RECEIVABLES

NATURE OF RECEIVABLES
Receivables – are financial assets that represent a contractual right to receive cash or another financial asset
from another entity.

CLASSIFICATION: (EXCEPT FINANCIAL INSTITUTIONS)

a. Trade receivables – are receivables arising from the sale of goods or services in the ordinary course of
business. They include AR (customers’ account, trade debtors) and NR. They are classified as current
assets when they are expected to be realized in cash within the normal operating cycle or 12 months,
whichever is longer.
▪ Accounts Receivable - receivables supported by oral or informal promises to pay.
▪ Notes Receivable – receivables supported by written or formal promises to pay in the form of
promissory notes.
b. Non-trade receivables – are receivables arising from sources other than sale of goods or services in the
ordinary course of business. They are classified as current assets only when they are expected to be
realized in cash within one year. Examples include:
▪ Advances to or receivable from shareholders, officers or employees – trade and other receivables if
collectible in one year
▪ Advances to affiliates – long term investments
▪ Advances to suppliers for the acquisition of merchandise – usually under trade and other receivables
▪ Subscription receivable if collectible within one year – arising from subscription of shares
▪ Accrued income – receivables arising from income earned but not yet collected, such as interest
income, dividend income, rent income, and the like.
▪ Claims receivable – receivables from insurance companies for casualties sustained, defendants under
suit, government agencies for refundable taxes and other remittances, common carriers for damaged
or lost goods, and suppliers for returned or damaged goods.
▪ Deposits – receivables from reimbursable deposits paid to cover potential damages or losses, deposits
for guarantee of performance or payment, and deposits for returnable items (e.g., crates, containers,
etc.)

Abnormal balances in accounts

Customer’s credit balances – results from overpayments, returns and allowances, and advance payments from
customers. These are classified as current liabilities and are not offset against debit balances in other
customer’s accounts.

Suppliers’ debit balances – results from overpayments and advances to suppliers. These are classified as
current assets and are not offset against accounts payable.

FINANCIAL STATEMENT PRESENTATION:

▪ Trade receivables and nontrade receivables which are currently collectible shall be presented as one line
item under “Trade and other receivables”.
▪ The breakdown of items is disclosed in the notes to financial statements.

RECOGNITION:
▪ As a rule, receivable is recognized when the entity has the right to consideration that is unconditional. This
is normally the case when control over the promised goods or services is transferred to the customer
(actual or constructive delivery).
▪ As a rule, control passes to the buyer/customer when:
a. No shipping terms is included in the contract – upon receipt of the goods or services
b. With shipping terms is included in the contract
1. FOB destination – upon the receipt of goods by the customer
2. FOB shipping point – upon shipment of goods to the carrier
MEASUREMENT:
▪ Receivables are initially recognized at fair value plus transaction costs under PFRS 9 Financial instruments.
Summary of Measurement
Types Initial Subsequent
1. Accounts receivable Face value (invoice price) Recoverable historical cost or NRV
2. Notes receivable
a. Short term interest-bearing Face value Recoverable historical cost
b. Short term non-interest
bearing with significant Present value Amortized cost
financing component
c. Long-term IB with reasonable
interest (effective rate = stated Face value Recoverable historical cost
rate)
d. Long-term IB with
unreasonable interest Present value Amortized cost
(effective rate ≠ stated rate)
e. Long-term non-IB Present value Amortized cost
3. Loans receivable Face value + DOC – OF Amortized cost

Notes:
▪ Invoice price is equal to [List price less trade discount less cash discount if net method]
▪ Recoverable historical cost represents the amount of cash expected to be recovered from the principal or
face value of the receivable.
▪ Amortized cost is the amount at which the financial asset is measured at initial recognition minus principal
repayments plus or minus the cumulative amortization using the effective interest method of any
difference between the initial carrying amount and the maturity amount and, for financial assets adjusted
for any loss allowance.
▪ Indirect origination costs incurred in loan arrangement shall be treated as outright expense.

SUBSEQUENT MEASUREMENT:
1. ACCOUNTS RECEIVABLE ➔ RECOVERABLE HISTORICAL COST OR NET REALIZABLE VALUE
Format:
Outstanding balance of A/R, end xxx
Less: Allowances for
(a) Sales discount
(b) Sales returns
(c) Freight charges
(d) Doubtful accounts xxx
Net realizable value xxx

Accounting for Cash discounts:

A. Under PFRS 15 (Revenue from contracts with customers)
▪ The entity is required to estimate the amount to which it expects to be entitled in exchange for transferring
the promised goods or service.
▪ The entity recognizes revenue (and receivable) equal to the estimated amount when it satisfies its
performance obligation in the contract.

B. Under traditional GAAP

▪ Cash discounts are accounted for using either:
1. Gross method – A/R and sales are initially recorded gross of cash discount.
2. Net method – A/R and sales are initially recorded net of cash discount.
Gross method Net method
Transactions: Entries: Entries:
1. Sales of merchandise A/R 100k A/R 95k
 for 100k, terms 5/10, Sales 100k Sales 95k
n/30.
2. Assume collection is Cash 95k Cash 95k
made within the Sales discount 5k A/R 95k
discount period A/R 100k
3. Assume collection is Cash 100k Cash 100k
made beyond the A/R 100k Sales discount forfeited 5k
discount period A/R
95k

Accounting for freight charges:

 The freight cost incurred has effects on accounts receivable when the terms are:
a. FOB destination, freight collect ➔ deduction from A/R
b. FOB shipping point, freight prepaid ➔ addition to A/R

Accounting for doubtful accounts:

1. Allowance method – recognize an allowance when the collectability of accounts becomes doubtful or
questionable.
➢ This method conforms with the accrual basis, matching, and conservatism. When it becomes certain
that accounts are uncollectible or worthless, the accounts are written off.
➢ When accounts previously written off are subsequently recovered, the write-off is reversed and
reestablished and the collection is recorded.
2. Direct write-off method – recognize doubtful accounts expense only when the accounts are deemed
worthless or cannot be collected anymore.

Entries:
Allowance method Direct write-off method – not permitted under IFRS
1. Doubtful of collection 1. Doubtful of collection
Doubtful account expense –--- xx
Allowance for doubtful account expense ---- xx No entry!
2. Write-off or the accounts are proved to be 2. Write-off or the accounts are proved to be
worthless worthless
Allowance for doubtful account expense -– xx Doubtful account expense -–xx
Accounts receivable ----------------------------xx Accounts receivable -------------xx
3. Recovery of doubtful accounts previously written 3. Recovery of doubtful accounts previously written
off off
*Accounts receivable ---------xx
Allowance for doubtful account expense ---xx Cash --------------xx
Gain on recovery -----xx
**Cash ----------------xx
Accounts receivable ----xx

Sample T-account of A/R and AFDA transactions using Allowance method:

Allowance for doubtful accounts (AFDA)
xxx beg.
Write-off xxx xxx recovery of bad debts
xxx provision of bad debts*
End. xxx

Outstanding A/R, end.

beg. xxx xxx sales discount/returns
credit sales xxx xxx write-off of A/R
recoveries xxx xxx collection of A/R including recoveries
dishonored notes xxx
xxx End.
*Methods of estimating doubtful accounts:
1. Percentage of net credit sales (Single loss-rate approach) = the resulting amount is the “doubtful account
expense”.
AJE:
Doubtful account expense ---xx
Allowance for doubtful account expense --xx
2. Percentage of outstanding A/R (Single loss-rate approach) = the resulting amount is the “required ending
allowance for doubtful accounts”. Any balances of allowance for doubtful accounts during the period
should be taken into consideration.
Required ending allowance ----------------------xx
Less: Allowance before adjustment (cr) --------xx
OR
Add: Allowance before adjustment (dr) xx
Doubtful account expense xx
3. Aging of outstanding A/R (Provision matrix) = the resulting amount is the “required ending allowance for
doubtful accounts”. Any balances of allowance for doubtful accounts during the period should be taken
into consideration.
Required ending allowance ----------------------xx
Less: Allowance before adjustment (cr) --------xx
OR
Add: Allowance before adjustment (dr) xx
Doubtful account expense xx

Sample format of aging of accounts receivable:

Days outstanding or days the
Receivable balances % of uncollectible
receivables are past due
0-60 days 120,000 1%
61 – 120 days 90,000 3%
Total accounts receivable 210,000

Sample computation of DAE using aging method assuming there is a credit balance of Allowance for doubtful
accounts in the beginning of the period amounting to P1,900:
 (120k x 1%) + (90k x 3%) = 3,900 – 1,900 = 2,000

2. FOR NOTES RECEIVABLE ➔ IF INITIALLY MEASURED AT PRESENT VALUE, AT AMORTIZED COST

Present value is the current value of a future sum of money or stream of cash flows. When the promissory
note is initially measured at present value, the principal or the face value normally includes the interest.

The present value computation is computed as follows:

a. For lump-sum (meaning future cash flows is to be collected at maturity date) ➔ PV of 1
b. For installment (meaning future cash flows is to be collected periodically)
1. Amount is collected equally in advance or immediately ➔ PV of annuity due or in advance
2. Amount is collected equally after a certain period (quarterly, semi-annually or annually) ➔ PV of
ordinary annuity

Format:
Recoverable historical cost (NRV or amortized cost)
Face value approach
Face amount of notes receivable xxx
Less: Subsequent collections of principals (i.e., installment) xxx
Less: Unearned interest income, end xxx
Less: Reduction for impairment xxx
Carrying amount, end. xxx
 or

Present value approach

Carrying amount, initial xxx
Less: principal repayments (installment) xxx
Add: Amortization of discount using effective interest method xxx
Less: Amortization of premium using effective interest method xxx
Carrying amount, end. xxx

SAMPLE AMORTIZATION TABLE

Amortization table – lump-sum – TABLE 1
Unearned interest income (total Carrying amount/Amortized
Date Interest income
interest income) cost/Present value
Issue date - Face amount – present value Initial carrying amount
Subsequent Carrying amount Unearned interest income, beg. –
periods x EIR subsequent amortization PV, beg. + interest income

Amortization table – installment (LT-NIB) – TABLE 2

Date Collections Interest income Amortization Carrying amount/Present
value
12/31/x1 Equal to installment Carrying amount x Collection – Interest Carrying amount –
collections + interest ER income Amortization
received
‘12/31/x2 Current portion – Noncurrent portion –
12/31/x1 12/31/x1

Amortization table – installment (LT-IB with unreasonable rate) – TABLE 3

Date Collections Interest Interest income Amortization Carrying amount/Present
received value
xxx Equal to Face amount Carrying amount Interest Carrying amount –
installment x SR x ER received – collections + discount
collections Interest amortization – premium
income amortization

Discount amortization ➔ interest income > interest received (effective rate > nominal rate)
Premium amortization ➔ interest received > interest income (nominal rate > effective rate)

Sample journal entries in accounting for notes receivable:

Date of sale:
Notes receivable xx
Unearned interest income xx
Sales or any appropriate account xx

Schedule of interest collections (for IB note):

Cash or accrued interest income xx
Interest income xx

Amortization of discount:
Unearned interest income xx
Interest income xx

Collection of principal periodically (for installment) and derecognition of notes receivable:

Cash xx
Notes receivable xx
3. LOAN RECEIVABLE - is a financial asset arising from a loan granted by a bank or other financial institution to
a borrower or client. Same accounting for notes receivable except for transaction cost which is generally
incurred in granting loan.

Format:
Face value of the loan --------------------------------xxx
Add: Direct origination costs -----------------------xxx
Less: Origination fees charged to borrower ---(xxx)
Initial carrying amount of the loan xxx

Subsequent measurement: At amortized cost

IMPAIRMENT OF FINANCIAL ASSETS

▪ An entity shall recognize a loss allowance for expected credit losses on financial asset measured at
amortized cost.
▪ The amount of impairment loss can be measured as the difference between the carrying amount and the
present value of estimated future cash flows discounted at the original effective rate.

Impairment loss is computed as follows:

Carrying amount of the long-term receivable Pxxx
Less: Present value of expected future cash flows
at the date of impairment testing* xxx
Impairment loss xxx

*Should be discounted using the original effective interest rate.

The carrying amount of the long-term receivable is computed as follows:

1. For long-term receivable issued at face value
Outstanding principal amount at date of impairment testing Pxxx
Add: Accrued interest (only if recognized by the entity) xxx
Carrying amount of the long-term receivable xxx

2. For long-term receivable issued with premium or discount

Present value at date of impairment testing* Pxxx
Add: Accrued interest (only if recognized by the entity) xxx
Carrying amount of the long-term receivable xxx

*Computed as:
Outstanding principal amount as of the date of impairment testing xxx
Add (Deduct): Unamortized Premium (Discount) on long-term rec. xxx(xxx)
Present value at date of impairment testing xxx

**The present value of expected future cash flows at date of

impairment testing is computed as follows:
Future cash flows xxx
Multiplied by: PVF using original effective rate xxx
Present value of expected future cash flows xxx
Three-Stage Impairment Approach (General Approach)
Stage 1 Stage 2 Stage 3
Scope • Credit risk has not • Credit risk has • Credit risk has
increased significantly increased increased
since initial significantly since significantly since
recognition (low credit initial recognition initial recognition
risk expediency) plus there is
objective evidence of
impairment.
Recognition of impairment • Recognize 12-month • Recognize lifetime • Recognize lifetime
expected credit losses expected credit expected credit
losses losses
Computation base of • Interest income is • Interest income is • Interest income is
interest income computed on the gross computed on the computed on the net
carrying amount of the gross carrying carrying amount of
asset amount of the asset the asset

RECEIVABLE FINANCING
Receivable financing – refers to the act of inducing cash inflows from receivables other than from their normal
or scheduled payments.

Forms of receivable financing:

1. Pledge (hypothecation) of accounts receivable ➔ receivables are used as collateral security for loans. It is
treated as secured borrowing because the pledgor/borrower retains control over the pledged receivables.
Accordingly, the pledged receivables are not derecognized. Only loan transaction is recorded. No entry is
made for the pledge receivables (disclosed only in the notes to financial statements).

Sample disclosure to notes to financial statements:

“Accounts of ₱1,000,000 are pledged to obtain the bank loan of ₱500,000.

2. Assignment of accounts receivable ➔ is a formal form of pledge wherein the receivables is used as
collateral security for borrowing and are specifically identified and stated in the loan contract. Meaning,
portion of receivables will be transferred from receivable account to assigned receivable account. It is
treated as secured borrowing. Entry is made for the assigned receivables. The assigned receivables are
presented in the SOFP as regular receivables, i.e., included in “trade and other receivables”. However, the
equity in assigned receivables (C.A of assigned receivables less C.A of the related loan) is disclosed in the
notes. The assignment may be made on a:
a. Non-notification basis - Under this form, the assignor/borrower does not notify the
debtors/customers that their receivables have been assigned. Hence, the debtors/customers will
continue to remit payments to the assignor/borrower.
b. Notification basis – Under this form, the assignor/borrower notifies the debtors/customers that
their receivables have been assigned. Accordingly, the debtors/customers will remit payments on
the receivables directly to the assignee/lender.

3. Factoring of accounts receivable ➔ sale of accounts receivables to a factor (i.e., bank or financial
institutions). It is classified either:
a. Without recourse (absolute sale of accounts receivable) – receivables are derecognized. The difference
between the net proceeds and carrying amount of receivables is treated gain or loss on factoring to be
presented in profit or loss.
b. With recourse (factoring as a continuing agreement) – there is a contingent liability on the part of the
transferor in case the factored receivable has not been fully collected. Accordingly, the receivables are
not yet fully derecognized.
Computation of net proceeds:
Face value of the A/R factored xxx
Less: Service charge/commission/interest xxx
Factors’ holdback xxx xxx
Net proceeds xxx

Computation of gain or loss for absolute sale of accounts receivable:

Net proceeds + factors’ holdback xxx
Less: Carrying amount xxx
Gain or loss* xxx

*If the factoring is made on a casual basis (i.e., isolated event), the charges are recorded as “loss”. However, if
the transferor regularly factors receivables as a means of financing, the charges are recorded as regular
expenses (i.e., commission expense or interest expense).

4. Discounting of notes receivables (for negotiable promissory notes)

• The holder of the notes (payee) endorses the note to a bank in exchange for the maturity value of the
note less a discount. At maturity, the bank collects the maturity amount of the note from the maker
(customer).
a. Discounting without recourse (absolute sale of promissory note) – notes receivable is
derecognized.
The following formulas are used in accounting for NR discounting:
o Net proceeds = Maturity value (MV) – Discount
o Maturity value = Principal + Interest for the full term of the note
o Discount = MV x discount period x discount rate
o Discount period = remaining period to maturity date of the note as of date of discounting
(unexpired term of the note)
o Discount rate = rate at which the note is discounted with a bank.
o Interest income = accrued interest as of the date of discounting.
Net proceeds ----------------------------------------------------xxx
Less: C.A of NR on the date of discounting --------------(xxx)
Gain or loss on note discounting xxx

b. Discounting with recourse – the holder/endorser of the note is held liable in case the maker fails to
pay at maturity to the endorsee.
i. Conditional sale of NR – a contingent liability equal to the face amount of the note
discounted is disclosed in the notes to financial statements. The “Note receivable
discounted” account is deducted from the total notes receivable when preparing the SOFP.
(Same accounting for absolute sale except that the notes receivable discounted is disclosed
and that the endorser has contingent liability if the note is unpaid at maturity)
ii. Secured borrowing – a liability equal to face amount of the note discounted is recognized
on the discounting. The note receivable discounted is not derecognized. No gain or loss is
recognized.

--- END OF LECTURE NOTES ---

PRACTICE EXERCISES:
STRAIGHT-PROBLEM
Problem 1:
Evelyn Co.’s terms of sale is 3/10, 1/20, n/60 and it provides for doubtful accounts based on aging of its
receivables at year-end. The balance of selected accounts taken from the December 31, 2024, statement of
financial position of Evelyn Co. are as follows:
Accounts receivable P674,000
Allowance for doubtful accounts 24,000

The following transactions affecting accounts receivable occurred during the year ended December 31, 2025:
Sales on account 3,000,000
Cash received from customers 3,200,000
Cash received includes the following:
Customers paying within the 10-day discount period 1,746,000
Customers paying within the 20-day discount period 990,000
Recovery of accounts written off 6,000
Customers paying beyond the discount period ?
Accounts receivable written off as worthless 22,000
Credit memoranda for sales returns 12,000

An aging of accounts receivable and collectability estimates on December 31, 2025 reveled the following:
Age Amount Collectibility %
Less than 30 days P150,000 98%
31-90 days 120,000 92%
91-120 days 86,000 85%
More than 120 days Remainder 70%

Questions:
1. What are the balances of accounts receivable and the related allowance account on December 31, 2025?
2. How much is the doubtful accounts expense for the year 2025?

Problem 2:
On January 1, 2023, Evanescence Corporation sold a machinery costing P380,000 with accumulated
depreciation of P160,000 on the date of sale. Evanescence received a P400,000 non-interest bearing note, due
January 1, 2026. There was no established exchange price for the machinery and the note had no ready
market. The prevailing rate of interest for a note of this type on January 1, 2023, was 10%. The present value of
1 at 10% for three periods is 0.75.

Questions:
1. In the 2023 profit or loss, how much should be reported as interest revenue?
2. What is the note’s carrying amount on December 31, 2023?
3. Assuming that the equipment was sold, and the note described in the problem was received on July 1,
2023, all other date being the same, what is the interest revenue for the year ended December 31, 2023?

Problem 3:
On January 1, 2023, Fire Company sold an equipment to Water Co. which had a carrying value on Fire’s books
of P100,000. Water gave Fire a P600,000, non-interest bearing note payable in five equal annual installments of
P120,000 with the first payment due on December 31, 2023. There was no established price for the equipment
and the note has no ready market value. The prevailing rate of interest for a similar note on January 1, 2023,
was 12%. Present value factors for 5 periods at 12% are as follows:
PV of 1 – 0.57
PV of an ordinary annuity of 1 - 3.60
Questions:
1. The interest revenue for 2023 is
2. How much is the amortized cost of the note receivable at December 31, 2023?

Problem 4:
On January 1, 2023, Evelyn Co. sold land that originally cost P400,000 to the Emily Co. As payment, Emily gave
Evelyn a P600,000 note. The note bears an interest rate of 8% and is to be repaid in three annual installment of
P200,000 plus interest on the outstanding balance. The first payment is due on December 31, 2023. The market
price of the land is not reliably determinable. The prevailing interest rate for notes of this type is 8%.

Question:
1. How much is the interest revenue for the year 2023?

Assume the same facts given in the problem above but change the prevailing interest rate for notes of this
type to 12%.
2. At how much should the note be recorded on January 1, 2023?
3. How much is the interest revenue for the year 2023?
4. What is the amortized cost of the receivable on December 31, 2023?

Assume the same facts given in the original problem above but change the prevailing interest rate for notes
of this type to 5%.
5. At how much should the note be recorded on January 1, 2023?
6. How much is the interest revenue for the year 2023?
7. What is the amortized cost of the receivable on December 31, 2023?

Problem 5:
Citystate Bank granted a loan to a client on January 1, 2023. The interest on the loan is 10% payable annually
starting December 31, 2023. The loan matures in three years on December 31, 2025. Pertinent information on
the loan is provided below:
Principal amount P10,000,000
Origination fee received from the borrower 680,000
Direct origination cost incurred 200,000
Indirect origination cost incurred 100,000

After considering the origination fee received from the borrower and the direct origination cost incurred, the
effective rate of the loan is 12%.

Questions:
1. What is the carrying amount of the loan on January 1, 2023?
2. What is the interest income for 2023?
3. What is the carrying amount of the loan on December 31, 2023?

Problem 6:
On January 1, 2023, XYZ Co. loaned P1,000,000 from ABC Bank. The loan has a term of 5 years and interest at
8% payable annually every December 31 stating December 31, 2023. Based on the credit information available
for XYZ Co. as of December 31, 2023, ABC Bank determined that the probability of default for the next twelve
months is 2% and expected to collect only 90% of the principal.

On December 31, 2024, the probability of default over the remaining life of the loan increased to 30% and
expected recovery of the principal is reduced to 60%. This, however, provides no objective evidence of
impairment.
As XYZ Co. was hardly hit by COVID-19 Pandemic, ABC Bank agreed for the settlement of the loan at 30% of the
principal on the maturity date, provided that the interest for 2025 will be paid, which the company did.

Questions:
1. Interest income for the year 2023
2. Impairment loss to be recognized in 2023
3. Impairment loss to be recognized in 2024
4. Impairment loss to be recognized in 2025
5. Interest income for the year 2026

Problem 7:
RR Bank loaned EE Co. P7,500,000 on January 1, 2022. The terms of the loan were payment in full on December
31, 2025, plus annual interest payment at 11%. The interest payment was made as scheduled on December 31,
2022. However, due to financial setbacks, EE Co. was unable to make the 2023 interest payment.

RR Bank considered the loan impaired and projected the cash flows from the loan on December 31, 2024. The
bank accrued the interest on December 31, 2023, but did not accrue the interest for 2024 due to the
impairment of the loan. The projected cash flows are:
Date of cash flow Amount projected on 12/31/24
December 31, 2025 500,000
December 31, 2026 1,000,000
December 31, 2027 2,000,000
December 31, 2028 4,000,000

The present value of 1 at 11% is 0.90 for one period, 0.81 for two periods, 0.73 for three periods, and 0.66 for
four periods. What is the loan impairment loss for 2024?

Problem 8:
On December 1, 2023, Echo Co. assigned specific accounts receivable totaling P4,000,000 as collateral on a
P3,000,000, 12% note from Metrobank. In addition to the interest on the note, Metrobank also charged a 5%
finance fee deducted in advance on the P3,000,000 value of the note. The company shall remit their monthly
collections of the assigned accounts to the Metrobank. The December collections of assigned accounts
receivable amounted to P2,000,000 less cash discounts of P100,000. The company accepted sales returns of
P150,000 on the assigned accounts and wrote-off assigned accounts of P200,000.

Questions:
1. What amount of cash was received from the assignment of accounts receivable on December 1, 2023?
2. What is the carrying amount of the note payable on December 31, 2023?
3. What is the balance of accounts receivable -assigned on December 31, 2023?
4. What amount should be disclosed as the equity of Echo Co. in assigned accounts on December 31, 2023?

Problem 9:
RX Company factored P2,000,000 of accounts receivable with a bank. The finance charge is 3% and 5% was
retained to cover sales discounts, sales returns and allowances.

Questions:
1. What amount of cash was received on the factoring of accounts receivable?
2. What amount should be recognized as loss on factoring?
Problem 10:
VZ Company sold accounts receivable without recourse for P5,300,000. The company received P5,000,000 cash
immediately from the factor.

The remaining P300,000 will be received once the factor verifies that none of the accounts is in dispute. The
accounts receivable had a face amount of P6,000,000. The company had previously established an allowance
for uncollectible accounts of P250,000 in connection with such accounts. What amount of loss on factoring
should be recognized?

Problem 11:
On August 31, 2023, Prestige Co. discounted (on a nonrecourse basis) at the bank a customer’s P600,000, 9-
month, 10% note receivable dated April 30, 2023. The bank discounted the note at 12% on the same date.

Questions:
1. What amount of cash was received from discounting?
2. What is the loss on note receivable discounting?

MULTIPLE CHOICE - THEORIES

1. Trade receivables are classified as current assets if they are reasonably expected to be collected
a. Within one year.
b. Within the normal operating cycle.
c. Within one year or within the operating cycle, whichever is shorter.
d. Within one year or within the operating cycle, whichever is longer.
2. Non-trade receivables are classified as current assets only if they are reasonably expected to be realized in
cash
a. Within one year or within the operating cycle, whichever is shorter.
b. Within one year or within the operating cycle, whichever is longer.
c. Within one year, the length of the operating cycle notwithstanding.
d. Within the normal operating cycle.
3. Under IFRS 9 Financial Instruments, Receivables are initially recognized at
a. Fair value c. Transaction price
b. Fair value plus transaction costs d. Cost
4. Credit balances in accounts receivable are classified as
a. Current liabilities c. Long-term liabilities
b. Part of accounts payable d. Deduction from accounts receivable
5. Accounts receivable are subsequently measured at their net realizable value. Which of the following
methods of estimating uncollectible accounts is in conformance with the IFRSs?
a. Allowance method c. Both A and B
b. Direct write-off method d. None of these
6. When an accounts receivable aging schedule is prepared, the resulting amount from the computation
a. when added to the total accounts written off during the year is the desired credit balance of the
allowance for doubtful accounts at year-end
b. is the amount of doubtful accounts expense for the year.
c. is the amount that should be added to the beginning allowance for doubtful accounts to get the
doubtful accounts expense for the year.
d. is the amount of desired credit balance of the allowance for doubtful accounts to be reported at year-
end.
7. The entry debiting accounts receivable and crediting allowance for doubtful accounts would be made when
a. A customer pays an account balance.
b. A customer defaults on an account.
c. A previously defaulted customer pays the outstanding balance.
d. Estimated uncollectible receivables are too low.
8. When the allowance method of recognizing bad debt expense is used, the allowance for doubtful accounts
would decrease when
a. Specific account receivable is collected c. Account previously written off becomes collectible.
b. Account previously written off is collected. d. Specific uncollectible account is written off.

9. Which of the following rates may be used to compute for the interest income on a receivable?
a. Stated rate c. Either A or B
b. Effective rate d. Neither A nor B
10. Which of the following rates may be used to compute for the interest receivable on a note receivable?
a. Stated rate c. Either A or B
b. Effective rate d. Neither A nor B
11. Total interest income recognized over the life of a noninterest bearing note is
a. Zero.
b. Greater than the total interest received on the note.
c. Less than the total interest received on the note.
d. Equal to the unearned interest income on initial recognition.
12. Which of the following items are true about discount on notes receivable?
I. The face value of the note is higher than its present value
II. The present value of the note is higher than its face value
III. The nominal rate is higher than the effective rate
IV. The effective rate is higher than the effective rate v
a. I and III c. I and IV
b. Il and III d. II and IV
13. The amortization of discount on notes receivable is:
a. An addition to interest income. c. A deduction from interest income.
b. An addition to accrued interest receivable. d. A deduction from accrued interest receivable.
14. A receivable is credit-impaired if
a. A loss event has occurred that is detrimental to the entity's ability to collect the contractual cash flows
from the receivable.
b. Its recoverable amount exceeds its carrying amount.
c. There is delay in the periodic payments on the receivable.
d. Its fair value is less than its carrying amount.
15. The recoverable amount of a loan or note receivable is
a. The present value of the estimated future cash flows to be received over the remaining life of the
receivable discounted at the current interest rate.
b. The present value of the estimated future cash flows to be received over the remaining life of the
receivable discounted at the original effective interest rate.
c. The present value of the estimated future cash flows to be received over the remaining life of the
receivable discounted at the original effective interest rate or current interest rate, whichever is more
clearly determinable.
d. The sum of principal plus interests.
16. Before impairment, the carrying amount of a credit-impaired loan or note receivable
a. Is equal to the unpaid principal.
b. Is equal to the unpaid principal plus any recorded accrued interest receivable.
c. Excludes any accrued interest receivable.
d. Less than the present value of the note receivable
17. Debt instruments that have declined significantly in credit quality since initial recognition but do not have
objective evidence of impairment are classified under:
a. Stage 1 impairment of financial assets. c. Stage 3 impairment of financial assets
b. Stage 2 impairment of financial assets. d. Stage 4 impairment of financial assets.
18. Pledge transactions
a. Are disclosed only.
b. Are accounted for by segregating the pledged receivables from the other receivables through a journal
entry.
c. Need not be disclosed if the related loan does not require any collateral security
d. A and B
19. Assignment of receivables
a. Are disclosed only
b. Are recognized by debiting accounts receivable-assigned
c. Give rise to receivables from factor
d. B and C
20. When specific accounts receivables are set up as collateral security for borrowings, the accounts receivable
are
a. Pledged b. Assigned c. Factored d. Discounted
21. It involves the outright sale of receivables to a financing institution known as a factor.
a. Pledging b. Assignment c. Factoring d. Selling
22. What is "recourse" as it relates to selling receivables?
a. The obligation of the seller of the receivables to pay the purchaser in case the debtor fails to pay.
b. The obligation of the purchaser of the receivables to pay the seller in case the debtor fails to pay.
c. The obligation of the seller of the receivables to pay the purchaser in case the debtor returns the
product related to the sale.
d. The obligation of the purchaser of the receivables to pay the seller if all of the receivables are collected.
23. A company factored accounts receivable without recourse with a bank. The company received cash as a
result of this transaction which is best described as
a. Bank loan collaterized by the company's accounts receivable.
b. Bank loan to be repaid by the proceeds from the entity's accounts receivable.
c. Sale of the company's accounts receivable to the bank with the risk of uncollectible accounts retained
by the company.
d. Sale of the company's accounts receivable to the bank with the risk of uncollectible accounts
transferred to the bank.

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