journal entry to record the transaction?
A. Debit loss on notes receivable P 87,000
B. Debit interest expense P 87,000
C. Credit liability for note discounted P 6,063,000
D. Credit interest income P 63,000

SOLUTION:
Cash 6,063,000
Interest Expense 87,000
Interest Income 150,000
Liability for Note Receivable Discounted 6,000,000
00 as collateral on a P
eceivable.

on the assigned

count of P 200,000.

ccrued on December 31,

ccounts of P 300,000.

s on December 31, 2020?

of the current year. Control

e accounts receivable of

he factor estimated the

he current year. Control

e recourse obligation is P

e account receivable of 54
y decided to use accounts

00. No bad debt allowance

as of that date, as

n collected by the end of

100,000
0% of accounts receivable
1,000,000
5,000,000
1,500,000
 f 8%. After holding the

aring note receivable.

% on September 1, 2020.
ceeds were not received
y 1, 2019 with face of P
ional sale with recognition

ty value of the note plus

interest on the total

Instructions:
Select the best answer among the given choices. Write your answer on the space provided before each number. Use
only CAPITAL LETTERS.

C . The accounts receivable balance consists of a debit balance of P 12,000 from Juan and a credit balance of P
2,000 from Peter. What is the Accounts Receivable balance to be reported in the Statement of Financial
Position?
A. P 10,000
B. P 14,000
C. P 12,000
D. P 8,000

B . Using the same information in number (6), what amount is to be reported as current liability?
A. P 10,000
B. P 2,000
C. P 12,000
D. P 0

A . Using the same information in number (1), if the general ledger balance of Accounts Receivable is P 10,000,
what would be the necessary adjusting journal entry?
A. Debit – Accounts Receivable, P 2,000; Credit – Customers’ Account with Credit Balances, P 2,000.
B. Debit – Accounts Receivable, P 2,000; Credit – Allowance for Doubtful Accounts, P 2,000.
C. Debit – Customers’ Account with Credit Balances, P 2,000; Credit – Accounts Receivable, P 2,000.
D. No adjusting journal entry is necessary.

D . Using the same information in number (1), if the ledger balance of Accounts Receivable is P 12,000, what
would be the necessary adjusting journal entry?
A. Debit – Accounts Receivable, P 2,000; Credit – Customers’ Account with Credit Balances, P 2,000.
B. Debit – Accounts Receivable, P 2,000; Credit – Allowance for Doubtful Accounts, P 2,000.
C. Debit – Customers’ Account with Credit Balances, P 2,000; Credit – Accounts Receivable, P 2,000.
D. No adjusting journal entry is necessary.

D . Goods were sent to SM Stores under consignment contract at billed price of P 100,000. Which of the
following is correct?
A. The accounts receivable must be debited for P 100,000
B. The accounts receivable must be credited for P 100,000
C. The Consignment Receivable account must be debited for P 100,000.
D. No receivable account is to be recognized.

B . The recovery of accounts previously written off would

I. Increase the allowance for doubtful accounts
II. Have no effect on accounts receivable
III. Decrease the net realizable value of accounts receivable

A. I and II only
B. I, II and III
C. II and III only
D. III only

A . Using the allowance method of accounting for doubtful accounts, if a collection is made on account
previously written off as uncollectible,
 A. Recharge the customer’s account first with the amount collected and then record its collection.
B. Record only its collection without recharging the customer’s account with the amount collected.
C. Recharge the customer’s account and simultaneously recognized income.
D. Record the collection by debiting cash and crediting income.

D . Which is correct regarding the Direct Write-off method of accounting for doubtful accounts?
I.
It recognized loss on accounts receivable when the account is proved to be worthless or uncollectible.
II. It used the account Allowance for Doubtful Accounts.
III. This is acceptable for financial accounting purposes.
IV. It properly reports accounts receivable at net realizable value.

A. I and II only
B. I, II and III only
C. I, II, III and IV
D. I only

C . Which is correct regarding Allowance Method of accounting for doubtful accounts?

I. It recognized losses on accounts receivable if there is doubtful of collection.
II. It used the account Allowance for Doubtful Accounts
III. This is acceptable for tax purposes.
IV. It properly reports accounts receivable at net realizable value.

A. I and II only
B. I, II, III and IV
C. I, II and IV only
D. II and IV only

B . Which of the following statements is correct?

I. The difference between the face value of noninterest-bearing notes receivable and its present value is
the unearned interest income.
II. The difference between the face value of noninterest-bearing long-term notes receivable and
Unearned Interest Income is called the carrying amount of notes receivable.
III. The prevailing market rate is the effective interest rate used in accounting for noninterest-bearing
long-term notes receivable.

A. I and II only
B. I, II and III
C. II and III only
D. I and III only

B . Which of the following is NOT an objective evidence of impairment of a financial asset?

A. Significant financial difficulty of the issuer or obligor.
B. A decline in the fair value of the asset below its previous carrying amount.
C. A breach of contract, such as a default or delinquency in interest payment or principal payment.
D. The lender, for economic or legal reason relating to the borrower’s financial difficulty, grants to the
borrower a concession that the lender would not otherwise consider.

A . If there is evidence that an impairment loss on loan receivable has been incurred, the loss is equal to the
A. Excess of the carrying amount of the loan receivable over the present value of the cash flows related
to the loan.
B. Excess of the of cash flows related to the loan over the carrying amount of the loan receivable.
C. Excess of the carrying amount of the loan over the principal amount of the loan.
 D. Excess of the principal amount of the loan over its carrying amount.

D . Which statement is incorrect regarding the general approach of applying the impairment requirements of PFRS
A. At each reporting date, an entity recognizes a loss allowance based in either 12-months ECLs or
lifetime ECLs depending on whether there has been a significant increase in credit risk on the financial
instrument since initial recognition.
B. If the credit risk increases significantly and the resulting credit quality is not considered to be low
credit risk, full lifetime expected credit losses are recognized.
C. When the entity has no reasonable expectations of recovering the financial asset, then the gross
carrying amount of the financial asset should be directly reduced in its entirety.
D. Increases in the loss allowance balance are recognized in profit or losses as an impairment loss but
decreases are not recognized.

C . The practice of realizing cash from trade receivables prior to maturity date is widespread. Which term is not
associated with this practice?
A. Hypothecation
B. Factoring
C. Defalcation
D. Discounting

C . When the accounts receivable are sold outright, the accounts receivable have been
A. Pledged
B. Assigned
C. Factored
D. Collateralized
e each number. Use

d a credit balance of P
ement of Financial

Receivable is P 10,000,

Balances, P 2,000.

ceivable, P 2,000.

le is P 12,000, what

Balances, P 2,000.

ceivable, P 2,000.

0. Which of the

e on account
d its collection.
mount collected.

hless or uncollectible.

nd its present value is

eceivable and

oninterest-bearing

ncipal payment.
culty, grants to the

loss is equal to the

he cash flows related

oan receivable.
ent requirements of PFRS 9?
months ECLs or
dit risk on the financial

sidered to be low

t, then the gross

mpairment loss but

ad. Which term is not