= Receivable, Chapter 10 - Loans and CHAPTER 10 LOANS AND RECEI' VABLE TOPIC OVERVIEW: oans and receivables, its characterist chapter discusses “Peubsequent measurement of each ‘yet Lond provision for bad'debts.— — or ING OBJECTIVES: eee this chapter, you should be able and identify the different class of receivables > ‘measurement, subsequen, nial statement presentation and derecognitign at itmethods of accounting for bad debts» the different methods of receivable financing the correct balances of receivables and related accounts, oy yh coke a yd nee Receivable i a financial asset that represents a contractual right (6 réoeive cash or another financial asset from another entity. It represents the le from customers and others, most frequently arising from m3 ise ce oF Under paragraph 108 of PERS 1 an entity's right to consideration thats unconditional right to consideration is unconditional the passage of time is required before payment of that considéralog amount coll isdue, Classification of receivables A. Asto source 1. Trade receivables - refer to claims arising from merchandise or services in the ordinary coursésof th operations. This includes: _ Accounts Receivable/ Customer's Accounts/Trade Debtor b. nase ate open accounts not supported by promissory ll » Notes Receivable - these are supported by a fol orien yginother entity called promissory note, 6h order to pay at a later promissory note an unconditional written agreeml NT ae GT chapter 10 - Loans and Recehaie certain sum of mon, order of the payee or earl or determinable date te receivable in the wen overdue notes, They are adh ancl together with the, ‘Accrued interes eka as} 2, Nontrade Receivables ~ these are receivables that arise from sources other than from sale course of business. Sale of goods or Services in the normal Examples of Nontrade Receivables Description Classificat 7. [Loans to officers, shareholders, Noneare doar directors and employees came Teporting date | 2, | Advances to affiliates Long-term investment, unless collectible within one year 3._| Advances to supplier for acquisition of | Currentasset merchandise 4 | Accrued: Income “receivable such a5 | Curetaset accrued dividends, rent, royalties and] interest oe Ret EA o 5. | Deposits to guarantee performance or | Currentasset payment to cover possible damages or] losses set RS 6. | Deposit with creditors, claims for losse: irrent asset ae and damages recei\ carriers for claims against damaged or lost 8._| Claims for tax refu 9. | Special deposit:ble Loans and Receivable aa Chapter 10 - a Issue on Subscriptions Receies ider SAS will be uy addresses this mata ion Classification Asto Statement of Financial Pt rent 1. Current receivables - generally classified as current because gp trecenepe of normal operating cycle notwithstanding he period from the reporting dat 1, Nontrade receivables ~ classified as current only if they ape reasonably expected to be realized in cash within 12 months after the reporting date Normal operating cycle is the period between the acquisition of materials entering into a process (or the purchase of goods for resale) and its realization in cash or an instrument that is readily convertible into cash, nontrade receivables that are not reasonably 2. Non-current - ‘expected to be realized in cash within 12 months after the reporting date. ¥ Under paragraph 2 of PFRS 15, an et depict the transfer of promised goods o1 Receivable and Inventory 0 reco under PFRS 15, the Sellet ig debit as a receivable or contract asset | ovr ae Chapter 10 ~ Loans and Receivable and should derecognize the inventoyys ize the inven ory Con ~ recognize the inventory and payable in tsyoye 2 the buyer. should other Revenue Recognition Issues pilland hold sales ae ilar weet contract under which ich an product until It is 0 the customer a future For example a customer may request an cnn eh the ntract because of the customer's lack of available spece tent on Such a because of delays in the customer's production schedules, te Productor ‘REVERIESSTEESEIED when th custome to have BHR product. A customer has obtained control when all a are met: all ofthe following enters (a) the reason for the billand-hold arrangement : example, the customer has requested the arrangemengy ts (0) the product mustbe identified separatelyas belonging othe customer (©) the product currently must be ready for physical transfer tn the customer; and (a) the entity cannot have the ability to use the product orto direct it to another customer. Revenue is HOEReeOgnized When there is simply an fl@ARONHOIAEHNRTGR Lay vay sales GOMiay sale are cates here Sc SEE es ‘Revenue fromsuchysaleg is However, when experience indicates that ‘evens! may be eebghizedWnen a the goods are on hand, identified and ready for delivery to the buyer. Sales to distributors or other intermediate parties Revenie faa nthe CORONER : ————o 252 a 4 es red directly to the customer delivery for r are still to be manufactured or will be del from a third party. 287rorof goods is transferred to the by ielivery takes place. value i P ‘or the period in which the items: jue from period to period, reven ralue of the item dispatched in rela ‘ms covered by the subscription, + Installment sales int sales are sales © e sales price, exclusive of interest, is non ‘is the present value of the consideration, installments receivable at the imputed rate ignized as revenue as it is earned der which the consideration is es, table to the pric determined by terest, The interest ele h enables the holder to obtain credit up issuer of the card for the purchase of goods charged ral om 1% to5%, + * ILLUSTRATION: Credit Card Sales year, Oxide sold merchandise to customers 1,000,000. On January 6, BPI Maser ar service charge of 5%6. Required: 1S remitted inf 1,000,000 no eae a ,000,000) 50,0 Accounts receivable - BPI Master Card INITIAL MEASUREMENT Re 1,000,000 ea with the recognition of revenlle ler PERS 15 Re Revenue from Contract-with- Customer e transaction price) while teasured at the am, chapter 10 - Loans and Receivable Ce der PERS 9 Financial Instruments; inane bat reall tT Vale pis tape We (eg, receivables) are orien eed ASME Tad ve ane er eek glee enti ring promised goods or The érat ts to be entitled in exchange for transfe ‘es to a customer, excluding amounts collected ‘on behalf of s (for example, Some sales taxes). The consideration promised wg tract with a customer may include fixed amounts, variable amounts, or expect servic al recognition of a receivable from a contra ict with a customer, an} Ufference between, the measurement of the receivable in accordance with PERS 9 and the corresponding amount of revenue recognized shall be presented as an expense (for example, asan impairment loss) ‘SUBSEQUENT MEASUREMENT naies Receivables are subsequently measured Br (auiot iced cost sing the effective interest rate method. “Amortized cost is the amount at which the receivable is measured intially. ‘minus principal repayments, plus or minus the cumulative amortization of ‘any difference between the initial amount recognized and the principal maturity minus reduction for impairment or uncollectibility. The amortized cost is also mentioned under PFRS 9 as the gross carrying amount of the asset less allowance for expected creditloss. = its net realizable For short-term receivable, the amortized cost is normal value. SHORT-TERM RECEIVABLES INITIAL MEASUREMENT: SHORT-TERM RECEIVABLES Short term receivables with no stated interest rates can be measured ally at transaction price (eg, invoice prite) when the effect of discounting is immaterial. Financing Element As provided under paragraph 60 of PFRS 15, an entity shall adjust the promised amount of consideration for the effects of the time value of money if the timing of payments agreed to by the parties to the contract (either ly or implicitly) provides the customer or the entity witha significant it of financing the transfer of goods or services to the customel. ever under paragraph 63 of PFRS 15, as a practical expedient, an entity need not adjust the promised amount of consideration for the effects of 2 significant financing component if the entity expects, at contract incepHons that the period between when the entity transfers a promised good orer 10 — Loans and Receivable. « ans and Receivable _—_—_ Ag crop = ante 10 oars en he customer pays FF that goo mentors OF serveg “To record collection within the discountoos-> service toa custom 4 di an Iscount period: Cay, vicvowd F. eal nt period willbe one year or Hs5. nt/ Quantity Discount | >= a “eo, discount 7 Lee} Trade Discount/ Volume reouage prospective customers to buy gu § [Accounts receivable [Pegs fs apes Messounts are deducted from heist agg ‘10 record collection Qeyondthediscoun pera andar never recognized inthe accounting reat Ca ee aad int recorded is based on the sales invoice. ! - ccounts receivable [saa spe os a ed receivables are always recorded net of rage the transaction price, ~— a aades "Note: Sale (revenue) andre discounts, which isthe same wi TON Cee ! ¢/ Settlement Discount aaah ConRa aeE Cash Discount / luctions from invoice price as an inducement fgp Naragsak Company into the following during the year: ie discount period (e.g. 2/10, Jan.02 Sold 10,000 units of merchandise to Rex Com point of view of the ; price of P100 with terms of 2/10, 1/20, n/30, int of view of the buyer. Jan.04 Sold 15,000 units of merchandise to Zeus Company at a selling les are recorded at the gross price of P100 with terms of2/10,1/20,n/30, Sales discounts taken by customers are debited to the Sales Jan.06 Rex returned2,000 units of goods o the company. Discounts account which das a red Jan. 10 Rex paid his account availing of the cash discount. considered to be more practical Feb.02 Zeus Company paid his account. Note: Discount is computed based 01 freight paid by the seller pany ata selling invoice price, not including) team Required: Prepare all the necessary entries assuming the company used: 1. Gross Method 2. Net Method 2) (Net price method - sales and receivables are recorded at the Ret amount. Sales discounts not taken by customers are credited to the SOLUTION: _ Sales Discounts Forfeited (discounts not taken) account, which is) Journal entries Gress Method ‘reported in the “other income" line item of the statement OF Date pos FAtcaTON comprehensive income, This method is considered to be theoretically Jan.o2 | Accounts Receivable 000000 ‘torrect since the receivable and sales are recorded using the eash pee : Sales ty equivalent = a 500,000 3) Al radar esate and sales are recoded a0 Jan.o4 | Accounts Rete 41,500,000 amount and a corresponding al wance for sales discount is recorded. 200,000 2: Gross and Net Method hie ue fon.06 |S neo 200,000 Gross Method fa Net Method _ Tash eee ——_|____\.netMethoa a 0 rec : a 16,000 Torecord sates aa ae Jan. 10 | Sales Discount (P600,000%«29) 00,000, Accou ___ | Accounts receivable Accounts Receivable [0c | ‘Sales (invoice price Cash 4.500.000 7,500,000, — —Lless sales discount) | Feb. 02 ‘Accounts Receivable ae To record sales return: 3 Sales re sleet a ee a Sales return (invoice | 300 p a I price Accounts receivable | ~~ [7,5,~7 Puce Sales discount) Aaa Accounts receivable |. =Method 2,460,000 i/a 0. 7 10 ___30,000_ 2,284,000 effectin goods shipped is lect the same and Receivable .- 10 - Loans ¢ jer FOB Shipping Poin Collection or Payment Journal Entries - Accounting For Freight [pean sive SELLER recounts payable [=] ea FOB shipping point, Freight prepaid eceivable (0x | Freight-in__ ‘Accounts payable ox seller will record freight-out. the buyer will record a freight-in- ; tyansportation-out and delivery 25310 - Loans and Receivable ee Oe Reduction of A/P id No effect io effect. a | it a ai prepaid [Addition toA/P discount ice price of the merchandise returned on Jan. 8 wing freight terms: destination point, freight prepaid 2 Compute for the net cash c SOLUTION: CASE NO. 1: FOB destination poii dl Requirement No. 1 vet ee Ro journal ent ‘merchandise sold 1000 x 90% x 80%) ice price of merchandi a tise returned chapter 10 ~ Loans and CASE NO, Requirement No. 1 Requirement No. 2 Invoice price of merchandise (P200,000 x 90% x 80%) ice price of m Total net cash collection CASE NO. 3: Requirement No.1 Requirement No. 2 ice price of me CASENO.. Requirement No. 1and ter 10 - Loa - oops 17 ron siping point eight PTePald ‘add Freight synthetic FOB Desting Symtetc FOB De their customers | damage (either ing Treatment a. Accounting Tres gie rise to two performance obligatio nt ma a) protein st the risk of loss dt ce Feo naan ‘price to each identified performance S the satisfaction of each performance obligation s revenue recognition could be accelerated dey “Maritime shipping terms (Incoterms) 1) Free alongside (FAS): A trade term requiring the seller te 00d to a named port alongside a vessel designated by costs and risks of loss of or damage to is been placed alongsidéthe tle and Fisk of loss of or damage.to the g buyer after the goods have been delivered trance and freight CIF): A trade term which is th XX accounts (XX) aie og 2 Methods of Accounting for {) Direct write-off (tax): to be uncollectible (whi Expense is debited and b) Does not result the statement, 1) Percentage expense is account (eer Advantage:ae receivable and allowance for bad rods of Accounting for Bad Debts ce at December 31 included the 10,000,000 le reported in the Balance of Percentage a/R collectible a 100 98% 800,000 95% _ 200,000 80% P1,500,000_ se to be 2% of net sales bad debts in number © | of the year aoe Roxas C pute for the Requirement No. 1 Nex sales (P10,000,000 - P700,000) ily by: Percentage of uncollectible iebts expense Requirement No. 2 Allowance for bad debts, beg. Add: Bad debts expense (No. 1) ecoveries .s; Accounts written-off nce for bad debts, end Requirement No. 3 Accounts receivable, end ly by: Percentage uncollectible ice for bad debts - end Requirement No. 4 Allowance for bad debts, beg. Bad debts expense (squeeze) Recoveries Less: Accounts written-off Allowance for bad debts - end Requirement No.5 Accounts receivable, end Less; Allowance for bad debts - end jizable value Requirement No. 6 Classification 0-1 month category (P500,000 x.02) 1-6 months category (P800,000 x.05) 259 ~ Loans and Recelvable Ss the net realizable value of the accounts re pany estimates its bad debt expense based llowance for bad debts at the end of the year: 'g the same method of estimating bad debts in number 6, realizable value of the accounts receivable, 9,300,000 es B_ 186,000 P 40,000 186,000 P_226,000 1,500,000 P__75,000 p 40,000 35,000 p__75,000 5 75,000 21,425,000 Required Balance P 10,000 40,000{Sales Discount a LUSTEAION eat reciable of P10 oi is secounting its sales under the gross mi Ti, 1/30. Te entity, however, estimates that ‘dl be avlled by the customer. 609% of the ct $o02, The balance was collected on January 31, 202: Required: Prepare the journal entry to record the sale, allo any) and cash discount availed by the customer unde SOLUTION: 1. The journal entry to rec Sales [P100,000 ~(P100,000 x 2% x 50%)] On December 31, 2021, the receivable is includ Financial postion as follows: Accounts receivable = Net real Sales Accounts receivable (P99, able (P99,000: Loe x 60%) tore 222isastologs "cl 260Receivabt 5 assuming: entries under PFRS 15 1g: je necesrny estimate that 30% of the good aro, rte agreed period of time, On January returned wi actualy returned and the balance of the goo lected. rar Co. cannot reliabl the customer did not return al SOLUTION: Requirement No.1 2024: Dec 31 chapter 10 - Loans and jy estimate future returns. On F any ofthe goods. 2 ‘Accounts receivable Sales (P150,000 x (100%-30%)] cost ofsales (P100,000 x 70%) Asset for right to recover product to bereturned Merchandise inventory 2022: Jan.5 Sales returns [(45%-30%) xP150,000] Accounts receivable Merchandise inventory Cost of sales Asset for right to recover product to be returns Requirement No, 2, 2021: Dec,31 Asset forright to recover product to bereturned Merchandise inventory 2022; Feb. Accounts receivable Sales Cost of sales ‘Asset for ight to recover produet to be return ‘consideration-and 's highly probable lative revenue recognized ‘chapter 10 ~ Loans and Recei when the uncertainty. resolved. Revenut elapsed. ILLUSTRATION 2: Right of R CLOY Company enters i includes the sale of one produc of a product transfers. CLOY' customer to return any unw refund, CLOY's cost of each: Because the contract al consideration received variable consideration to to use the expected products will not be ret CLOY Company determi entity's influence, it has uncertainty is resol CLOY Company immaterial and exChapter 10 ~ Loans and Receivable Asset for right to recover product to be returned 36,000 (200 x P6,000 x 3%) (200 x P6,000 x 979%) Merchandise inventory (200 x P6,000) CASE NO. 1 1,164,000 Merchandise inventory 36,000 Asset for right to recover product to be returned 36,000 Refund liability 90,000 Cash 90,000 CASE NO. 2 Cost of sales 36,000 Asset for right to recover product to be returned Refund liability 90,000 Sales CASE NO.3 Cost of sales 36,000 Asset for right to recover product to be returned Refund liability (200 x P15,000 x 3%) 90,000 Sales that if the return period has lapsed or none of the customers returned CASE NO. 4 story (200 x P6,000 x 59%) recover product to be returned 60,000 90,000 apter 10 ~ Loans and Recelvable cpepte bo ope a AUDIT OF A/R AND RELATED ACCOUNTS No adjusting entry f ‘luded in the count? ‘Yes __No adjusting ent scenario 2: __ “Was there a valid sale? Accounts receivable xx was the sale recorded? No Sales xx Were the inventories ‘txcluded in the count? ieee TET za Ifanswer Scenario 3: ‘iene ee here a Valid sale? Tap Was the sale recorded? Nowe sieee ey Were the inventories excluded in the count? a Ifanswer Scenario 4: is: Then, ‘Was there a valid sale? None Sales x Was the sale recorded? Yes ‘Accounts receivable xx Were the inventories Mdse. inventory xx excluded in the count? Yes. Cost of sales 2 ILLUSTRATION i You are engaged to perform an audit of the accounts of the Marianne Co. for the year ended December 31, 2021 and have observed the taking of the physical inventory of the company on December 30, 2021. Only merchandise shipped by the Marianne Co. to customer up to and including, December 30, 2021 has been eliminated from inventory. The inventory as determined by physical inventory count has been recorded on the books by the company’s controller. No p ‘inventory records are maintained and all sales are made on an FOB shipping point basis. You are to assume ‘hat all other data not presented herein are correct: ae |100,000 Janay irmo00 December 20 E nf }000 january 5 cs aon January 4 Required: Comedion wt theforegoing data Cost of Sales Merchandise inventory-end Noadjusting journal entry No adjusting journal entry les Accounts receivable Sales Accounts receivable ‘Merchandise ‘Inventory-< Cost of Sales. ae Accounts receivab Sales _ sep cy sta2, On oo 3, Annual uniform ie cash price) a pV =Periodi ual uniform col on ie cash price) PV= Periodic col 4 ERM NOTES MEASUREMENT: LONG-T! aaa receivable is subsequently m i value will equal to its face value @) 8. Interest Bearing Notes Receivable - With Unrea Amortized cost using th imputed interest rate ‘market rte of interest for the same receivables. © Non-Interest Bearing Notes Receivable/Zero-Int 'd cost using the imputed interest rate t interest for the same receivables, ’ st bearing note can be computed as fol Face amount Add: Premium, On notes recej ‘ess Discount on notes receivable Loss allowanceee is collectible within one yg, a} amount I presente thereat 2 are as fllovs: ies fr le 100,000. Notes 22 or 350,000 yan ated deprecia ‘ ‘cul 5 ’ a 0,000 Machinery 10,000 pec 31 Cash Interest income erest-Bearing Note With Unrealistic Inte ion of Principal ection of Pryce sokd a machine witha cost oF agave Gregorio a 4-year, P100,000, 10% no terest tobe paid annually on December 31. The pr 16%. 4. Compute forthe fllowingas of December 31, 2021: 4. Gainorloss onsale of machinery. bh Ierestincome Current potion ofthe Notes Receivable 4. Noncurret potion ofthe Notes Receivable 2. Prepareall the necessary entries in 2021, SOLUTION: P100,000x.5523) P 55,230 270 chapter 10 ~ Loans and Receivable 13314 13,844 14,459, 45,173 Notes: ¥- Interest Income = Beginning balance of present value x effective interest ral Present value 2H year = Present value end of lue end of 1* year minus premiu amortization plus discount amortization, eerie crs the principal amount ofthe nae iscolcil within one year, the entire carrying amount will be presented as current assets; ise, i presented as noncurrent assets, es Requirement No. 1b Interest income = 213.314 (see amortization table above) Requirement No, 1¢ ice no principal amount is collectible within one year from the RequirementNo. 1d ‘The entire amortized cost of P86,526 (see amortization table above) is to be presented as noncurrent asset since it is collectible beyond one year from the reporting date. Requirement No.2 Journal entries for 2021 are as follows: Jan.1 Notes receivable 100,000 ‘Accumulated depreciation 350,000 Loss on sale 66,788 Machinery +P500,000 Unearned interest income (P100,000-P83,212) 16,788 Dec.31 Cash 10,000 Interest income 10,000 ‘Unearned interest income 3314 Interest income 3314 mChapter 10 ~ Loans and Receivable ILLUSTRATION: Interest-Bearing Note With Unrealistic Interest Rat Interest is Payable Semi-Annually, One-Time Collection of Principat On January 1, 2021, Teofilo Co. sold a machine with a cost of P500,000 ang carrying value of P150,000 to Candido Co. In lieu of cash payment, Candi gave Teofilo a 4-year, P100,000, 10% note. The note requires interest to -annuaily every June 30 and December 31. ng rate of interest for a note of this type is 16%. Required: 1. Compute for the following as of December 31, 2021: a. Gain or loss on sale of machinery. b. Interest income. c. Current portion of the Notes Receivable. d. Noncurrent portion of the Notes Receivable. 2. Prepare alll the necessary entries in 2021. 3 SOLUTIO! Requirement No. 1a ig Price: Present value of principal (P100,000x.5403) P-54,030 ‘Add: Present value of interest “ (P100,000 x 5% x 5.7466) 28,733 P 82,763 Less: Carrying amount of machinery Loss on sale Amortization table: pooRieca oe Interest Interest Discount | pate Collection __Income _ Amortization (01/01/2021 06/30/2021 5,000 6,621 1,621 12/31/2021 5,000 6,751 1,751 06/30/2022 5,000 6,891 1891 12/31/2022 5,000 7,042 2,042 06/30/2023 5,000 7,205 2,205 12/31/2023 5,000 7,382 2,382 06/30/2024 2,572 12/31/2024 Note: ¥ Since the interest of the note is payable semi-annual factor to be used in computing for the total present value is 8% for 8 annual periods (4 years x 2), both for the principal and interest. Requirement No. 1b 4 Interest income (P6,621 + P6,751) = P13,372 (see amortization table at chapter 10 - Loans and Receivabie COE ee ae Requirement No. 1¢ zero, since no principal amount is collectible within one year e reporting date. within one year from th Requirement No, 1d ‘The entire amortized cost of P86,135 (see amortization table above) is presented as part of noncurrent asset since itis collectible beyond one year from the reporting date. As an alternative, the non-current portion can also be determined using the following: Principal collectible beyond one year 100,000 Less: Unearned interest income (P17,237 - P3372) 13,865 Carrying amount of notes receivable 86135, Requirement No. 2 Journal entries for 2021 are as follows: Jan.1 Notes receivable 100,000 Accumulated depreciation 350,000 Loss on sale 67.237 Machinery 500,000 Unearned interest income (P100,000-P82,763) 17.237 June 30 Cash 5,000 Interest income 5,000 To record interest collection Dec.31 Cash 5,000 Interest income 5,000 To record interest collection Unearned interest income (P1621 +P1,751) 3372 Interest income 3372 To record amortization of discount ILLUSTRATION: Interest-bearing Note With Unrealistic Interest Rate, Uniform Collection of Principal On January 1, 2021, Candido Co. sold a machine with a cost of P500,000 and cartying Value of P150,000 to Teofilo Co. In lieu of cash payment, Teofilo gave Candido a 4-year, P100,000, 10% note. The note requires interest to be paid annually on December 31, ‘The prevailing rate of interest for a note of this type is 16% and the principal amount ofthe note isto be paid in four equal annual installments ‘of P25,000 every December 31. Required: 273Reaaigg prc Present value ofN/ ess Carying amount of machinery Losson sale Present value of notes recel 25,000 10,000 25,000 7,500 12/31/2023 25,000 5,000 12/31/2024 25,000 2,500 Total present value ofnotes receivable Interestee ee Chapter 10 — Loans and Receivable 12/31/2071 eee 12/31/2022 12/31/2023 12/31/2024 12/31/2025 45,453 Requirement No. 1b Interest income = 31,045 (see amortization table above) Requirement No. 1¢ entire note receivable is collectible beyond one year. 31,045 Requirement No. 1d The entire P341,495 (see amortization table above) is presented as p noncurrent asset since it is collectible beyond one yeai re Pa y' year from the report Requirement No.2 Journal entries for 2021 are as follows: Jan.1 Notes receivable 500,000 Accumulated depreciation 150,000 Loss on sale 39,550 Machinery 500,000 Unearned interest income (P500,000- 310,450) 189,550 Dec.31 Unearned interest income 31,045 Interest income ILLUSTRATION: Noninterest-bearing Note, Uniform Collection Principal carrying Value of P350,000 to Ron Co. In 8 Ronaldo a 3-year, P600,000 note. 14% and the principal amount of the note is to be paid annual installments of P200,000 every December 31. chapter 10 ~ Loans and Receivable Go 464,320 1 350,000. 114,320 Annual Interest Present "Date Collection Income __ Amortization __value 01/01/2021 464,320 12/31/2021 200,000 65,005, 134995 329,325 12/31/2022 2 46,105 153,895 175,430 [12/31/2023 2 245570 175,430 al collection = periodic payment Y Interest income = Beginning balance of present value x elective interest. rate = (P464,320 x14%) ‘SHORTCUT FORMULA: Present value of the next period end may be computed as follows [Present value beginning x (effective interest rate) -total annual collection of interest and principal ~ accrued interest ¥ Example: Using the previous amortization table, the present value of the note for years 2021 to 2023 is computed as follows: 1) PV end of 12/31/2021 = [(P464,320 x 1.14) - P200,000] = P329;325 2), PV end of 12/31/2022 = (P329,325 x 1.14) -P200,000] = P175,430 3)_PVend of 12/31/2023 = [(P175,430 x 1.14) -P200,000] = 0 RequirementNo. 1b Interest income = P65,005 (see amortization table above) Requirement No. 1¢ Principal collection next year Fz00.000 Less: Amortization of discount / UII 5 Current portion of notes receivable 153,895 Requirement No. 1d Principal collectible beyond one year ceo Less: Amortization of discount / UII eee Non-current of notes receivable 175,431 Requirement No.2 r Journal entries for 2021 are as follows: Jan.1 Notes receivable 600,000 ‘Accumulated depreciation 150,000 Gain on sale p114320 27Chapter 10 ~ Loans and Receivable Machinery Unearned interest income (P600,000 - 464,320) Dec.31 Cash 200,000 Notes receivable 65,005 ILLUSTRATION: Noninterest Bearing Note Periodic Pay Available Cash Price ee On January 1, 2021, Jasmin Co. sold a machine to Tab: payment, Tabs gave Jasmin a 3-year, 300,000 note. The mach cost of P500,000 and accumulated depreciation as of january 1, 3028 200,000. The machinery has a cash price of P288,000, 7 The note is a non-interest bearing and ; fearing and payable in three equal installments of P100,000 every December 31 beginning December 31, 20 Required: ; 1. Compute for the following as of December 31, 2021: a. Gain or loss on sale of machinery. b. Interest income. Current portion of the Notes Receivable. 4. Noncurrent portion of the Notes Receivable. 2. Prepare all the necessary entries in 2021 5 Co. In lieu of eq SOLUTION: Requirement No. 1a Net Selling price = Cash price Less: Carrying amount of machinery Cost 500,000 Less: Accumulated depreciation 200,000 Loss on sale ing trial and error, the effective interest rate of the transaction is ; ® refer to subsequent discussion in this chapter rega / 100,000 100,000 100,000 P 94,240 96,125 98,047 Chapter 10 ~ Loans and Receivable ne — uirementNo. 1b rest income = B5,760 (see amortization table above) Requirement No. 1¢ Principal collectible in 2022, Les: Amortization of discount /U res Current portion of notes receival P 96,125) Requirement No. 1d Principal collectible in 2023 ¥ 100,000 Less: Amortization of discount / UIt 1,953 Noncurrent portion of notes receivable ? 98,047 Observe the amount highlighted in the table. The carrying value of the note on December 31, 2021 is broken down as fol Current portion of Notes receivable 96,125 Non-current portion of Notes receivable 98,047 Carrying value ~ 12/31/2021 Tries 760° Requirement No.2 Journal entries for 2021 are as follows: Jan.1 Notes receivable +P 300,000 ‘Accumulated depreciation 200,000 Loss on sale 12,000 Machinery’ 500,000 Unearned interest income (P300,000-288,000) 12,000 Dec.31 Cash 100,000 Notes receivable 100,000 To record collection of P100,000 notes receivable Unearned interest income 6,000 Interest income 6,000 To record amortization of interest Computation of periodic collection ; . : ‘Traditionally, the principal of the loan is paid uniformly while the interest is based on the beginning outstanding loan. Hence, the principal is fixed and the interest is variable. However, nowadays, the total repayment of the loan is normally uniform and aces Pe var ‘of both the principal and the interest. In this case, repayment applicable to the principal and interest varies. 279jon of the uniform annual collecti smpounded. The formula Chapter 10 - Loans and Receivable Some problems will require compu for the notes Jle when such notes are CO! the annual! Present value of the notes. ity or annuity due tony =~ PVofordinary annul of payment is monthly, the present value factor i | Annual col In actual practice, the more common frequency ‘compute for monthly collection, simply change @ months. jent or Collection ILLUSTRATION: Computation of Annual Payment oF CTE On January 1, 2021, Jayzel Company sold an inventory to J 7 2,000,000, Jayze' pived in exchange for the product which provid be made every December 3 rate of the notes receivable whic that four equal anni starting December. is compounded anni Required: Compute for the: 1. Annual collection. 2. Interest income in 2021. Case No. 1: Based on the given dats Case No. 2: Assume instead that 2021 first payment is made on January SOLUTION: CASE NO. 1 RequirementNo. 1 Present value of the notes = PV ofordinary annuity for 4 periods = P2,000,000/3.1699 = P630.935 al Annual collection Requirement No. 2 Interest income (10% x P2,000,000) = 200,000 CASE NO. 2 Requirement No. 1 = Present value of the notes Annual collection = PV of annuity due for 4 periods Annual collection = P2,000,000/3.4869 = P573,575 Requirement No, 2 Interest income [10% x (2,000,000 - P573,575)] = P142,642 280 chapter 10 ~ Loans and Receivable ee eS ion LOAN RECEIVABLE For banks and other fina fo heterogeneous custome ‘ITAL MEASUREMENT - LOAN RECEIVABLE Loans receivable should be intially measured affair val pi cost. In other words, the following items should be considered in the inital measurement of loans receivable which is directly robted neractens toa customer or borrows press ain erantive a oan 4} Origination fees include compensation fo on for the loan originati activities. Origination fees charged to the borrower's Sead to unearned interest income, eg 2) Direct origination cost refers to transaction cost incurred in evaluating the borrower's financial Condition, evaluating guarantees collateral and other security, negotiating the terms of the loan, preparing and processing documents and closing the loan transaction. ‘The process is also known as credit investigation. 3) Indirect origination cost is cost incurred thatis not directly related to the loan origination, therefore, it shall be accounted as an expense, ‘Institutions, loans receivable arises from loans ‘The journal entries to record the loan isa follows: 1. Torecord the loan Loan receivable x Cash xx 2. To record the receipt of origination fees: Cash xXx xX ‘Unearned interest income To record the payment of direct origination costs 3 Unearned interest income xx Cash. xx 4. To record collection of loan receivable Cash xx XX Loan receivable 5. To record amortization of unearned interest income, XX, Unearned interest income Interest income xX Based on the journal entries above, the initial carrying amount of the loan receivable may be computed as follows: Principal Amount xX, Origination fee received Ox) Direct origination cost XX il carrying amount XX 281