Louis Dee Miraflor

Audit Intern, Deloitte Philippines

With High Honors, Trece Martires City Senior High School
President, ABM Club
Champion, 1st Provincial ABM Quiz Bee
Finished Grade 10 in a Science High School

About the Speaker

Receivables
 Ownership:
Destination - Seller
Shipping Point - Buyer

Party who actually paid:

Prepaid- Seller
Collect - Buyer
Ownership:

Seller Buyer

Shipping Point Destination

Ownership:

Seller

Destination
Ownership:

Buyer

Shipping Point
Ownership:

Seller Buyer

Shipping Point Destination

 Destination Prepaid -

Destination Collect Decrease AR

Shipping Point Prepaid Increase AR

Shipping Point Collect -

*entity is the seller*

 Destination Prepaid -

Destination Collect Decrease AR

Shipping Point Prepaid Increase AR

Shipping Point Collect -

*entity is the seller*

Destination + Collect
Nag-abono si Buyer, bababa ang collection.
Decrease of AR.

Shipping Point + Prepaid

Nag-abono si Seller, tataas ang collection.
Increase of AR.

*entity is the seller*

SEVENTEEN Company uses the gross method of accounting for cash discounts.
In one of its transactions on December 15, 2022, SEVENTEEN Company sold
merchandise with a list price of P2,000,000 to a client who was given a trade
discount of 20% and 10%. Credit terms given by SEVENTEEN Company were
5/10, n/30. The goods were shipped FOB shipping point, freight collect. Total
freight charge paid by the client was P100,000. On December 20, 2022, the
client returned damaged goods originally billed at P200,000.

What is the amortized cost of this accounts receivable on Dec. 31, 2022?

A. 1,240,000
B. 1,140,000
C. 1,168,000
D. 1,068,000
SEVENTEEN Company uses the gross method of accounting for cash discounts.
In one of its transactions on December 15, 2022, SEVENTEEN Company sold
merchandise with a list price of P2,000,000 to a client who was given a trade
discount of 20% and 10%. Credit terms given by SEVENTEEN Company were
5/10, n/30. The goods were shipped FOB shipping point, freight collect. Total
freight charge paid by the client was P100,000. On December 20, 2022, the
client returned damaged goods originally billed at P200,000.

What is the amortized cost of this accounts receivable on Dec. 31, 2022?

A. 1,240,000
B. 1,140,000
C. 1,168,000
D. 1,068,000
SEVENTEEN Company uses the gross method of accounting for cash discounts.
In one of its transactions on December 15, 2022, SEVENTEEN Company sold
merchandise with a list price of P2,000,000 to a client who was given a trade
discount of 20% and 10%. Credit terms given by SEVENTEEN Company were
5/10, n/30. The goods were shipped FOB shipping point, freight collect. Total
freight charge paid by the client was P100,000. On December 20, 2022, the
client returned damaged goods originally billed at P200,000.

What is the amortized cost of this accounts receivable on Dec. 31, 2022?

A. 1,240,000
B. 1,140,000
C. 1,168,000
D. 1,068,000
Trade Discounts are CONSIDERED whether taken or not

Trade Discounts
vs.
Cash Discounts

Cash Discounts are special discounts to fasten payments

SEVENTEEN Company uses the gross method of accounting for cash discounts.
In one of its transactions on December 15, 2022, SEVENTEEN Company sold
merchandise with a list price of P2,000,000 to a client who was given a trade
discount of 20% and 10%. Credit terms given by SEVENTEEN Company were
5/10, n/30. The goods were shipped FOB shipping point, freight collect. Total
freight charge paid by the client was P100,000. On December 20, 2022, the
client returned damaged goods originally billed at P200,000.

What is the amortized cost of this accounts receivable on Dec. 31, 2022?

A. 1,240,000
B. 1,140,000
C. 1,168,000
No mention of payment, hence,
D. 1,068,000 discount for credit terms will not apply
SEVENTEEN Company uses the gross method of accounting for cash discounts.
In one of its transactions on December 15, 2022, SEVENTEEN Company sold
merchandise with a list price of P2,000,000 to a client who was given a trade
discount of 20% and 10%. Credit terms given by SEVENTEEN Company were
5/10, n/30. The goods were shipped FOB shipping point, freight collect. Total
freight charge paid by the client was P100,000. On December 20, 2022, the
client returned damaged goods originally billed at P200,000.

What is the amortized cost of this accounts receivable on Dec. 31, 2022?

List Price 2,000,000

A. 1,240,000 Less: 20% Discount (400,000)
B. 1,140,000 Total 1,600,000
C. 1,168,000 Less: 10% Disount (160,000)
Total 1,440,000
D. 1,068,000
Less: Returned Goods (200,000)
Answer 1,240,000
SEVENTEEN Company uses the gross method of accounting for cash discounts.
In one of its transactions on December 15, 2022, SEVENTEEN Company sold
merchandise with a list price of P2,000,000 to a client who was given a trade
discount of 20% and 10%. Credit terms given by SEVENTEEN Company were
5/10, n/30. The goods were shipped FOB shipping point, freight collect. Total
freight charge paid by the client was P100,000. On December 20, 2022, the
client returned damaged goods originally billed at P200,000.

What is the amortized cost of this accounts receivable on Dec. 31, 2022?

A. 1,240,000 Alternative Solution:

B. 1,140,000 (2,000,000 x 0.8 x 0.9) - 200,000 = 1,240,000
C. 1,168,000
D. 1,068,000
 Notes
Receivables
 Realistic Unrealistic

Rate Nominal Rate = Effective Rate Nominal Rate ≠ Effective Rate

Premium None Nominal Rate > Effective Rate

Discount None Nominal Rate < Effective Rate

Amortization None Nominal Rate - Effective Rate

Interest Income Face Value x Nominal Rate Amortized Cost x Effective Rate

CV, BS Date Face Value Amortized Cost

 Realistic Unrealistic

Rate Nominal Rate = Effective Rate Nominal Rate ≠ Effective Rate

Premium None Nominal Rate > Effective Rate

Discount None Nominal Rate < Effective Rate

Amortization None Nominal Rate - Effective Rate

Interest Income Face Value x Nominal Rate Amortized Cost x Effective Rate

CV, BS Date Face Value Amortized Cost

 Realistic Unrealistic

Rate Nominal Rate = Effective Rate Nominal Rate ≠ Effective Rate

10% 8%
Premium None Nominal Rate > Effective Rate

10% 12%
Discount None Nominal Rate < Effective Rate

Amortization None Nominal Rate - Effective Rate

Interest Income Face Value x Nominal Rate Amortized Cost x Effective Rate

CV, BS Date Face Value Amortized Cost

 Other Names for Nominal and Effective Rates

Nominal Rate: Stated Rate

Coupon Rate
Contract Rate

Effective Rate: Prevailing Rate

Market Rate
Yield Rate
NewJeans Company sold one of its machines on January 1, 2022 to IVE
Company in exchange for a non-interest-bearing note requiring five annual
payments of P500,000 or a total of P2,500,000. The machine had a carrying
amount of P1,750,000 in NewJeans' books. The first payment is due on
December 31, 2022. The market interest for similar notes was 10% and the
relevant present value factors are:

PV of a single payment at 10% for 5 periods 0.621

PV of an ordinary annuity of 1 at 10% for 5 periods 3.791
PV of an annuity due of 1 at 10% for 5 periods 4.170

How much is the gain or loss on sale of machine?

How much is the interest income for the year 2022?
How much is the carrying value of the notes on December 31, 2022?
LUMP SUM
PV of a single payment at 10% for 5 periods

EQUAL PAYMENTS IN INSTALLMENTS

PV of an ordinary annuity of 1 at 10% for 5 periods

IN ADVANCE
PV of an annuity due of 1 at 10% for 5 periods
LUMP SUM
PV of a single payment at 10% for 5 periods
How to compute: [Link] ÷÷=====

EQUAL PAYMENTS IN INSTALLMENTS

PV of an ordinary annuity of 1 at 10% for 5 periods
How to compute: [Link] ÷÷===== -1÷÷[Link]=

IN ADVANCE
PV of an annuity due of 1 at 10% for 5 periods
How to compute: [Link] ÷÷===== -1÷÷[Link]=+1
SAMPLE EXERCISE
Compute for (Use 4 decimal places):

PV of 1 at 6% for 5 periods =
PV of Ordinary Annuity at 6% for 5 periods =

PV of 1 at 12% for 4 periods =

PV of Ordinary Annuity at 12% for 4 periods =

PV of 1 at 9% for 6 periods =
PV of Ordinary Annuity at 9% for 6 periods =
SAMPLE EXERCISE
Compute for (Use 4 decimal places):

PV of 1 at 6% for 5 periods = 0.7473

PV of Ordinary Annuity at 6% for 5 periods = 4.2124

PV of 1 at 12% for 4 periods = 0.6355

PV of Ordinary Annuity at 12% for 4 periods = 3.0373

PV of 1 at 9% for 6 periods = 0.5963

PV of Ordinary Annuity at 9% for 6 periods = 4.4860
NewJeans Company sold one of its machines on January 1, 2022 to IVE
Company in exchange for a non-interest-bearing note requiring five annual
payments of P500,000 or a total of P2,500,000. The machine had a carrying
amount of P1,750,000 in NewJeans' books. The first payment is due on
December 31, 2022. The market interest for similar notes was 10% and the
relevant present value factors are:

PV of a single payment at 10% for 5 periods 0.621

PV of an ordinary annuity of 1 at 10% for 5 periods 3.791
PV of an annuity due of 1 at 10% for 5 periods 4.170

How much is the gain or loss on sale of machine?

Note 500,000 x 3.791 = 1,895,500

Machine (1,750,000)
Gain 145,500
NewJeans Company sold one of its machines on January 1, 2022 to IVE
Company in exchange for a non-interest-bearing note requiring five annual
payments of P500,000 or a total of P2,500,000. The machine had a carrying
amount of P1,750,000 in NewJeans' books. The first payment is due on
December 31, 2022. The market interest for similar notes was 10% and the
relevant present value factors are:

PV of a single payment at 10% for 5 periods 0.621

PV of an ordinary annuity of 1 at 10% for 5 periods 3.791
PV of an annuity due of 1 at 10% for 5 periods 4.170

How much is the interest income for the year 2022?

Note 500,000 x 3.791 = 1,895,500

Rate 10%
Interest Income 189,550
NewJeans Company sold one of its machines on January 1, 2022 to IVE
Company in exchange for a non-interest-bearing note requiring five annual
payments of P500,000 or a total of P2,500,000. The machine had a carrying
amount of P1,750,000 in NewJeans' books. The first payment is due on
December 31, 2022. The market interest for similar notes was 10% and the
relevant present value factors are:

PV of a single payment at 10% for 5 periods 0.621

PV of an ordinary annuity of 1 at 10% for 5 periods 3.791
PV of an annuity due of 1 at 10% for 5 periods 4.170

How much is the carrying value of the notes on December 31, 2022?
Shortcut Method for Carrying Value

CV x [Link] - Cash Inflows

NewJeans Company sold one of its machines on January 1, 2022 to IVE
Company in exchange for a non-interest-bearing note requiring five annual
payments of P500,000 or a total of P2,500,000. The machine had a carrying
amount of P1,750,000 in NewJeans' books. The first payment is due on
December 31, 2022. The market interest for similar notes was 10% and the
relevant present value factors are:

PV of a single payment at 10% for 5 periods 0.621

PV of an ordinary annuity of 1 at 10% for 5 periods 3.791
PV of an annuity due of 1 at 10% for 5 periods 4.170

How much is the carrying value of the notes on December 31, 2022?

Solution: 1,895,500 x 1.1 - 500,000

= 1,585,050
NewJeans Company sold one of its machines on January 1, 2022 to IVE
Company in exchange for a non-interest-bearing note requiring five annual
payments of P500,000 or a total of P2,500,000. The machine had a carrying
amount of P1,750,000 in NewJeans' books. The first payment is due on
December 31, 2022. The market interest for similar notes was 10% and the
relevant present value factors are:

PV of a single payment at 10% for 5 periods 0.621

PV of an ordinary annuity of 1 at 10% for 5 periods 3.791
PV of an annuity due of 1 at 10% for 5 periods 4.170

How much is the carrying value of the notes on December 31, 2023?
NewJeans Company sold one of its machines on January 1, 2022 to IVE
Company in exchange for a non-interest-bearing note requiring five annual
payments of P500,000 or a total of P2,500,000. The machine had a carrying
amount of P1,750,000 in NewJeans' books. The first payment is due on
December 31, 2022. The market interest for similar notes was 10% and the
relevant present value factors are:

PV of a single payment at 10% for 5 periods 0.621

PV of an ordinary annuity of 1 at 10% for 5 periods 3.791
PV of an annuity due of 1 at 10% for 5 periods 4.170

How much is the carrying value of the notes on December 31, 2023?

Solution: 1,585,050 x 1.1 - 500,000

= 1,243,555
NewJeans Company sold one of its machines on January 1, 2022 to IVE
Company in exchange for a non-interest-bearing note requiring five annual
payments of P500,000 or a total of P2,500,000. The machine had a carrying
amount of P1,750,000 in NewJeans' books. The first payment is due on
December 31, 2022. The market interest for similar notes was 10% and the
relevant present value factors are:

PV of a single payment at 10% for 5 periods 0.621

PV of an ordinary annuity of 1 at 10% for 5 periods 3.791
PV of an annuity due of 1 at 10% for 5 periods 4.170

How much is the carrying value of the notes on December 31, 2023?

Alternative 1,895,500 x 1.1 - 500,000 x 1.1 - 500,000

Solution: = 1,243,555
2-Minute
Break
On January 1, 2021 Le Sserafim Company sold a tract of land for P5,250,000 to
RV Company. RV Company paid P1,250,000 down and signed a non-interest
bearing note for the balance which is due on January 1, 2025. There was no
established exchange price for the land and the note had no ready market. The
prevailing interest rate for this type of the note was 12%.

How much is the carrying value of the note on December 31, 2021?

A. 4,000,000
B. 3,188,684
C. 2,847,040
D. 2,542,000
On January 1, 2021 Le Sserafim Company sold a tract of land for P5,250,000 to
RV Company. RV Company paid P1,250,000 down and signed a non-interest
bearing note for the balance which is due on January 1, 2025. There was no
established exchange price for the land and the note had no ready market. The
prevailing interest rate for this type of the note was 12%.

Land 5,250,000 PV of 1 at 12% for 4 periods = 0.6355

Cash (1,250,000)
Notes 4,000,000

Carrying Value on January 1, 2021

4,000,000 x 0.6355 = 2,542,000

Carrying Value on December 31, 2021

2,542,000 x 1.12 = 2,847,040 *Note: No Cash Inflow
Interest
Bearing
ZB1 Corporation received from Wanna One Company a 4-year, 12% note on
January 1, 2022 for P500,000 in exchange for consultation services rendered.
The fair value of the services is not readily determinable and the note is not
readily marketable. The note is considered to have an appropriate imputed rate
of interest of 10%. Annual interest is receivable every December 31.
 Notes

Principal Interest
PV of 1 PV of Ordinary Annuity

*Compute the PV using Effective Rate

*Compute the Interest using Nominal Rate
ZB1 Corporation received from Wanna One Company a 4-year, 12% note on
January 1, 2022 for P500,000 in exchange for consultation services rendered.
The fair value of the services is not readily determinable and the note is not
readily marketable. The note is considered to have an appropriate imputed rate
of interest of 10%. Annual interest is receivable every December 31.

Nominal Rate = 12%

Effective Rate = 10%

Principal = 500,000
Interest = 500,000 x 12% = 60,000

PV of 1 at 10% for 4 periods = 0.6830

PV of Ordinary Annuity at 10% for 4 periods = 3.1699
 Notes

Principal Interest
500,000 60,000
x 0.6830 x 3.1699
= 341,500 = 190,194

Carrying Value of Notes = 341,500 + 190,194 = 531694

January 1, 2022
ZB1 Corporation received from Wanna One Company a 4-year, 12% note on
January 1, 2022 for P500,000 in exchange for consultation services rendered.
The fair value of the services is not readily determinable and the note is not
readily marketable. The note is considered to have an appropriate imputed rate
of interest of 10%. Annual interest is receivable every December 31.

January 1, 2022 Carrying Value - 531694

Compute for:
Interest Income for the Year 2022
Carrying Value of the Note on December 31, 2022
Interest Income for the Year 2023
Carrying Value of the Note on December 31, 2023
January 1, 2022 Carrying Value - 531694
Compute for:
Interest Income for the Year 2022
Carrying Value of the Note on December 31, 2022
Interest Income for the Year 2023
Carrying Value of the Note on December 31, 2023

INTEREST INCOME FOR THE YEAR 2022

531,694 X 10% = 53,169

January 1, 2022 Carrying Value - 531694
Compute for:
Interest Income for the Year 2022
Carrying Value of the Note on December 31, 2022
Interest Income for the Year 2023
Carrying Value of the Note on December 31, 2023

CARRYING VALUE OF THE NOTE ON DECEMBER 31, 2022

531,694 X 1.1 - 60,000 = 524,863

January 1, 2022 Carrying Value - 531694
Compute for:
Interest Income for the Year 2022
Carrying Value of the Note on December 31, 2022
Interest Income for the Year 2023
Carrying Value of the Note on December 31, 2023

INTEREST INCOME FOR THE YEAR 2023

531,694 X 1.1 - 60,000 = 524,863 X 10% = 52,486

January 1, 2022 Carrying Value - 531694
Compute for:
Interest Income for the Year 2022
Carrying Value of the Note on December 31, 2022
Interest Income for the Year 2023
Carrying Value of the Note on December 31, 2023

CARRYING VALUE OF THE NOTE ON DECEMBER 31, 2023

531,694 X 1.1 - 60,000 = 524,863

524,863 X 1.1 - 60,000 = 517,349

OR
531,691 X 1.1 - 60,000 X 1.1 - 60,000 = 517,349
Receivable
Financing
 Loan Sale Included Excluded

Pledging (General) ✓ ✓

Assignment (Specific) ✓ ✓

Factoring (AR) ✓* ✓** ✓* ✓**

Discounting (NR) ✓* ✓** ✓* ✓**

*With Recourse
**Without Recourse
 Loan Sale Included Excluded

Pledging (General) ✓ ✓

Assignment (Specific) ✓ ✓

Factoring (AR) ✓* ✓** ✓* ✓**

Discounting (NR) ✓* ✓** ✓* ✓**

*With Recourse
**Without Recourse
 Loan Sale Included Excluded

Pledging (General) ✓ ✓

Assignment (Specific) ✓ ✓

Factoring (AR) ✓* ✓** ✓* ✓**

Discounting (NR) ✓* ✓** ✓* ✓**

*With Recourse
**Without Recourse
 Loan Sale Included Excluded

Pledging (General) ✓ ✓

Assignment (Specific) ✓ ✓

Factoring (AR) ✓* ✓** ✓* ✓**

Discounting (NR) ✓* ✓** ✓* ✓**

*With Recourse
**Without Recourse
On February 1, 2022, NCT Company factored receivables without recourse with
a face amount of P300,000 to WAYV Company. WAYV Company assesses a
finance charge of 3% of the receivables and retains 5% of the receivables.
Relative to this transaction, NCT factored the receivables on a without recourse
basis.

How much is the proceeds and loss on sale arising from factoring of
receivables?

A. 291,000 ; 0
B. 291,000 ; 9,000
C. 276,000 ; 0
D. 276,000 ; 9,000
On February 1, 2022, NCT Company factored receivables without recourse
with a face amount of P300,000 to WAYV Company. WAYV Company
assesses a finance charge of 3% of the receivables and retains 5% of the
receivables. Relative to this transaction, NCT factored the receivables on a
without recourse basis.

How much is the proceeds and loss on sale arising from factoring of
receivables?

A. 291,000 ; 0
B. 291,000 ; 9,000
C. 276,000 ; 0
D. 276,000 ; 9,000
FACTORING
AR Factored xx
Less: Factoring Fee (xx)
Selling Price xx
Less: Factor's Holdback (xx)
Proceeds xx

*Factor's Holdback is base on AR Factored)

On February 1, 2022, NCT Company factored receivables without recourse
with a face amount of P300,000 to WAYV Company. WAYV Company
assesses a finance charge of 3% of the receivables and retains 5% of the
receivables. Relative to this transaction, NCT factored the receivables on a
without recourse basis.

How much is the proceeds and loss on sale arising from factoring of
receivables?

A. 291,000 ; 0
AR Factored 300,000
B. 291,000 ; 9,000
Less: Factoring Fee (9,000)
C. 276,000 ; 0
Selling Price 291,000
D. 276,000 ; 9,000
Less: Factor's Holdback (15,000)
Proceeds 276,000
 Good luck and
God bless on your
qualifying exam!