RIZAL TECHNOLOGICAL UNIVERSITY

Cities of Mandaluyong and Pasig

LESSON 2

TRADE AND OTHER RECEIVABLES

1. Nature and Classification of Trade and Other Receivables

2. Presentation and Measurement of Trade and Other Receivables in the
Statement of Financial Position
a. Accounts Receivable
b. Allowance for Doubtful Accounts
c. Notes Receivable
d. Loans Receivable
3. Impairment of Trade and Other Receivables
4. Receivable Financing
a. Pledging/Hypothecation
b. Assignment
c. Factoring
d. Discounting

Overview

This module is prepared for the students to understand the nature of

receivables.
This module discusses nature of trade and other receivables, classify
receivables according to source, recognition and measurement principles in IFRS 9
Financial Instruments and IFRS 15 Revenue from Contracts with Customers relating
to receivables, formulate entries for transactions affecting notes and accounts
receivable, formulate entries to account for different forms of receivable financing,
presentation and classification of receivables in the statement of financial position.
This module will cover a brief discussion of the theory and standard behind the topic,
exercises and practice problem the cover the said topic.

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Cities of Mandaluyong and Pasig

Study Guide

This module is designed for the students to understand trade and other receivables.
This module includes:
1. Topic Discussions - to be read by the students to fully understand the topic.
2. Assessment – to be accomplished by the students after the discussion to test
their skills and understanding to the subject matter.
3. Assignment – activity to be done by students to be submitted to the
instructor. This is to reinforce or advance the student’s learning. It is
relevant to the past, current, and future lessons.
To complete the requirements of this module, the students are required to:
1. Read and understand the topic discussion and the guided exercises
2. Accomplish the assessment.
3. Accomplish the assignment due on next meeting.

Learning Outcomes

At the end of the discussion, the students are expected to:

1. Describe and understand the nature of trade and other receivables, classify
receivables according to source, recognition and measurement principles in
IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with
Customers relating to receivables.
2. Understand transactions affecting notes and accounts receivable,
presentation and classification of receivables in the statement of financial
position.
3. Understand different arrangements on notes and loans receivables, including
interest-bearing and noninterest-bearing notes and loans.
4. Account for impairment for receivables such as bad debts and expected credit
losses.
5. Understand different financing arrangements on accounts receivable and
notes receivable.
6. Identify the required disclosures for receivables in the financial statements.

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 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

Topic Presentation

TRADE AND OTHER RECEIVABLES

Receivables, in the broadest sense, represent any legitimate claim from others for money,
goods or services. In the narrower sense and as contemplated in accounting, receivables
represent claims that are expected to be settled by receipt of cash or another financial asset
from another entity. Loans and receivables are financial assets within the scope of IFRS 9
Financial Instruments and IFRS 7 Financial Instruments – Disclosures.
For accounting purposes, receivables include the following:
1. Amounts collectible from customers and others, most frequently arising from sales of
merchandise, claims for money lent, or the performance of services. They may be on
open accounts or evidenced by time drafts or promissory notes.
2. Accrued revenues, such as accrued interest, commissions, rental and others.
3. Other items such as loans and advances to officers, employees, affiliated companies,
customers or other outside parties; legitimate claims against suppliers and insurance
companies; and other claims arising from nonrecurring transactions such as calls for
subscription receivables and disposal of property.

CLASSIFICATION OF RECEIVABLES ACCORDING TO SOURCE

As to source or origin, receivables are classified into two, namely:
1. Trade Receivables. Receivables arising from sale of goods or services in the normal course
of business are called trade receivables. These receivables should include only charges for
actual sales completed (when there has already been actual or constructed delivery of goods
or performance of services) on or before the end of the reporting period. These receivables
include accounts receivables and notes receivable.

2. Non-trade Receivables. Receivables that arise from sources other than from sale of goods
or services in the normal course of business are considered non-trade receivables.
Specific examples of non-trade receivables include:
1. Loans to officers and employees
2. Advances to affiliates
3. Accrued interest and dividends
4. Deposits to guarantee performance or payment or to cover possible damages or losses
5. Subscriptions for the entity’s equity securities
6. Deposit with creditors
7. Claims for losses and damages
8. Claims for tax refunds or rebates
9. Claims against common carriers for damaged or lost goods

CLASSIFICATION OF RECEIVABLES IN THE STATEMENT OF FINANCIAL POSITION

In a properly classified statement of financial position, trade receivables are generally
classified as current assets because they are collectible within the entity’s normal operating
cycle. The normal operating cycle is the period required for cash to be converted into
inventories through purchase and production, inventories into receivables through sale, and
receivables back into cash equivalents through collection.

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Cities of Mandaluyong and Pasig

Where the normal operating cycle of the business extends beyond twelve months because of
long credit terms, as in the case of certain installment receivables (e.g., installment sales for
household appliances), in which such accounts are an integral part of working capital, it is
appropriate to classify the receivables as current assets; however, the amount or estimate
thereof not collectible within twelve months should be disclosed.
Non-trade receivables that are expected to be collected within 12 months from the end of the
reporting period are also classified as current assets, regardless of the length of the entity’s
normal operating cycle. Non-trade receivables that are not reasonably expected to be collected
within twelve months from the end of the reporting period are reported as non-current assets.
However, subscription receivable with call date beyond twelve months from the end of the
reporting period is appropriately reported as deduction from shareholders’ equity.

Figure 2.1
Presentation in a Statement of Financial Position
of a Trade and Other Receivable Item

INITIAL RECOGNITION
Based on IFRS 9 Financial Instruments, an entity shall recognize a financial asset in its statement
of financial position when and only when, the entity becomes a party to the contractual provision
of the instrument. Thus, trade receivables are recognized simultaneous to the recognition of the
related receivables are recognized simultaneous to the recognition of the related revenues,
either from sale of goods or rendering of services.
Trade receivables are initially recognized at the transaction price. Transaction price, as defined
by IFRS 15 Revenue from Contracts with Customers, is the amount to which an entity expects
to be entitles in exchange for the transfer of goods and services (par. 47, IFRS 15).
Customers’ credit balances
These are credit balances in accounts receivable resulting from overpayments, sales returns
and allowances and advance payments from customers. These credit balances are classified as
current liabilities and are not offset against the debit balances in other customers’ accounts,
except when the same is not material in which case only the net accounts receivable may be
presented.
Suppliers’ debit balances
These are debit balances in accounts payable resulting from overpayments, purchase returns
and allowances and advance payments to suppliers. These credit balances are classified as
current assets and are not offset against the credit balances in other suppliers’ accounts, except
when the same is not material in which case only the net accounts payable may be presented.

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Cities of Mandaluyong and Pasig

ACCOUNTS RECEIVABLE AND RELATED REVENUES

Trade receivables on open accounts and are not evidenced by promissory notes or time drafts
are called accounts receivable. These are evidenced by sales invoices, delivery receipts and
other similar documents.
Initial Recognition of Accounts Receivable
Accounts receivable, generally being considered as short-term receivables, its fair value is equal
to the face amount or original invoice amount. Cash flows relating to short-term receivables
are not discounted because the effect of discounting is usually immaterial.
Subsequent Recognition of Accounts Receivable
Accounts receivables are subsequently measured at net realizable value (NRV) meaning the
amount of cash expected to be collected or estimated recoverable amount. Net realizable value
is actually the amortized cost of accounts receivable. In estimating the net realizable value of
trade accounts receivable, the following deductions are made:
a. Allowance for freight charge c. Allowance for sales discount
b. Allowance for sales return d. Allowance for doubtful accounts
FREIGHT CHARGES
Freight charges, or the cost on delivery and transport of goods to its intended location, affects
the balance of the accounts receivable, depending on the type of freight agreements.
Terms Related to Freight Charge
1. Free on Board (FOB) Destination
It means that ownership of the goods purchased is vested in the buyer upon receipt thereof.
The seller shall be responsible for the freight charge up to the point of destination.
2. Free on Board (FOB) FOB Shipping Point
It means that ownership of the goods purchased is vested in buyer upon shipment thereof.
The buyer will pay the transportation charge from the point of shipment to the point of
destination. This is also the presumed freight agreement when the problem is silent.
3. Freight Collect
It means that freight charge on the goods shipped is not yet paid. The common carrier shall
collect the same from the buyer. The freight charge is actually paid by the buyer.
4. Freight Prepaid
It means that freight charge on the goods shipped is already paid by the seller.
Pro-forma Journal Entries for Freight Charges
SELLER BUYER
FOB Destination, Freight Prepaid
Freight out xxx NO ENTRY
Cash xxx
FOB Destination, Freight Collect
Freight out xxx Accounts payable xxx
Accounts receivable xxx Cash xxx
FOB Shipping Point, Freight Collect
NO ENTRY Freight in xxx
Cash xxx
FOB Shipping Point, Freight Prepaid
Accounts receivable xxx Freight in xxx
Cash xxx Accounts payable xxx

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Cities of Mandaluyong and Pasig

SALES DISCOUNTS
Sales discounts are a reduction in the price of a product or service that is offered by the seller.
Entities usually offer two types of discounts:
a. trade discounts
b. cash discounts
Trade discounts, also known as volume or quantity discounts, are means of converting a catalog
price to the prices actually charged to the buyer. These may be used to make price differentials
among different classes of customers, varying quantities, or changes in prices. Such trade
discounts are also used to avoid frequent changes in prices. Such trade discounts are also used
to avoid frequent changes in catalogs and to hide the true invoice price from competitors. They
are commonly quoted in percentage, and at times, series of percentages.
Trade discounts are not recognized for financial accounting purposes. They are deducted from
the list prior to recording the accounts receivable arising from a credit sales transaction. To
state simply, both accounts receivable and the related revenue are always recorded net of trade
discounts.
Illustration 1. Trade Discounts
Assume that on July 16, 2022, RICK FLAG Manufacturing sells merchandise on account with a
list price of P100,000, less trade discounts of 10%, 10% and 5%. The invoice price of the
merchandise is computed as follows:
List Price ₱100,000
Less 10% x 100,000 10,000
List price after 10% trade discount ₱ 90,000
Less 10% x 90,000 9,000
List price after 10% and 10% trade discount ₱ 81,000
Less 5% x 81,000 4,050
Invoice price ₱ 76,950

Alternatively, the invoice price may simply be computed as

₱100,000 x .90 x .90 x .95 ₱ 76,950
Thus, the entry for the sale transaction is:
Accounts Receivable 76,950
Sales 76,950
Cash discounts, or sales discounts from the seller’s point of view, are reductions from the
sales price as an inducement for prompt payment of an account.
They are expressed in terms which may read as: 2/10, n/30 (2% discount is granted if account
is paid within 10 days from the invoice date, gross amount due in 30 days); 3/15, n/60 (3%
discount is granted if account is paid within 15 days from the invoice date, gross amount due
in 60 days).
The timing of the recognition of the cash discounts is based on the method of accounting
adopted by the company for purchases and the related accounts payable. These methods are
as follows:
a. Gross price method
b. Net price method
c. Allowance method

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Cities of Mandaluyong and Pasig

Gross Price Method

Under this method, both the account receivable and sales are initially recorded at the gross
sales price with no accounting recognition of the available cash discount until it is actually taken.
When the discount is taken, it is debited to the sales discounts account.
Illustration 2.1. Cash Discounts – Gross Method
On July 16, 2022, WALLER Manufacturing sells merchandising on account with a list price of
P100,000, less trade discounts of 10%, 10% and 5%. The invoice price of the merchandise is
computed earlier as P76,950. assume further that the credit terms were 2/10; n/30, FOB
shipping point and freight paid to the shipper by WALLER Manufacturing amounted to P2,000.
The sale on July 16, 2022 is recorded as follows:
Accounts Receivable 78,950
Sales 76,950
Cash 2,000
The amount charged to accounts receivable includes the freight paid in behalf of the customer.
When goods are shipped FOB shipping point, the title to the goods is transferred from the
seller to the buyer. This may also be termed as FOB shipping point, freight prepaid. Thus,
freight paid by the seller under this term is an account collectible from the buyer.

If the customer pays on or before July 26, 2022, which is within the discount period of 10 days,
the journal entry is:
Cash 77,411
Sales Discount 1,539
Accounts Receivable 78,950
The sales discount is computed based on the invoice price (2% x P76,950), which excludes the
freight charges prepaid by the seller.

When the customer pays after July 26, which is beyond the discount period, the journal entry
is:
Cash 78,950
Accounts Receivable 78,950

While the gross method lacks conceptual validity, it is the simplest and most widely used method
because the cash discount is usually immaterial, and the record keeping is less complicated.
Sales Discounts are reported as deduction from Sales in the profit or loss section of the
statement of comprehensive income.
Under the gross price method, inasmuch as the sales discount is recorded only when taken, it
is possible that sales may have been recorded in one reporting period, but the cash discount
may have been taken by the customer upon payment in the subsequent period.
Thus, if no adjustment would be taken up at year-end, both the sales revenue and accounts
receivable are overstated on the financial statements. To avoid such misstatement, an entry to
set up anticipated sales discounts must be prepared at year-end, as follows:

Sales Discount xxx

Allowance for Sale Discount xxx

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With the above adjusting entry, sales revenue in the statement of comprehensive income is
reduced by the anticipated sales discount, and accounts receivable in the statement of financial
position is reduced by the allowance for sales discount. This brings the accounts receivable to
an amount potentially collectible in cash. For convenience, the above adjusting entry is reversed
at the beginning of the subsequent accounting period, so that the eventual collection is recorded
by merely debiting cash and crediting accounts receivable at the amount of cash collected.

The gross price method is the most popular because of its convenience. However, it may not
faithfully represent the amount of sales reported in the statement of comprehensive income,
specifically, when significant amounts of receivable are collected beyond the discount period.
The sales account is a mixture of two items of revenues: revenue from sales to customers and
the finance income earned by the entity because of the lapse of the discount period granted.
Net Price Method
Under the net price method, both the accounts receivable and the sales are recorded at the
sales price less the available cash discount (the net price).
Illustration 2.2. Cash Discounts – Net Method
Using the previous illustration, WALLER records the sales transaction on July 16 as follows:
Accounts Receivable 77,411
Sales 75,411
Cash 2,000
The company does not recognize the cash discount if it collects the account within the discount
period. Hence, if WALLER is able to collect the above account on or before July 16, it shall
prepare this entry:
Cash 77,411
Accounts Receivable 77,411
If collection is made beyond the discount period and therefore, the cash discount is not taken
by the customer, the difference between the amount collected (the gross price) ad the amount
originally recorded (the net price) is credited to the Sales Discounts Forfeited (or Sales
Discounts Not Taken) account. If WALLER collects the amount after July 26, it shall prepare the
following entry:
Cash 78,950
Sales Discount 1,539
Accounts Receivable 77,411
The balance of Sales Discounts Forfeited account is reported as other operating income (or
finance income) in profit or loss section on the statement of comprehensive income.
The net method is theoretically superior over the gross method, because it initially recognizes
the accounts receivable at its amortized cost. This method strictly adheres to IFRS 15 which
requires that variable considerations resulting from discounts, rebates, refunds, credits, price
concessions, incentives, penalties or other similar items shall be estimated by the entity to
minimize reversal of revenue in the future when an uncertainty has been resolved.
The net method requires an adjusting entry at year-end for sales discounts forfeited on accounts
receivable that have passed the discount period. The year-end adjusting entry is:
Accounts Receivable xxx
Sales Discounts Forfeited xxx

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Allowance Method
Under the allowance method, the accounts receivable is recorded at the gross sales price, the
sales revenue is recorded at net amount and the available cash discount is recorded as a credit
in the valuation account, Allowance for Sales Discounts.

Illustration 2.3. Cash Discounts – Allowance Method

If in the previous illustration, WALLER uses the allowance method, it would prepare the following
entry on July 16:
Accounts Receivable 78,950
Sales 75,411
Cash 2,000
Allowance for Sales Discounts 1,539
The sales discount is recognized when it is offered to customer using the account allowance for
sales discount. The collection on or before July 26 is recorded as follows:
Cash 77,411
Allowance for Sales Discounts 1,539
Accounts Receivable 78,950
The collection beyond the discount period is recorded as:
Cash 78,950
Allowance for Sales Discounts 1,539
Accounts Receivable 78,950
Sales Discounts Forfeited 1,539
Under the allowance method, an adjusting entry is made at year-end when the account remains
uncollected and the discount period has already lapsed. The adjustment cancels the related
allowance for sales discount, thus increasing the amortized cost of accounts receivable. Such
year-end adjusting entry is
Allowance for Sales Discounts xxx
Sales Discounts Forfeited xxx
The Allowance for Sales Discount account is a valuation account that reduces accounts
receivable to its amortized cost, and Sales Discounts Forfeited is presented as other operating
income in profit or loss section in the statement of comprehensive income. With appropriate
adjusting entries, the choice of the method used does not make any difference in the amortized
cost of accounts receivable reported in the statement of financial position.
CREDIT CARD SALES
Credit card sales involving a national credit card company result in an accounts receivable in
the name of the card-issuing company. Credit card fees, normally ranging from 1% to 5% of net
credit card sales, reduce the value of the accounts receivable.
The account Credit Card Service Charge would be reported as an operating expense in profit or
loss.
Illustration 3. Credit Card Sales
Assume that WALLER Department Store has Citibank Visa drafts/receipts that total ₱1,200,000
on December 20. The entry to record the Citibank Visa sales would be
Accounts Receivable - Citibank Visa 1,200,000
Sales 1,200,000

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Cities of Mandaluyong and Pasig

Citibank subsequently remits to WALLER the corresponding amount of sales reduced by service
fees charged. Assuming a 2% service fees by the bank, which is recognized by WALLER as a
selling expense, the entry in the books of SM is:
Cash 1,176,000
Credit Card Service Charge 24,000
Accounts Receivable 1,200,000
There are some credit card companies that allow the retailer to deposit credit card
drafts/receipts directly to a current account. The bank receives the deposit slip and credit card
drafts/receipts and increases the retailer’s current account for the total amount less the bank
credit card service charge. Under such arrangement, credit card sales of WALLER Department
Store are recorded as:
Cash 1,176,000
Credit Card Service Charge 24,000
Sales 1,200,000
The transaction is, in effect, a cash sale and the retail companies do not establish a receivable
from the card issuing bank. The credit card sales are the responsibility of the bank that issued
the credit card and the customers pay directly to them. Meanwhile, uncollectible from these
transactions are considered as losses for the card issuing bank.
NOTES RECEIVABLE
A note receivable is a formal claim against another that is evidenced by a written promise, called
promissory note, or a written order to pay at a later date, called time draft.
Long term receivables that are interest bearing are initially measured at fair value which is
equal to face value.
Long term receivables that are non-interest bearing are initially measured at fair value which
is equal to present value of all future cash flows discounted using the prevailing market rate of
interest.
A promissory note is an unconditional written agreement to pay to bearer or to the order of the
payee a certain sum of money on a specific or determinable date. A time draft is a written order
(made by the drawer), addressed to the drawee to pay a certain sum of money on a specific or
determinable date. A time draft may be a two-party draft (drawer orders drawee to pay the
drawer) or a three-party draft (drawer orders drawee to pay another party, which is the payee).
Trade notes generally arise from sale involving relatively high peso amounts where the buyer
wants to extend payment period beyond the usual credit period. Likewise, sellers sometimes
request notes from customers whose open accounts have become past due.
A note or draft that provides for the payment of interest for the period between the issuance
date and the due date is called an interest-bearing note. On the date of the receipt of the note,
the present value of an interest-bearing note, which bears a realistic interest rate, is equal to its
face value. Subsequent to the date of the note or the draft, the present value of an interest-
bearing note is equal to its face value plus accrued interest.
Dishonored Notes
When a promissory note matures and it is not paid, it is said to be dishonored. Dishonored
notes shall be removed from notes receivable account and transferred to accounts receivable
account at an amount to include, if any, interest and other charges.
Accounts Receivable xxx
Notes Receivable xxx
Interest Income xxx

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INITIAL RECOGNITION FOR NOTES RECEIVABLE

Following IFRS 9, a note receivable is initially recognized when the entity becomes a party to
the contractual provision of the instrument, that is when the entity becomes the payee of the
note issued by the maker. A note is initially recognized at the transaction price based on the
circumstance that gives rise to the receipt of the note, which is any of the following:
a. The amount of cash given up in exchange for the note;
b. the fair value of the non-cash consideration given up in exchange for the note, or if such
fair value cannot be practically determined, the fair value of the note received, which is the
discontinued cash flow of future collections, based on an implicit interest rate.
Interest-Bearing Notes Receivable
The fair value of an interest-bearing note is generally its face value, unless it is clear that the
interest rate stated in the note does not reflect a realistic interest rate.

Illustration 4. Interest-Bearing Notes Receivable

Assume the following selected transactions completed by WEASEL Corporation during 2022:
Aug. 5 Received a 60-day, 9%, P12,000 promissory note from X Company for
merchandise sold.
Oct. 4 Collected from X Company in settlement of its note dated August 5.
10 Received a 30-day, 12%, P16,000 promissory note from Y Company in
settlement of an overdue account.
Nov. 6 Received a 120-day, 12%, P24,000 promissory note form Z Company in
settlement of an account.
9 Y Company dishonored its note on maturity date.
30 Collected the amount due from Y Company on account of its overdue note. An
additional charge for interest at 12% on maturity value from maturity date is also
collected.
Dec. 31 Year-end adjustments are made.
The following are the journal entries for the given transactions:
2022 Particulars Debit Credit
Aug. 5 Notes Receivable ₱12,000
Sales ₱12,000

Oct. 4 Cash 12,280

Notes receivable 12,000
Interest income 180
I = 12,000 x 9% x 60/360*

10 Notes Receivable 16,000

Accounts receivable 16,000

Nov. 6 Notes Receivable 24,000

Accounts receivable 24,000

Nov. 9 Accounts Receivable 16,160

Notes receivable 16,000
Interest income 160
I = 16,000 x 12% x 30/360*

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Nov. 30 Cash 16,273

Accounts receivable 16,160
Interest income 113
I = 16,160 x 12% x 21/360*

Dec. 31 Interest Receivable 440

Interest income 440
I = 24,000 x 12% x 55/360*

*The computations of interest in the foregoing entries are based on a 360-day year.

To qualify for reporting as Notes Receivable, the note must be negotiable; that is it must be
payable to order or bearer and must not yet be due. Thus, a dishonored note receivable does
not qualify to be reported as Notes Receivable in the statement of financial position.
Overdue notes from customers, together with accrued interest thereon are generally reclassified
as accounts receivable. Other descriptive account titles, such as Dishonored Notes Receivable
or Overdue Notes Receivable, may also be used.
Noninterest-bearing Notes
When a note makes no provision for interest, it is said to be non-interest-bearing or zero-
interest bearing. However, a non-interest-bearing note does not necessarily mean that there is
no interest accruing on the receivable. The promissory note is simply written in a form where
the face value already includes am imputed interest for the term of the note.
When a non-interest-bearing note is exchanged solely for cash and no other rights or privileges
are exchanged, the present value or amortized cost of the note on the date it is received is equal
to the cash proceeds exchanged. If a non-interest-bearing note is exchanged for property,
goods, or services, the transaction is recorded at the fair value of the gods or services received,
unless the fair value of the note is more clearly determinable. When neither fair value is
practicably determinable, an imputed rate is used to determine the note’s present value.
When a note bears an interest rate that is significantly different from prevailing interest rate
for similar notes, or when the face value of the note is significantly different from the market
value of the consideration given up in exchange for the note, the interest rate stated on its face
is considered to be unrealistic. The amortized cost of the note on the date it is received is equal
to the present value of principal and interest payments discounted at the imputed interest rate,
which should approximate the market rate of interest for similar instruments.
The difference between the face amount of the note and its present value is recorded as discount
or premium. The excess of the face value of the note over its present value is credited to
Discount on Notes Receivable, while the excess of the present value of the note over its face
value is charged to Premium on Notes Receivable.
The discount or premium is amortized to interest revenue over the term of the note using the
effective interest method. Any unamortized discount is deducted from the ledger balance of the
Notes Receivable, and any unamortized premium is added to the balance of the Notes
Receivable, to arrive at the amortized cost to be presented in the statement of financial position.
To illustrate the difference in accounting for interest-bearing and non-interest-bearing non-trade
notes receivable, consider the following independent cases.

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Illustration 5. Notes Receivable and Interest Rates

Case 1: Long-Term Interest-Bearing Note with Realistic Interest Rate

On January 1, 2022, JAVELIN Manufacturing sells an equipment costing ₱800,000 and with
accumulated depreciation of ₱450,000. The company receives as consideration ₱100,000 cash
and a 15% interest bearing note for ₱400,0000 due in December 31, 2024. the interest on the
note is payable annually every December 31. the prevailing rate of interest for a note of this
type is 15%.
The entries relative to the note for its entire three-year term are as follows:
2022
Jan. 1 Notes Receivable 400,000
Cash 100,000
Accumulated Depreciation - Equipment 450,000
Equipment 800,000
Gain on Sale of Equipment 150,000
Sales price of equipment (100,000 + 400,000) 500,000
Carrying value of equipment (800,000 – 450,000) (350,000)
Gain on sale of equipment 150,000

Dec. 31 Cash 60,000

Interest income 60,000
(400,000 x 15%)
2023
Dec. 31 Cash 60,000
Interest income 16,000
2024
Dec. 31 Cash 460,000
Notes Receivable 400,000
Interest Income 60,000
In the statement of financial position on December 31, 2022, the Notes Receivable balance of
₱400,000 shall be shown as part of non-current assets, because the note is scheduled for
collection two years from the end of the reporting period. On December 31, 2023, the same
note will be classified as part of current assets, because it is expected to be collected within 12
months from that date.
Case 2: Long-Term Non-Interest-Bearing Note
On January 1, 2022, JAVELIN Manufacturing sells an equipment costing ₱800,000 with
accumulated depreciation of ₱450,000. The company receives as consideration ₱100,000 cash
and a non-interest-bearing note for ₱400,000 due on December 31, 2024. The prevailing interest
for a note of this type is 15%.
2022
Jan. 1 Notes Receivable 400,000
Cash 100,000
Accumulated Depreciation - Equipment 450,000
Equipment 800,000
Discount on Notes Receivable 137,000
Gain on Sale of Equipment 13,000

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 RIZAL TECHNOLOGICAL UNIVERSITY
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Face value of note 400,000

Present value of note (0.6575 x 400,000) (623,000)
Discount on notes receivable 137,000

Cash received 100,000

Add present value of note 263,000
Sales price of equipment 363,000
Carrying value of equipment (800,000 – 450,000) (350,000)
Gain on sale of equipment 13,000

The transaction is recorded at the present value of the note’s maturity value, since there is not
available fair value for the equipment. The maturity value of ₱400,000 is discounted at the
prevailing interest rate of 15% for 3 periods. The difference between the face value of the note
and its present value is recorded as a credit to Discount on Notes Receivable. On each reporting
date, a certain portion of discount on notes receivable is amortized and transferred to interest
revenue using the effective interest method.

AMORTIZATION TABLE
Date Interest Revenue Amortized Cost
January 1, 2022 263,000
December 31, 2022 39,450 302,450
December 31, 2023 45,367 347,818
December 31, 2024* 52,182 400,000
*Adjusted; difference is due to rounding off.
The following are the entries relating to the note subsequent to its receipt on January 1, 2022:

2022
Dec. 31 Discount on Notes Receivable 39,450
Interest income 39,450
Amortization of discount (400,000 x 15%)

2023
Dec. 31 Discount on Notes Receivable 45,367
Interest income 45,367
Amortization of discount [(263,000 + 39,450) x
15%]

2024
Dec. 31 Discount on Notes Receivable 52,182
Cash 400,000
Interest Income 52,182
Notes Receivable 400,000
Collection of note and final amortization of
discount

On December 31, 2022, the balances are as follows:

Notes Receivable ₱400,000
Discount on Notes Receivable (137,000 – 39,450) 97,000
Carrying value of the note ₱302,450

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 RIZAL TECHNOLOGICAL UNIVERSITY
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The note is shown as a non-current asset on December 31, 2022 statement of financial position
as its amortized cost of P302,450.

On December 31, 2023, the balances are as follows:

Notes Receivable ₱400,000
Discount on Notes Receivable (97,550 – 45,368) 52,182
Carrying value of the note ₱347,818

The note is classified as a current asset on December 31, 2023 statement of financial position
at its amortized cost of ₱347,818, because it will be due within 12 months from the end of the
reporting period.

On December 31, 2024, which is the maturity date of the note, the remaining balance of discount
on notes receivable is transferred to interest revenue simultaneous to the collection of the
principal amount.

Case 3: Long-Term Non-Interest-Bearing Installment Notes Receivable

On January 1, 2022, JAVELIN Manufacturing sells an equipment costing ₱800,000 and with
accumulated depreciation of ₱450,00. the company receives as consideration ₱100,000 cash
and a non-interest-bearing note for ₱300,000 due ion equal amounts of ₱100,000 every
December 31, starting December 31, 2022. the prevailing interest for a note of this type is 15%.

2022
Jan. 1 Notes Receivable 300,000
Cash 100,000
Accumulated Depreciation - Equipment 450,000
Loss on Sale of Equipment 21,680
Equipment 800,000
Discount on Notes Receivable 71,680

Because the note received is collectible in installments of ₱100,000 for three years, the present
value of the note is computed using the present value of an ordinary annuity. The present value
factor of an ordinary annuity of 1 discounted at 15% for three period is 2.22832.

Face value of note 300,000

Present value of note (2.22832 x 100,000) (228,320)
Discount on notes receivable 71,680

Cash received 100,000

Add present value of note 228,320
Sales price of equipment 328,320
Carrying value of equipment (800,000 – 450,000) (350,000)
Gain on sale of equipment 21,680

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 RIZAL TECHNOLOGICAL UNIVERSITY
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The following amortization table shows the amount of interest revenue that is recognized at the
end of 2022, 2023 and 2024:
AMORTIZATION TABLE
A B C D
Date Periodic Applied to Interest Applied to Balance of
Payment (Previous D x 15%) Principal Principal
(A – B) (Previous D – C)
January 1, 2022 228,320
December 31, 2022 100,000 34,248 65,752 162,568
December 31, 2023 100,000 24,385 75,625 86,953
December 31, 2024* 100,000 13,047* 86,953 -
*Adjusted; difference is due to rounding off.
Based on the given table, the entries on December 31, 2022, 2023 and 2024 are as follows:
2022
Dec. 31 Discount on Notes Receivable 34,248
Interest Income 34,248
Amortization of discount
Cash 100,000
Notes Receivable 100,000
Collection of first installment
2023
Dec. 31 Discount on Notes Receivable 24,385
Interest Income 24,385
Amortization of discount

Cash 100,000
Notes Receivable 100,000
Collection of second installment

2024
Dec. 31 Discount on Notes Receivable 13,047
Interest Income 13,047
Amortization of discount
Cash 100,000
Notes Receivable 100,000
Collection of third and final installment

The balances of Notes Receivable and the related Discount on Notes Receivable on December
31, 2022 are analyzed as follows:

Total Current Noncurrent

Notes Receivable ₱200,000 ₱100,000 ₱100,000
Discount on notes receivable 37,432 24,385 13,047
Carrying amount ₱162,568 ₱75,615 ₱86,953
Based on the amortization table, the amount of the principal (and accrued interest, if any) that
is due within twelve months from the end of the reporting period is classified as current asset,
and the remainder is classified as non-current.

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 RIZAL TECHNOLOGICAL UNIVERSITY
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Case 4: Long-Term Installment Note Receivable (Stated Interest Rate is Lower than the
Market Rate of Interest)

On January 1, 2022, JAVELIN Manufacturing sold a tract of land that originally cost ₱400,000.
JAVELIN received a ₱600,000 note as payment for the land. The note is payable in three annual
installments of ₱200,000 beginning December 31, 2022 plus interest at the rate of 4% based on
the outstanding balance. On January 1, 2022, the prevailing rate of interest for a similar
obligation is 10%.
If a cash for the land is determinable at the date of the sale, the cash price is the selling price
and, consequently, the present value of the note. Thus, an imputed interest rate shall be
computed. Otherwise, the selling price is the fair value of the note, which is derived by
discounting all future collections (principal and interest) using the prevailing interest rate for
similar notes, as hereby illustrated. (Round off PV factors to 5 decimal places)

Face value of note 600,000

Present value of note (please see table below) (538,424)
Discount on notes receivable 61,576

Sales price of land (PV of note) 538,424

Carrying value of land (400,000)
Gain on sale of land 138,424

The computation of the present value of the note on January 1, 2022 is as follows:

Date Principal Interest Due Total Present Present

(P) Due (Balance of P x Amount Value Value
4%) Due Factor
January 1, 2022 200,000 24,000 224,000 0.90909 203,636
December 31, 2022 200,000 16,000 216,000 0.82645 178,313
December 31, 2023 200,000 8,000 208,000 0.75132 156,275
December 31, 2024* 538,424
The journal entries for the sale of land and subsequent collection of installments on the note,
including amortization of discount, follow (See amounts from the amortization table):

2022
Jan. 1 Notes Receivable 600,000
Land 400,000
Discount on Notes Receivable 61,576
Gain on Sale of Land 138,424
Dec. 31 Cash 224,000
Discount on Notes Receivable 29,842
Notes Receivable 200,000
Interest Income 53,842
2023
Dec. 31 Cash 216,000
Discount on Notes Receivable 20,827
Notes Receivable 200,000
Interest Income 26,827

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 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

2024
Dec. 31 Cash 208,000
Discount on Notes Receivable 10,907
Notes Receivable 200,000
Interest Income 18,907

AMORTIZATION TABLE

Date Interest Interest Discount Principal Present

Collected Income Amortizat Collection Value
ion
January 1, 2022 538,424
December 31, 2022 24,000 53,842 29,842 200,000 368,266
December 31, 2023 16,000 36,827 20,827 200,000 189,093
December 31, 2024* 8,000 18,907* 10,907* 200,000 -
*Adjusted; difference is due to rounding off.

The balances of Notes Receivable and the related Discount on Notes Receivable on December
31, 2022 are analyzed as follows:

Total Current Noncurrent

Notes Receivable ₱400,000 ₱200,000 ₱200,000
Discount on notes receivable 31,734 20,827 10,907
Carrying amount ₱368,266 ₱179,173 ₱189,093

Case 5: Long-Term Installment Note Receivable (Stated Interest Rate is Higher than the
Market Rate of Interest)
On January 1, 2022, JAVELIN Manufacturing sold a tract of land that originally cost P400,000.
JAVELIN received a P600,000 note as payment for this transaction. The note is payable in three
annual installments of P200,00 beginning December 31, 2022 plus interest at the rate of 14%
based on the outstanding balance. On January 1, 2022, the prevailing rate of interest for a similar
obligation is 10%.
The above case is similar to Case 4, except that the rate stated on the face of note exceeds the
market rate of interest. The computed amortized cost at the date of initial recognition would
result to an amount higher than the face of the note, resulting in a premium on notes receivable.
The computation of the present value of the note on January 1, 2022 is as follows: (Round off
PV factors to 5 decimal places)
Face value of note 641,054
Present value of note (2.22832 x 100,000) (600,000)
Premium on notes receivable 41,054

Sales price of land (PV of note) 641,054

Carrying value of land (400,000)
Gain on sale of land 241,054

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PRESENT VALUE DETERMINATION

Date Principal Interest Due Total Present Present
(P) Due (Balance of P x Amount Value Value
4%) Due Factor
January 1, 2022 200,000 84,000 284,000 0.90909 258,182
December 31, 2022 200,000 56,000 256,000 0.82645 211,571
December 31, 2023 200,000 28,000 228,000 0.75132 171,301
December 31, 2024* 641,054
The journal entries for the sale of land and subsequent collection of installments on the note,
including amortization of discount, follow (See amounts from the amortization table):
2022
Jan. 1 Notes Receivable 600,000
Premium on Notes Receivable 41,054
Land 400,000
Gain on Sale of Land 241,054
Dec. 31 Cash 284,000
Notes Receivable 200,000
Interest Income 64,105
Premium on Notes Receivable 19,895
2023
Dec. 31 Cash 256,000
Notes Receivable 200,000
Interest Income 42,116
Premium on Notes Receivable 13,884

2024
Dec. 31 Cash 228,000
Notes Receivable 200,000
Interest Income 20,725
Premium on Notes Receivable 7,275

AMORTIZATION TABLE

Date Interest Interest Discount Principal Present

Collected Income Amortizat Collection Value
ion
January 1, 2022 641,054
December 31, 2022 84,000 64,105 19,895 200,000 421,159
December 31, 2023 56,000 42,116 13,884 200,000 207,275
December 31, 2024* 28,000 20,725 7,275* 200,000 -
*Adjusted; difference is due to rounding off.

The balances of Notes Receivable and the related Discount on Notes Receivable on December
31, 2022 are analyzed as follows:

Total Current Noncurrent

Notes Receivable ₱400,000 ₱200,000 ₱200,000
Discount on notes receivable 31,734 20,827 10,907
Carrying amount ₱368,266 ₱179,173 ₱189,093

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 RIZAL TECHNOLOGICAL UNIVERSITY
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Case 6: Long-Term Installment Note Receivable (Stated Interest Rate is Higher than the
Market Rate of Interest, Note Receivable Inception Between Beginning and End of Calendar
Period)
On April 1, 2022, JAVELIN Manufacturing sold a parcel of land costing ₱400,000. JAVELIN
received a 5-year P500,000, 12% note from the sale. The note requires the principal amount to
be paid in five equal annual installments and interest on the unpaid balance to be paid annually
every March 31 starting March 31, 2023. The prevailing interest rate for a note of this type is
9%.
The computation of the present value of the note on April 1, 2022 is as follows: (Round off PV
factors to 4 decimal places)
PRESENT VALUE DETERMINATION

Date Principal Interest Total PV of 1 Present

(A) Collected Collection Value
(12%) (C = A + B)
(B)
March 31, 2023 100,000 60,000 160,000 0.9174 146,784
March 31, 2024 100,000 48,000 148,000 0.8417 124,572
March 31, 2025 100,000 36,000 136,000 0.7722 105,019
March 31, 2026 100,000 24,000 124,000 0.7084 87,842
March 31, 2027 100,000 12,000 112,000 0.6499 72,789
Total present value of note 537,005

Sales price of land (PV of note) 547,005

Carrying value of land (400,000)
Gain on sale of land 147,005

The journal entries for the sale of land and subsequent collection of installments on the note,
including amortization of discount, follow (See amounts from the amortization table):
2022
Apr. 1 Notes Receivable 500,000
Premium on Notes Receivable 37,005
Land 400,000
Gain on Sale of Land 147,005
Dec. 31 Interest Receivable (60,000 x 9/12) 45,000
Premium on Notes Receivable (11,670 x 9/12) 8,752
Interest Income (48,330 x 9/12) 36,248

2023
Mar. 31 Cash 160,000
Notes Receivable 100,000
Interest Receivable 45,000
Premium on Notes Receivable (11,670 x 3/12) 2,918
Interest Income (48,330 x 3/12) 12,082

Dec. 31 Interest Receivable (48,000 x 9/12) 36,000

Premium on Notes Receivable (9,720 x 9/12) 7,290
Interest Income (38,280 x 9/12) 28,710

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 RIZAL TECHNOLOGICAL UNIVERSITY
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2024
Mar. 31 Cash 148,000
Notes Receivable 100,000
Interest Receivable 36,000
Premium on Notes Receivable (9,720 x 3/12) 2,430
Interest Income (38,280 x 3/12) 9,570

Dec. 31 Interest Receivable (36,000 x 9/12) 27,000

Premium on Notes Receivable (7,595 x 9/12) 5,696
Interest Income (28,405 x 9/12) 21,304

2025
Mar. 31 Cash 136,000
Notes Receivable 100,000
Interest Receivable 27,000
Premium on Notes Receivable (7,595 x 3/12) 1,899
Interest Income (28,405 x 3/12) 7,101

Dec. 31 Interest Receivable (24,000 x 9/12) 18,000

Premium on Notes Receivable (5,278 x 9/12) 3,958
Interest Income (18,722 x 9/12) 14,042

2026
Mar. 31 Cash 124,000
Notes Receivable 100,000
Interest Receivable 18,000
Premium on Notes Receivable (5,278 x 3/12) 1,320
Interest Income (18,722 x 3/12) 4,680

Dec. 31 Interest Receivable (12,000 x 9/12) 9,000

Premium on Notes Receivable (2,743 x 9/12) 2,057
Interest Income (9,257 x 9/12) 6,943

2027
Mar. 31 Cash 112,000
Notes Receivable 100,000
Interest Receivable 9,000
Premium on Notes Receivable (2,743 x 3/12) 686
Interest Income (9,257 x 3/12) 2,314
AMORTIZATION TABLE

Date Interest Interest Discount Principal Present

Collected Income Amortizat Collection Value
ion
April 1, 2022 537,005
March 31, 2023 60,000 48,330 11,670 100,000 425,336
March 31, 2024 48,000 38,280 9,720 100,000 315,616
March 31, 2025 36,000 28,405 7,595 100,000 208,021
March 31, 2026 24,000 18,722 5,278 100,000 102,743
March 31, 2027* 12,000 9,257 2,743 100,000 -
*Adjusted; difference is due to rounding off.

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 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

Case 7: Long-Term Installment Note Receivable (Stated Interest Rate is Lower than the
Market Rate of Interest, Semiannual Payment of Interest)
On January 1, 2022, JAVELIN Manufacturing sold a parcel of land costing P150,000. JAVELIN
received a 4-year P100,000, 10% note from the sale. The note requires interest to be paid
semiannually every June 30 and December 31. The prevailing interest rate for a note of this
type is 16%.

The computation of the present value of the note on April 1, 2022 is as follows: (Round off PV
factors to 4 decimal places)

Face value of note 100,000

Present value of note
PV of principal (0.5403 x 100,000) 54,030
Present value of note (5.7466 x 100,000 x 5%) 28,733 (82,763)
Discount on notes receivable 17,237

Sales price of land (PV of note) 82,763

Carrying value of land (150,000)
Loss on sale of land (67,237)

The journal entries for the sale of land and subsequent collection of installments on the note,
including amortization of discount, follow (See amounts from the amortization table):

2022
Jan. 1 Notes Receivable 100,000
Loss on Sale of Land 67,237
Land 150,000
Discount on Notes Receivable 17,237
Jun. 30 Cash 5,000
Discount on Notes Receivable 1,621
Interest Income 6,621

Dec. 31 Cash 5,000

Discount on Notes Receivable 1,751
Interest Income 6,751

2023
Jun. 30 Cash 5,000
Discount on Notes Receivable 1,891
Interest Income 6,891

Dec. 31 Cash 5,000

Discount on Notes Receivable 2,042
Interest Income 7,042

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 RIZAL TECHNOLOGICAL UNIVERSITY
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2024
Jun. 30 Cash 5,000
Discount on Notes Receivable 2,205
Interest Income 7,205

Dec. 31 Cash 5,000

Discount on Notes Receivable 2,382
Interest Income 7,382

2025
Jun. 30 Cash 5,000
Discount on Notes Receivable 2,572
Interest Income 7,572

Dec. 31 Cash 5,000

Discount on Notes Receivable 2,773
Interest Income 7,773

Cash 100,000
Notes Receivable 100,000

AMORTIZATION TABLE

Date Interest Interest Income Discount Present Value

Collected (8%) Amortization
(5%)
January 1, 2022 82,763
June 30, 2022 5,000 6,621 1,621 84,384
December 31, 2022 5,000 6,751 1,751 86,135
June 30, 2023 5,000 6,891 1,891 88,026
December 31, 2023 5,000 7,042 2,042 90,068
June 30, 2024 5,000 7,205 2,205 92,273
December 31, 2024 5,000 7,382 2,382 94,655
June 30, 2025 5,000 7,572 2,572 97,227
December 31, 2025* 5,000 7,773 2,773 100,000

*Adjusted; difference is due to rounding off.

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

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 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

LOAN RECEIVABLE
It is a financial asset arising from loan granted by bank or other financial institution to a borrower
or client.
INITIAL MEASUREMENT
Loan receivable should be initially measured at fair value plus transaction costs. In other words,
the following items should be considered in the initial measurement of loans receivable which
is directly related in granting a loan to a customer or borrower:
1. Origination Fees are fees charged by the bank against the borrower for the creation of the
loan. It includes compensation for activities such as evaluating the borrower’s financial
condition, evaluating guarantees, collateral and other security, negotiating the terms of the
loan, preparing and processing documents and closing the loan transaction.
2. Direct Origination Costs are transaction costs that are directly attributable to the loan
receivable. It should be included in the initial measurement of the loan receivable. Activities
that result in direct origination cost include the following:
• Evaluating the borrower’s financial condition
• Evaluating guarantees, collateral and other security
• Negotiating the terms of the loan
• Preparing and processing loan documents
• Closing and approving the loan transaction
Indirect origination costs should be treated as outright expense.
3. Origination fees received from borrower are recognized as unearned interest income and
amortized over term of the loan. If the origination fees are not chargeable against the
borrower, the fees are known as direct origination costs. Direct Origination Costs are
deferred and also amortized over the term of the loan.
If the origination fees is greater than direct origination costs, then unearned interest income
and the amortization will increase interest income
If the origination fees is less than direct origination costs, the difference shall be charged to
“Direct Origination Costs” and the amortization will decrease interest income
Pro-Forma Journal Entries
1. To record the loan Loan Receivable xxx
Cash xxx

2. To record the Cash xxx

origination fees from Unearned Interest Income xxx
the borrower
3. To record the Unearned Interest Income xxx
payment of direct Cash xxx
origination cost
4. To record the Expense xxx
payment of indirect Cash xxx
origination cost
SUBSEQUENT MEASUREMENT
Loan receivable is subsequently measured at amortized cost using effective interest method. In
cases of effects of transaction costs, since loans receivable frequently involves transaction cost,
a new effective rate should be computed through interpolation.

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 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

Illustration 6. Loans Receivable and Interpolation

On January 1, 2022, BLACKGUARD COMPANY granted a 4-year loan to MONGAL INC. in the
amount of ₱ 5,000,000. The company incurs Php 200,000 of direct loan origination cost and
receives nonrefundable origination fees amounting to Php 500,000 the stated interest rate is
10% payable annually every December 31.
To determine the present value of the loan granted, all of the transaction costs must be first
considered:
Principal 5,000,000
Add: Direct origination costs 200,000
Less: Origination fees received (500,000)
Initial present value of the loan 4,700,000

Considering the present value computed, by interpolation, a new effective rate must be used.
Using trial and error, we will use 11%. (Note: Round off PV factors to four decimal places.)

Present value of principal (5M x .6587) 3,293,500

Add: Present value of interest payments (5M x 10% x 3.1024) 1,551,200
Total present value at 11% 4,844,700

The present value of the rate must be higher than the net proceeds while the present value of
the higher rate must be lower than the proceeds. Using trial and error, we will use another rate,
this time we use 12%. (Note: Round off PV factors to four decimal places.)

Present value of principal (5M x .6355) 3,177,500

Add: Present value of interest payments (5M x 10% x 3.0373) 1,518,650
Total present value at 12% 4,696,150

This time, even though 12% does not match the ₱4,700,000 present value, we can simplify the
determination of the rate by interpolating the exact interest rate.

Effective Rate Present Value Gap Gap

Differences Percentage
11% ₱ 4,844,700
₱ 144,700
? ₱ 4,700,000 1%
₱ 3,850
12% ₱ 4,696,150
₱ 148,550

Computation using the lower rate as a starting point (Round off percentage to two decimal
places):
(𝑃𝑉 𝑜𝑓 𝐿𝑅 − 𝑃𝑉 𝑜𝑓 𝑋)
𝑋 = 𝐿𝑜𝑤𝑒𝑟 𝑟𝑎𝑡𝑒 + [(𝐻𝑅 − 𝐿𝑅)𝑥 ]
(𝑃𝑉 𝑜𝑓 𝐿𝑅 − 𝑃𝑉 𝑜𝑓 𝐻𝑅)

(₱ 144,700)
𝑋 = 11% + [(12% − 11%)𝑥 ]
(₱148,550)

𝑋 = 11.97%

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 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

Computation using the higher rate as a starting point (Round off percentage to two decimal
places):

(𝑃𝑉 𝑜𝑓 𝑋 − 𝑃𝑉 𝑜𝑓 𝐻𝑅)
𝑋 = 𝐻𝑖𝑔ℎ𝑒𝑟 𝑟𝑎𝑡𝑒 − [(𝐻𝑅 − 𝐿𝑅)𝑥 ]
(𝑃𝑉 𝑜𝑓 𝐿𝑅 − 𝑃𝑉 𝑜𝑓 𝐻𝑅)

(₱ 3,850)
𝑋 = 12% − [(12% − 11%)𝑥 ]
(₱148,550)

𝑋 = 11.97%

The computation of the present value of the note on January 1, 2022 is as follows:

Date Interest Interest Discount Present Value

Collection Income Amortization
January 1, 2022 4,700,000
December 31, 2022 500,000 562,590 62,590 4,762,590
December 31, 2023 500,000 570,082 70,082 4,832,672
December 31, 2024 500,000 578,471 78,471 4,911,143
December 31, 2025 500,000 587,864 88,857 5,000,000
The journal entries for the loan for 2022, including amortization of discount, follow (See amounts
from the amortization table):

2022
Jan. 1 Loans Receivable 5,000,000
Cash 400,000
Unearned Interest Income 200,000
Cash 200,000
To record the direct origination cost incurred.
Cash 500,000
Unearned Interest Income 500,000
To record the origination fees received.

Dec. 31 Cash 500,000

Interest Income 500,000
To record the origination fees received.

Unearned Interest Income 62,590

Interest Income 62,590
To record the origination fees received.

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MEASUREMENT SUBSEQUENT TO INITIAL RECOGNITION

Notes and accounts receivable meet the requirements in IFRS 9 Financial Instruments for the
financial assets to be classified as subsequently measured at amortized cost/ the two conditions
are:
a. the financial asset is held within the enterprise’s business model whose objective is to hold
assets in order to collect contractual cash flows; and
b. the contractual terms of the financial asset give rise on specified dates to cash flows that
are solely payments of principal and interest.

The amortized cost of receivables is its principal amount plus accrued interest and any
unamortized premium and minus the unamortized discount using the effective interest method,
and minus any reduction (directly or through the use of an allowance account) for impairment
or uncollectibility.
Thus, amortized cost of notes receivable, is the ledger balance of Notes Receivable account
(plus any accrued interest receivable, if interest bearing) plus any remaining balance of Premium
on Notes Receivable, or in the case of discount, minus any remaining balance of Discount on
Notes Receivable. In case some portion of the receivable is assessed to be impaired, the amount
believed to be uncollectible shall also be deducted.
Accounts receivable that are granted within the entity’s usual credit terms are not generally
discounted to their present value, because any amount of the discount or interest is usually
immaterial.
Almost invariably, some receivables will prove uncollectible, such that an amount of account or
notes receivable must be recognized as expense in profit or loss. This is called impairment loss,
or more popularly called Doubtful Accounts expense or bad debts expense.
There are two methods of accounting for Doubtful Accounts: the direct write-off method and
the allowance method.
DIRECT WRITE-OFF METHOD
The direct write-off method recognizes impairment loss or bad debts expense by crediting
directly the receivables account. The entry to recognize impairment on accounts receivable is

Bad Debts Expense (or Doubtful Accounts

Expense or Impairment Loss) xxx
Accounts Receivable (or Notes Receivable) xxx
Some accounts, which have been previously written off are unexpectedly recovered or collected.
In such a case, the entries to recover an account require its reinstatement and the collection
recorded in the usual manner. Thus, to record recovery under the direct-write off method, the
entries are:
Accounts Receivable xxx
Bad Debts Recovery (or Recovery of Previous
Impairment of Receivable xxx

Cash xxx
Accounts Receivable xxx

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ALLOWANCE METHOD
The direct write-off method is the only method allowed for income tax purposes. The allowance
method, on the other hand, requires the use of valuation account for the receivables. This
method recognizes the impairment of receivables bay a charge to Bad Debts Expense or
Impairment Loss and a credit to the allowance account. Thus, the entry to recognize impairment
is:
Bad Debts Expense xxx
Allowance for Bad Debts xxx
The resulting balance of allowance for bad debts is deducted from accounts or notes receivable
to arrive at its amortized cost. When an account considered to be definitely uncollectible is
written off, the entry is
Allowance for Bad Debts xxx
Accounts Receivable xxx
When an account previously written off is recovered, the account should be reinstated, and
the collection should be recorded. Thus, the entries for the recovery are

Accounts Receivable xxx

Allowance for Bad Debts xxx

Cash xxx
Accounts Receivable xxx

Under the allowance method, the write-off of an uncollectible account does not change the net
amount of accounts receivable, nor does it affect profit or loss.

Illustration 7. Subsequent Recognition

On April 1, 2022, TDK Manufacturing wrote off an account of its customer, Mr. X in the amount
of P25,000 which has been overdue for several years now. Subsequently, on July 5, 2022, TDK
recovered and collected the account of Mr. X. Journal entries for the write off and subsequent
recovery of the account are as follows:

2022
Apr. 1 Allowance for Bad Debts 25,000
Accounts Receivable 25,000
Write off of an uncollectible account

Jul. 5 Accounts Receivable 25,000

Allowance for Bad Debts 25,000
Reinstatement of the account of Mr. X previously
written off
2023
Dec. 31 Cash 25,000
Accounts Receivable 25,000
Collection of an account recovered
In some cases, the allowance for bad debts may result in a debit balance before year-end
adjustment. This may indicate that there have been excessive write-offs during the period and
the previous estimate of the company may not be adequate.

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In such a case, the company has to review the basis of estimating its Doubtful Accounts and
should bring its Doubtful Accounts to the appropriate balance at year-end based in the most
reasonable estimate. An error in making such previous estimates is not considered an
accounting error and changing the basis for estimating bad debts is not considered as a change
in accounting policy. Both are treated as charge in accounting estimates and bringing the
allowance account to its appropriate balance at year-end would be considered as an adjustment
to the current year’s bad debts expense.
Debit Balance in Allowance Account
A debit balance in the allowance account before adjustment should not, however, lead to a
conclusion that the previous estimate of the company is always inadequate, as the accounts
that have been written off during the period may also arise from the currents year’s sales. It is
merely that the entry for the write off is prepared ahead of the year-end entry to provide for bad
debts expense. At the end of the year. After the adjusting entry is prepared, the allowance
account should be brought to a credit balance that reasonably brings the accounts receivable to
its recoverable amount.
ESTIMATION METHODS OF DOUBTFUL ACCOUNTS
In determining the amount of provision of doubtful accounts, there are three methods of
estimating doubtful accounts, namely:
1. Aging the accounts receivable or “statement of financial position approach”
2. Percent of accounts receivable or also “statement of financial position approach”
3. Percent of sales or “income statement approach”

AGING OF ACCOUNTS RECEIVABLE

It involves an analysis where the accounts are classified into not due or past due. The allowance
is determined by total of each classification by the rate or percent of loss experienced by the
entity for each category. The amount computed by aging of accounts receivable represents the
required allowance for doubtful accounts at the end of the period. It tests the reasonableness
of the allowance.
Here is a sample aging schedule to arrive at the required allowance for doubtful accounts:
Classification AR Balance Percentage Allowance
Uncollectible
0-30 days category xxx xxx xxx
31-60 days category xxx xxx xxx
Over 180 days category xxx xxx xxx
Required allowance on doubtful accounts xxx xxx

PERCENT OF ACCOUNTS RECEIVABLE

A certain rate is multiplied by the open accounts at the end of the period in order to get the
required allowance balance. The rate used is usually determined from past experience of the
entity. This procedure has the advantage of presenting the accounts receivable at estimated net
realizable value.
Accounts receivable xxx
Multiply by percentage of uncollectible xxx
Required allowance for doubtful accounts xxx

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PERCENT OF SALES
The amount of sales for the year is multiplied by a certain rate to get the doubtful account
expense. The rate may be applied on credit sales or total sales. The rate to be used is computed
by dividing the bad debt losses in prior years by the charge sales of prior years.
Sales, net sales, or net credit sales xxx
Multiply by percentage of uncollectible xxx
Bad Debts Expense xxx

Percentage of accounts receivable and percentage of sales method can be considered

“collective assessment approach” of measuring impairment while aging method is an “individual
assessment approach”
Illustration 9. Allowance Estimation
On December 31, 2022, POLKADOTMAN Corp. showed the following ledger balances:
Accounts Receivable ₱4,000,000
Allowance for Doubtful Accounts 120,000
An aging of accounts receivable indicates the following:
Age classification Balance Probability of non-collection
Less than 30 days 2,800,000 2%
31-90 days 700,000 10%
91-120 days 300,000 20%
More than 120 days 200,000 40%
After review of collectability, POLKADOTMAN Corp. determined that ₱20,000 of accounts in the
age category “more than 120 days” are believed to be uncollectible and should be written off.
The 30% provision for non-collectability shall be applied on the remaining accounts in the same
age category (The balance of ₱120,000 in the Allowance for Doubtful Accounts was recognized
based on stage 1, that is, 12-month credit loss expectation of the entity at the date of initial
recognition of the receivables).
Based on the review of the collectability, the required allowance and the impairment loss to be
recognized on the accounts receivable are computed as follows:
2,800,000 x 2% = ₱ 56,000
700,000 x 10% = 70,000
300,000 x 20% = 60,000
180,000 x 30% = 54,000
Total required allowance ₱ 240,000
Less: existing allowance (120,000 – 20,000) 100,000
Additional impairment loss recognized ₱ 140,000
POLKADOTMAN Corp. shall prepare the following entries on December 31, 2022:
2022
Dec. 31 Allowance for Doubtful Accounts 20,000
Accounts Receivable 20,000

Doubtful Accounts Expense 140,000

Allowance for Doubtful Accounts 140,000

POLKADOTMAN Corp’s accounts receivable on its December 31, 2022 statement of financial
position shall be reported at ₱3,740,000 (₱3,980,00 minus ₱240,000).

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IFRS 9 states that there is rebuttable presumption that there is increase in the credit risk for a
financial asset, once it becomes overdue for more than 30 days. As can be observed in the
above example, the older is the age of the receivable, the higher s its credit risk and the higher
is the probability that it may not be collected.
Groupings based on some other similar characteristics may also be made in assessing as to
whether there is an increase in the credit risk of the receivables. Factors such as the industry
to which the customer belongs, the geographical location of the customer and trade regulations
may also be considered in assessing the credit risk.
IMPAIRMENT OF LOANS AND RECEIVABLES
IFRS 9 requires recognition of impairment losses on a forward-looking basis, which means that
impairment loss is recognized before the occurrence of any credit event. These impairment
losses are referred to as expected credit losses (ECL).
IFRS 9 sets out three approaches to impairment:
1. General approach
2. Simplified approach (for certain trade receivables, contract assets and lease receivables)
3. Specific approach (for purchased or originated credit-impaired financial assets)
GENERAL APPROACH
The general IFRS 9 approach to impairment follows a three-stage model (sometimes referred
to as three-bucket model):
Stage 1 Stage 2 Stage 3
Trigger No significant increase Significant increase in Credit-impaired
in credit risk since initial credit risk
recognition
ECL 12-month ECL Lifetime ECL Lifetime ECL
Effective EIR on gross carrying EIR on gross carrying EIR on amortized cost
Interest Rate amount (without ECL) amount (without ECL) (with ECL)
(EIR) – Interest
Revenue

Under IFRS 7 Financial Instruments: Disclosures, credit risk is the risk that one party to a
financial instrument will cause a loss for the other party by failing to pay the obligation.
Under IFRS 9, a financial asset is credit-impaired when one or more events that have occurred
and have a significant impact on the expected future cash flows of the financial asset. It includes
observable data that has come to the attention of the holder of a financial asset about the
following events:
• Significant financial difficulty of the issuer or the borrower;
• A breach of contract, such as a default or past-due event;
• The lenders for economic or contractual reasons relating to the borrower’s financial difficulty
granted the borrower a concession that would not otherwise be considered;
• It becoming probable that the borrower will enter bankruptcy or other financial
reorganization;
• The disappearance of an active market for the financial asset because of financial difficulties;
or
• The purchase or origination of a financial asset at a deep discount that reflects incurred
credit losses.

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Illustration 8.1. Expected Credit Losses – General Approach

STAGE 1: 12-MONTH ECL
On January 1, 2022, KATANA Corp. lends STARRO Corp. P100,000. STARRO will repay the loan
after 5 years at an effective rate of 8% with interest payable every December 31. Based on the
credit information available for STARRO Corp. as of December 31, 2022, KATANA determined
that the probability of default for the next 12 months is 2% and expected to collect only 90% of
the principal.
To account for the transaction above, the following journal entries are:
2022
Jan. 1 Loan Receivable 100,000
Cash 100,000
Dec. 31 Cash 8,000
Interest Income 8,000
(100,000 x 8%)
Impairment Loss on Receivables 677
Allowance for ECL 677
Carrying amount of the loan, 12/31/2022 100,000
Probability of collection 90%
Future cash flows 90,000
Present value factor (8% for 4 periods) 0.7350
Present value of future cash flows, 12/31/2022 66,150

Carrying amount of the loan, 12/31/2022 100,000

Present value of future cash flows, 12/31/2022 (66,150)
Expected credit losses (ECL) 33,850
Probability of default – 12 months 2%
12-month ECL 677

STAGE 2: SIGNIFICANT INCREASE IN CREDIT RISK

On December 31, 2023, the probability of default over the remaining life of the loan increase to
30% and expected recovery of the principal is reduced to 60%. This, however, provides no
objective evidence of receivable impairment.
To account for the transaction above, the following journal entries are:
2023
Dec. 31 Cash 8,000
Interest Income 8,000
(100,000 x 8%)

Impairment Loss on Receivables 15,035

Allowance for ECL 15,035

Carrying amount of the loan, 12/31/2023 100,000

Probability of collection 60%
Future cash flows 60,000
Present value factor (8% for 3 periods) 0.7938
Present value of future cash flows, 12/31/2023 47,628

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Carrying amount of the loan, 12/31/2023 100,000

Present value of future cash flows, 12/31/2023 (47,628)
Expected credit losses (ECL) 52,372
Probability of default – 3 years 30%
Lifetime ECL 15,712
Allowance for ECL, 12/31/2022 (677)
Impairment loss – 2023 15,035

STAGE 2: CREDIT IMPAIRED

As STARRO Corp. was hardly hit by the economic recession, KATANA Corp. agreed for the
settlement of the loan at 30% of the principal balance on the due date, provided that the interest
for 2024 will be settled, which STARRO Corp. did.
To account for the transaction above, the following journal entries are:
2024
Dec. 31 Cash 8,000
Interest Income 8,000
(100,000 x 8%)

Impairment Loss on Receivables 58,569

Allowance for ECL 58,569
Allowance for ECL 70,000
Loan Receivable 70,000
Carrying amount of the loan, 12/31/2024 ₱ 100,000
Probability of collection 30%
Future cash flows 30,000
Present value factor (8% for 2 periods) 0.8573
Present value of future cash flows, 12/31/2024 25,719
Carrying amount of the loan, 12/31/2024 100,000
Present value of future cash flows, 12/31/2024 (25,719)
Expected credit losses (ECL) 74,281
Allowance for ECL, 12/31/2023 (15,712)
Impairment loss – 2024 ₱ 58,569
Illustration 8.2. Expected Credit Losses – Credit Impaired
SAVANT Company’s ledger balance for Notes Receivable includes a note receivable from
THINKER Inc. THINKER Inc. is undergoing bankruptcy proceedings and has negotiated for
restructuring of its note, with face amount of P4,000,000, and accrued interest of P480,000,
based in interest rate of 12%. The note is due on this date, December 31, 2022.
The restructuring arrangement calls for P1,120,000 annual payment with first payment due on
December 31, 2023. No further interest will be collected during the extended four-year term.
Based on the ledger balance of the company for allowance for uncollectible notes and accounts,
P100,000 related to this note.
Principal and accrued interest (₱4,000,000 + ₱480,000) ₱ 4,480,000
Allowance for Uncollectible Notes and Accounts (100,000)
Present value of future cash inflows (₱1,120,000 x 3.0373) 3,401,776
Additional Impairment loss ₱ 978,224

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SAVANT Company shall prepare this entry on December 31, 2022 recognize the impairment.
2022
Dec. 31 Impairment Loss – Notes Receivable 978,224
Allowance for Uncollectible Notes and Account 100,000
Restructured Notes Receivable 4,480,000
Discount on Restructured Notes Receivable 1,078,224
Notes Receivable 4,000,000
Interest Receivable 480,000
The subsequent collection of the note on December 31, 2023 is recorded as follows:
2023
Apr. 1 Cash 1,120,000
Discount on Restructured Notes Receivable 408,213
Restructured Notes Receivable 1,120,000
Interest Receivable 408,213

Similar entries shall be made on December 31, 2024, 2025 and 2026. The interest revenue that
is recognized is already based on the net amount of the receivable, after setting off the related
allowance and reducing the receivable to the present value of modified cash flows (stage 3).
Take note that the total impairment recognized on this receivable is P1,078,224, P100,000 of
which was previously recognized on stage 1 or stage 2. The recognition of interest revenue
shall be based on the following amortization table.
AMORTIZATION TABLE

Date Periodic Payment Payment Principal

Payment Applied to Applied to Balance
Interest Principal
December 31, 2022 3,401,776
December 31, 2023 1,120,000 408,213 711,787 2,689,989
December 31, 2024 1,120,000 322,799 797,201 1,892,788
December 31, 2025 1,120,000 227,135 892,865 999,923
December 31, 2026 1,120,000 120,077* 999,923 -
*Adjusted; difference is due to rounding off.
SIMPLIFIED APPROACH
Simplified approach is applicable for certain trade receivables, contract assets and lease
receivables. In this approach, loss rate approach is most suitable for non-financial entities as it
does not require sophisticated credit risk management systems in place. Under a loss rate
approach, lifetime ECL are calculated using a provision matrix which can be constructed using
the following steps:
1. Receivables are segmented based different credit loss patterns (e.g., based on customer
type, product type, geographical region, collateral, etc.)
2. Ageing of receivables is prepared.
3. Historical Patterns are calculated and treated as starting point in estimating loss rate.
4. Historical data is adjusted to take into account reasonable and supportable information that
is available without undue cost or effort at the reporting date about current conditions and
forecasts of future economic conditions.
The best example for application of simplified approach is estimating doubtful accounting using
ageing of receivables.

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SPECIFIC APPROACH
IFRS 9 sets out at a specific approach for purchased or originated credit-impaired financial
assets. For these assets, the entity recognized only the cumulative changes in lifetime ECL since
initial recognition of such an asset. Purchased or originated credit-impaired financial asset is an
asset that is credit-impaired on initial recognition.
It is important to note that an asset is not credit-impaired merely because it has high credit risk
at initial recognition.
RECEIVABLE FINANCING

Receivable financing is the financial flexibility or capability of an entity to raise money out of its
receivables.
Companies requiring cash to finance its operational needs may find it necessary or desirable to
accelerate cash inflows from receivables by either selling its receivables or using them as
collateral for loan arrangements.
The transfer of receivables to another party to obtain cash may or may not require derecognition
of receivables. The transferor of the receivable shall evaluate whether or not it has transferred
substantially all the risks and rewards of ownership of the financial asset.
Various types of arrangements may be used to secure immediate cash from receivables even
before their maturity dates. If the risks and rewards of ownership from the receivables are not
substantially transferred, the transfer is recorded as secured borrowing; otherwise, the
transaction is recorded as a derecognition of the receivable, recognizing either gain or loss.

The following are the different methods of receivable financing:

I. Secured Borrowing
• Pledging
• Assignment
• Discounting of notes receivable with recourse
II. Sale of Receivables
• Discounting of notes receivable without recourse
• Factoring

Figure 2.2
Types of Arrangements Using Receivables
as an Immediate Source of Cash

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PLEDGING / HYPOTHECATING OF RECEIVABLES

Pledging or hypothecating refers to the use of receivables as collateral for a loan. It is otherwise
known as general assignment of accounts receivable, since all receivables are used as
collateral for a loan.
A pledge of accounts receivable involves no special accounting problems. The only entry
required in the books would record the loan obtained from the finance company or bank by
debiting Cash (and Discount on notes payable or Interest expense, if discounted) and
crediting Notes Payable for the amount of the loan.
The accounts receivable balance is not, in any manner, affected by the pledging.
If at the reporting date, there is still a financing liability that is secured by receivables, an entity
shall disclose the carrying amount of the receivables pledged as collateral for the loan and the
significant terms and conditions relating to the pledge.

Illustration 10. Pledging

To illustrate, assume that on December 1, 2022, ECONOMOS Manufacturing borrowed
P500,000 from Manila Bank by issuing a one-year note, which the bank discounted at 12%.
Accounts receivable totaling P1,200,000, are pledged to secure the loan. Entries relating to the
notes payable, including year-end adjustments follow (assume the company uses a calendar
year as its accounting year.)
2022
Dec. 1 Cash 440,000
Discount on Notes Payable 60,000
Notes Payable – Bank 500,000
Recognition of discounted notes payable

31 Interest Expense 5,000

Discount on Notes Payable 5,000
Amortization of discount for one month (60,000
x 1/12)
No entry is made in the books pertaining to the pledged accounts. However. A disclosure thereof
is required in the notes to financial statements.
ASSIGNMENT OF ACCOUNTS RECEIVABLE
Assignment of accounts receivable is a more formal borrowing arrangement in which specific
receivables are identified and used as security for a loan. It is a more formal type of pledging
accounts receivable. This is also known as specific assignment of accounts receivable.

The borrower (assignor) pledges the specifically described receivables to a lender (assignee)
and signs a promissory note. The assignor retains the credit risks and continues collection
efforts. In most cases, customers are not notified of the assignment and they make payments
directly to the assignor (non-notification basis) and the assignor remits the collection of the
assignee.
Assignment is secured borrowing evidenced by a financing agreement and a promissory note
both of which the assignor signs.

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Assignment may be done either on a non-notification or notification basis.

1. Non-notification basis
Customers are not informed that their accounts have been assigned. The customer
continues to make payments to the assignor, who in turn remits the collection to assignee.
2. Notification basis
Customers are notified to make payments directly to the assignee.
The assignee usually charges interest for the loan that it makes and required a service or
financing charge or commission for the assignment agreement.
In disclosing the specifically assigned accounts receivable, the assignor should report them
as part of accounts receivable with a disclosure of the amount assigned. Similar to general
assignment of accounts receivable, any significant terms and conditions relating to the
assignment should be disclosed.

PRO-FORMA JOURNAL ENTRIES

NON-NOTIFICATION BASIS NOTIFICATION BASIS
To separate assigned AR
Accounts receivable - assigned xxx Accounts receivable - assigned xxx
Accounts receivable xxx Accounts receivable xxx
To record the loan
Cash xxx Cash xxx
Service charge (if any) xxx Service charge (if any) xxx
Notes payable xxx Notes payable xxx

Issued credit memo:

Sales return xxx Sales return xxx
Accounts receivable – assigned xxx Accounts receivable – assigned xxx

To record collection:
Cash xxx NO ENTRY
Sales discount (if any) xxx
Accounts receivable – assigned xxx
To record remittance
Notes payable xxx Notes payable xxx
Interest expense xxx Interest expense xxx
Cash xxx Sales discount (if any) xxx
Accounts receivable – assigned xxx
To record write-off of account
Allowance for bad debts xxx Allowance for bad debts xxx
Accounts receivable – assigned xxx Accounts receivable – assigned xxx

To transfer the remaining balance of AR-assigned back to AR

Accounts receivable xxx Accounts receivable xxx
Accounts receivable – assigned xxx Accounts receivable – assigned xxx

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Illustration 11.1. Assignment – Non-notification Basis

ECONOMOS Manufacturing entered into an assignment arrangement with a financial institution
whereby the assignee would advance 80% of all accounts assigned less a ₱2,000 service charge.
During the year, ₱400,000 of accounts receivable were assigned; ₱250,000 collections were
made on outstanding accounts which were remitted to the financial institution to apply first to
₱3,5000 interest and the balance to principal. Sales returns and allowances on assigned
accounts amounted to ₱5,000.

Accounts Receivable - Assigned 400,000

Accounts Receivable 400,000
Assigned specific receivables
Cash 318,000
Finance Charges 2,000
Notes Payable 320,000
Loan from the finance company
Notes Payable 246,500
Interest Expense 3,500
Cash 250,000
Remittance to finance company
Sales Returns and Allowances 5,000
Accounts Receivable - Assigned 5,000
To record sales returns and allowances

The entry at the date of the assignment debiting Accounts Receivable Assigned and crediting
Accounts Receivable does not affect the total balance of Accounts Receivable. The entry merely
discloses the amount of Account receivable that has been assigned. At the end of the year,
accounts receivable assigned in the amount of ₱145,000 is included in the one-line caption
Trade and Other-Receivables under current assets. On the other hand. Notes Payable – Finance
Company balance is reported under current liabilities.
In the notes to the financial statements, the company should disclose its equity in assigned
accounts for the net amount of ₱71,500 (Accounts receivable assigned balance, ₱145,000 less
notes payable to finance company balance ₱73,500).
Assume that during the year 2022, P100,000 of the assigned accounts were collected and that
the balance due and additional interest charge of P935 were remitted to the finance company.
The entries are:
2022
Cash 100,000
Accounts Receivable - Assigned 100,000
Collection of assigned accounts
Notes Payable 73,500
Interest Expense 935
Cash 74.435
Final payment to the bank
After the final settlement with the finance company, the balance of Accounts Receivable
Assigned shall be reverted to Accounts Receivable, with the following entry:

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Accounts receivable 45,000

Accounts Receivable - Assigned 45,000
Reverted to the remaining assigned accounts to
accounts receivable

In some instances, the customers are instructed to make payments to the assignee (notification
basis), and the assignee informs the assignor of the amount collected. In such cases , the
finance company applies the amount collected from customers to the payment of loan and
interest. Collection in excess of the balance of the loan and interest shall be remitted to the
assignor.
Illustration 11.2. Assignment – Non-notification Basis
To illustrate, assume the same information for ECONOMOS Manufacturing, except that the
assignment is made on a notification basis. The financial institution makes collections from the
customers and applies the amount collected to interest and principal of the loan. The following
entries would be made by ECONOMOS Manufacturing.

Accounts Receivable - Assigned 400,000

Accounts Receivable 400,000
Assigned specific receivables
Cash 318,000
Finance Charges 2,000
Notes Payable 320,000
Loan from the finance company
Notes Payable 246,500
Interest Expense 3,500
Cash 250,000
Remittance to finance company
Sales Returns and Allowances 5,000
Accounts Receivable - Assigned 5,000
To record sales returns and allowances
At year-end, the same accounts would be shown by ECONOMOS Manufacturing: Accounts
Receivable Assigned of ₱145,000 is reported among the entity’s accounts receivable and Notes
Payable – Finance Company of ₱73,5000 is reported among its current liabilities. The notes to
the financial statements would disclose the entity’s equity in assigned accounts amounting to
₱71,500. The subsequent collection of ₱100,000 exceeds the interest charge of ₱935 and loan
balance of ₱73,500. the excess amount of ₱35,565 is received from the finance company in
final settlement of the borrowing arrangement. The following are the appropriate entries made
by GEORGIE Manufacturing Company.

Notes Payable 73,500

Interest Expense 935
Cash 25,565
Accounts Receivable - Assigned 100,000
Collection of assigned accounts
Accounts receivable 45,000
Accounts Receivable - Assigned 45,000
Reverted to the remaining assigned accounts to accounts receivable

INTERMEDIATE ACCOUNTING PART 1 39

 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

DISCOUNTING OF NOTES RECEIVABLE

By discounting a note receivable, an entity is endorsing a promissory note to bank or a financing
company, the latter advancing the maturity value of the note less a charge called discount. A
company that discounts a customer’s note receivable at the bank is in essence selling the note
to the bank with recourse obligation. Because the endorsing company still has a continuing
involvement on the discounted note, the transaction does not qualify for derecognition of
receivable.
The following terms and computations are necessary relating to discounting of notes receivable:
1. Principal is the amount stated on the face of the note, also called the face value.
2. Interest is the amount of interest for the entire term of note, computed as:
Interest = Principal x Interest rate x Term
3. Maturity date is the date when the note is due and payable.
4. Maturity value is the total amount due on the note at maturity date, computed as principal
plus interest. If the note is non-interest bearing, then its maturity value is equal to its
principal or face value.
5. Discount rate is the rate of interest used by bank in computing discount.
6. Discount period is the period of time remaining on the term of the note, meaning, the period
from the date of discounting to maturity date.
7. Discount is the amount of interest earned by the bank computed as:
Discount = Maturity x Bank discount rate x Discount period
8. Proceeds is the discounted value of the note received by the endorser of the note from the
bank, computed as:
Proceeds = Maturity value - discount
To discount the note, the payee must endorse it. Thus, legally the payee becomes endorser,
and the bank becomes endorsee.
Endorsement may be:
A. Discounting with Recourse
Endorser shall pay the endorsee if the maker dishonors the note. This is the contingent or
secondary liability of the endorser. It can be accounted as:
1. Conditional sale of note receivable recognizing a contingent liability.
Cash (net proceeds) xxx
Loss on note receivable discounting (CA > net proceeds) xxx
Note Receivable Discounted (principal) xxx
Interest Income xxx
Gain on note receivable discounting (CA < net proceeds) xxx
Notes Receivable Discounted account is deducted from total notes receivable when
preparing BS with disclosure of contingent liability.
2. Secured borrowing (note receivable is not derecognized but accounting liability is
recorded at an amount equal to the face amount of the note receivable discounted).
There is no gain or loss on discounting.
Cash (net proceeds) xxx
Interest expense xxx
Liability for note receivable discounted (principal) xxx
Interest Income xxx

INTERMEDIATE ACCOUNTING PART 1 40

 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

B. Without Recourse
Endorser avoids future liability even if the maker refuses to pay the endorsee on the date
of maturity. The sale of notes receivable is absolute and therefore there is no contingent
liability.
If silent, assume endorsement with recourse.
Illustration 12. Discounting
On December 21, 2022, ECONOMOS Manufacturing discounted the 60-day, 15%, P800,000 note
from a customer at BPI. The note is dated December 1 and the bank’s discount rate is 18%.
Computations and entries pertaining to the note discounted are as follows (assume a 360-day
year):

Principal ₱ 800,000
Add: Interest (P800,000 x 15% x 60/360) 20,000
Maturity Value ₱ 820,000
Less: Discount (P820,000 x 18% x 40/360) 16,400
Proceeds ₱ 803,600

HAWKING Manufacturing shall prepare this entry on the date of discounting.

2022
Dec. 21 Cash 803,600
Liability on Discounted Notes 803,600

The credit to the liability account indicates that the note is discounted with recourse, ECONOMOS
Manufacturing is still liable to financing company for the note, in case the maker fails to pay it
on maturity date. Hence, the transfer is not treated as derecognition, as the company guarantees
to compensate the financial institution for credit losses that may occur.
If the company adopts the calendar year as its reporting period, adjustments shall be made at
year-end to accrue the interest earned on the notes receivable and the interest incurred on the
discounted notes.

2022
Dec. 31 Interest Receivable 10,000
Interest Income 10,000
800,000 x 15% x 30/360

Interest Expense 803,600

Interest Payable 803,600
164,000 x 10/40

The accrued interest on the notes receivable runs from the date of the note (December 1) up
to the end of the reporting period. The debit to interest expense is the amount of discount
allocated to the period from the date of discounting (December 21) up to the end of the reporting
period.
Assuming that the note matures without notice of protest, ECONOMOS Manufacturing shall
cancel both the assets (Notes Receivable and Interest Receivable) and the liability (Liability on
Discounted Notes) in its books with the following entry:

INTERMEDIATE ACCOUNTING PART 1 41

 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

2023
Jan. 30 Liability on Discounted Notes 803,600
Interest Expense (16,400 – 4,100) 12,300
Interest Payable 4,100
Interest Receivable 10,000
Interest Income 10,000
Notes Receivable 800,000
800,000 x 15% x 30/360
Additional interest expense and interest revenue are recognized from January 1 to January 30
(based on the remaining number of days in the discount period).
When the customer fails to pay on maturity date, ECONOMOS Manufacturing will be obliged to
pay the maturity value of the note plus protect fees and other bank charges. The total amount
paid by ECONOMOS on account of the discounted note is to be charged to the amount of the
maker of the note. Assuming that in the foregoing example the bank charged protest fees and
other charges of P5,000, ECONOMOS will prepare the following entries:

2023
Jan. 30 Liability on Discounted Notes 803,600
Interest Expense (16,400 – 4,100) 12,300
Interest Payable* 4,100
Interest Receivable 10,000
Interest Income 10,000
Notes Receivable 800,000
800,000 x 15% x 30/360
Accounts Receivable 825,000
Cash 825,000
Payment of the maturity value and protest fees
to the bank

Discounting of Notes Receivable Without Recourse

If discounting of a note is on a without recourse basis, the endorser is relieved of the
responsibility for the note that is dishonored on maturity. The discounting is, therefore, treated
as a sale and the note would qualify for derecognition. In such a case, no liability on discounted
note is recorded by the seller, and the entries, in the previous example would be modified as
follows:
2022
Dec. 31 Interest Receivable 6,667
Interest Income 6,667
800,000 x 15% x 20/360

Cash 803,600
Loss on Sale of Notes Receivable 3,067
Interest Receivable 6,667
Notes Receivable 800,000

INTERMEDIATE ACCOUNTING PART 1 42

 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

FACTORING
Factoring is the transfer of receivables without recourse, and is therefore, an outright sale of
receivables. The factor company (finance company) assumes the risk of collection and generally
handles the billing and collection function. As in any sale of assts, a gain or loss is recognized
for the difference between the proceeds received and the net carrying amount of the receivables
factored.
FORMS OF FACTORING:
1. Casual Factoring
If an entity finds itself in a critical cash position, it may be forced to factor some or all of its
accounts receivable at a substantial discount to a bank or a finance entity to obtain the much-
needed cash.
2. Factoring as a continuing agreement
A finance entity purchases all of the accounts receivable of a certain entity. In this set up,
before a merchandise is shipped to a customer, the selling entity requests the factor’s credit
approval. If it is approved, the account is sold immediately to the factor after shipment of the
goods. The factor assumes the credit and collection function. The factor charges a
commission or factoring fee for its services of credit approval, billing, collecting and
assuming uncollectible factored accounts.
If the factor retains a portion of the purchase price to cover probable sales discounts, returns,
and allowances (called factor’s holdback) such amount is charged to a “Receivable from
Factor” account. Subsequent discounts, returns and allowances are credited to this account.
The final settlement of the factor’s holdback is made after the factored receivables have been
fully collected.
Illustration 13. Factoring
During December, ECONOMOS Corp. sold goods priced at P200,000 with credit terms of n/30.
These were immediately factored to a finance company. The factoring fee was 10% of the
receivables purchased. The factor’s holdback is 5% of the purchase price.

The entry to record the factoring is as follows:

Cash 171,000
Loss from Factoring 20,000
Receivable from Factor 9,000
Accounts Receivable 200,000

Gross amount of receivables factored ₱ 200,000

Less: Factoring fee (10% x 200,000) 20,000
Factor’s holdback (5% x 180,000) 9,000 29,000
Net cash received from factoring ₱ 171,000
When customers whose accounts were factored make returns, the transaction is recorded as:
Sales Returns and Allowances 10,000
Receivable from Factor 10,000
When all the receivables factored are collected and no returns, discounts or allowances are
allowed, final settlement with the factor is recorded as:
Cash 9,000
Receivable from Factor 9,000

INTERMEDIATE ACCOUNTING PART 1 43

 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

PRESENTATION OF TRADE AND OTHER RECEIVABLES

Trade receivables and non-trade receivables which are currently collectible shall be presented
on the face of the statement of financial position as one line item called trade and other
receivables.

DISCLOSURE REQUIREMENTS:
1. An entity shall disclose the following in its financial statements (based on IFRS 7 Financial
Instruments: Disclosures):
I. information that enables users of its financial statements to evaluate the significance of
receivables for its financial position and performance, including significant terms and
conditions that may affect the amount, timing, and certainty of future cash flows;
II. the accounting policy and method adopted including the criteria for recognition and the
basis of measurement applied;
III. information about its exposure to credit risk including the amount that best represents
its maximum credit risk exposure at the end of the reporting period, without taking
account of the fair value of any collateral, in the event of other parties failing to perform
their obligations and including significant concentrations of credit risks; and
IV. information about its exposure to interest rate risk including contractual repricing or
maturity date whichever dates are earlier and including effective interest rates, when
applicable.
2. For accounts receivable pledged or assigned and notes receivable discounted, the entity
shall disclose the following:
a) the nature of the risks and rewards of ownership to which the entity remains exposed;
b) the carrying amount of financial assets it has pledged as collateral for liabilities or
contingent liabilities; and
c) the terms and conditions relating to its pledge.
3. When an entity holds collateral and is permitted to sell or repledge the collateral in the
absence of default by the owner of the collateral, it shall disclose:
i. the fair value of the collateral held;
ii. the fair value of any such collateral sold or repledged, and whether the entity has an
obligation to return it; and
iii. the terms and conditions associated with the use of the collateral.
4. When an entity shall disclose material items of income and expense, and gains and losses
resulting from receivables. For this purpose, the disclosure shall include at least the
following items:
• total interest income, calculated using the effective interest method; and
• the amount of interest income accrued on impaired receivables

5. An entity shall disclose the nature and amount of any impairment loss recognized in profit
or loss (Bad Debts Expense). When receivables are impaired by credit losses and the entity
records the impairment in a separate account (allowance account) to record individual
impairments of a similar account used to record a collective impairment rather than directly
reducing the carrying amount of the asset, it shall disclose a reconciliation of changes in
that account during the period.

INTERMEDIATE ACCOUNTING PART 1 44

 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

THEORIES: TRUE or FALSE. Read the statements below and determine if the following statement
is true or false.

1. Receivables are claims that are expected to be settled by receipt of cash or another financial
asset from another entity, but not both.

2. Trade receivables are recognized simultaneously with the recognition of related revenue
when the criteria for revenue recognition are met.

3. Accounts receivable is always recorded gross of trade discounts but net of cash discounts.

4. Allowance for doubtful accounts/expected credit losses could have a debit balance during a
period due to excessive write-offs. This can be fixed or adjusted at year-end through
provision of doubtful accounts expense for the year.

5. Cash flows attributable to short-term notes receivable are not discounted because the
difference between the present value and the face amount is not material.

6. When using the allowance method of accounting for doubtful accounts, the effect of writing
off an uncollected account on the accounts receivable is a decrease on the balance and on
the allowance for doubtful accounts is also a decrease on the balance.

7. An entity received a 60-day, 10% note for ₱10,000 on April 16, 2023. The entity should
record a total receivable due of ₱10,250 on June 16, 2023.

8. In loans receivables, all transaction costs such as direct origination costs, indirect
origination costs and origination fees shall be added to the carrying amount of the loan.

9. If the face amount of the note is greater than the present value of note, there is a discount
on notes receivable.

10. The amortization of premium on notes receivable that is recognized shall be an addition to
interest income.

11. A 240-day, 6% interest bearing note was discounted at a bank at 8% after being held for
150 days. The proceeds received from the bank upon discounting would be maturity value
less the discount at 8% for 150 days.

12. An entity factored accounts receivable without recourse to a bank. The Company received
cash as a result of this transaction which is a bank loan to be repaid by the proceeds from
the company’s accounts receivable.

INTERMEDIATE ACCOUNTING PART 1 45

 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

PROBLEMS: Answer the following requirements. Prepare supporting computations and

solutions as necessary.
PROBLEM 1:

The following transactions were completed by DEADSHOT COMPANY in December 2022:

Dec. 9 Sold merchandise to ARGUS Store under credit terms of 2/10, n/30. The list
price is P80,000, less 10%, less 5%.
10 Sold merchandise to HIVE Corp., P50,000, 2/10, n/30.
19 Collected the account of ARGUS Store in full.
26 Sold merchandise to PENTAGON Corp., P40,000, 2/10, n/30.

The company adopts the calendar year as its accounting period. The accounts of HIVE Corp and
PENTAGON Corp. are considered to be collectible on December 31. PENTAGON Corp. paid its
account in full on January 5, 2023, while HIVE Corp. paid its account in full on January 9, 2023.

Required: Journalize the foregoing transactions using the gross method and net method of
accounting for sales discounts. Prepare also any appropriate adjusting entry on December 31.
PROBLEM 2:

HARLEY QUINN Company used the allowance method of accounting for doubtful accounts. The
following summary schedule was prepared from an aging of accounts receivables outstanding
on December 31, 2022:

Number of days outstanding Amount Uncollectibility

0-30 days 2,500,000 2%
31-60 days 1,000,000 10%
61-90 days 500,000 20%
Over 90 days 100,000 40%

The following information is available for the year 2022:

Sales for 2022 (25% cash sales; 75% credit sales) 50,000,000
Allowance for doubtful accounts:
Balance, January 1, 2022 (debit balance) 20,000
Write-offs during the year 1,350,000
Recovery of accounts written off during the year 750,000

The company based the estimate of the doubtful accounts on the aging of the accounts
receivable.

Required: Compute for the following:

1. Allowance for doubtful accounts for December 31, 2022.
2. Doubtful accounts expense for 2022.
3. Accounts receivable to be presented on December 31, 2022.

INTERMEDIATE ACCOUNTING PART 1 46

 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

PROBLEM 3:

On January 1, 2022, CAP. BOOMERANG Corp. sold a tract of land that was acquired several
years ago for ₱1,800,000. CAP. BOOMERANG received a three-year, non-interest-bearing note
for ₱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 equal
annual installments of ₱2,000,000 every December 31, starting December 31, 2022.

Required: (Round off PV factors to four decimal places.)

1. Prepare an amortization table based on the transaction above until the end of term.
2. What is the amount of interest income recognized in CAP. BOOMERANG 's profit and loss
for the year 2022 and 2023?
3. What is the carrying value of the note on December 31, 2023?

PROBLEM 4:
ENCHANTRESS Corp. granted a loan to a client on January 1, 2022. The interest on the loan
10% payable annually starting December 31, 2022. The loan matures in three years on
December 31, 2024. Pertinent information on the loan is provided below:

Principal amount ₱ 1,000,000

Origination fee received from the borrower 55,200
Direct origination costs paid 30,770
Indirect origination costs paid 5,000

After considering the origination fee received from the borrower and the direct origination costs
incurred, the effective rate on the loan is 11%.

Required: Compute for the following:

1. Initial measurement of the loan
2. Interest income for 2022
3. Carrying amount of the loan on December 31, 2022
4. Journal entries from January 1, 2022 up to December 31, 2022.

PROBLEM 5:
KILLER CROC INC. received from a customer a one-year, ₱500,000 note bearing annual interest
of 8%. Five months prior to maturity, KILLER CROC INC. discounted the note at Asia United Bank
at an effective interest rate of 10%.

Required: Compute for the amount of proceeds from the note discounting and provide the
entries for the discounting, assuming the note was discounted without recourse.

INTERMEDIATE ACCOUNTING PART 1 47

 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

PROBLEM 6:
BLOODSPORT COMPANY finances some of its current operations by factoring its accounts
receivable to a finance company. On July 1, 2022, the company factored ₱2,000,000 of its
accounts receivable to RATCATCHER 2 Company. Purchase price was 85% of the receivables
factored. RATCATCHER 2 withheld 5% of the purchase price as protection against sales returns
and allowances.

Sales returns recorded by RATCATCHER 2 COMPANY on the factored accounts receivable

totaled ₱30,000; the balance of the factor's holdback was settled by the finance company on
August 31, 2022.

Required:
1. What was the net cash received by BLOODSPORT COMPANY from these factored accounts?
2. Give the entries in the books BLOODSPORT COMPANY to record the foregoing in the
months of July and August 2022.

PROBLEM 7:
KING SHARK INC. loaned PEACEMAKER Corp. ₱5,000,000 on January 1, 2022. The terms of the
loan were payment in full on December 31, 2026 plus annual interest payments at 10% every
December 31 starting December 31, 2022 until December 31, 2026.

Due to the economic downtrend brought by the different economic recessions, PEACEMAKER
Corp. is experiences declining revenues and is likely to default on its loan payment with KING
SHARK Inc. PEACEMAKER Corp. requests for a restructuring of its loan with KING SHARK INC.
on December 31, 2026. KING SHARK accrued the interest in 2026.

The prevailing market rate of interest on December 31, 2026 is 7%. The terms of the
modification of the agreement are as follows:
a. Condonation of half of the accrued interest, the other half will be paid on restructuring date.
b. Extension of maturity date to December 31, 2028 with no interest during the extended term.

Required: Compute for the following: (Round off PV factors to four decimal places.)
1. Present value of the expected future cash flows as of the restructuring date.
2. Impairment loss for 2026.
3. Interest income for 2027.
4. Carrying amount of the loan receivable on December 31, 2027.

INTERMEDIATE ACCOUNTING PART 1 48