Financial Accounting

Receivables

PROBLEMS:
Shown below is ABC Companys aging schedule of its accounts receivable on December 31,
2012:

Days past due

Customers: Balance due: Current: 0 30 days: 31 60 days: Over 60 days:
One Co. P 23,000 - - P 23,000 -
Two Co. 105,000 P 62,000 P 20,000 13,000 P 10,000
Three Co. 87,500 23,000 14,500 10,000 40,000
Four Co. 93,500 53,000 20,500 10,000 10,000
Five Transport 40,000 - - - 40,000
Six Co. 31,000 15,000 16,000 - -
Seven Co. 1,000 1,000 - - -
Eight Co. 64,000 20,000 18,000 16,000 10,000
Nine Co. 60,000 60,000 - - -

The accounts receivable and Allowance for uncollectible account balance per general ledger is P
505,000 and P 82,000, respectively on December 31, 2012.

The following are audit comments for possible adjustments:

One Co. Merchandise found defective; returned by the customer on November 10 for
credit, but the credit memo was issued by ABC only on January 2, 2013

Two Co. Account is good but usually pays late.

Three Co. Merchandise worth P 40,000 destroyed in transit on June 4, 2012. The carrier
(Five Transport) was billed on July 1.

Four Co. Customer billed twice in error for P 10,000. Balance is collectible.

Five Co. Collected in full on January 15, 2013.

Six Co. Paid in full on December 29, 2912 but not recorded. Collections were deposited
January 3, 2013.

Seven Co. Received account confirmation from customer for P 11,000. Investigation
revealed an erroneous credit for P 10,000

Eight Co. Neglected to post P 10,000 credit to customers account.

Nine Co. Customer wants to know the reason for receipt of P 40,000 credit memo as its
accounts payable balance is P 100,000.

1. What should be the adjusted balance of the Accounts receivable trade at December
31, 2012?

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The following information is from DEF Co.s first year of operations:

Merchandise purchased P 450,000

Ending merchandise inventory 123,000
Collections from customers 150,000

All sales are on account and goods sell at 30% markup.

2. What is the accounts receivable balance at the end of the co.s first year of operations?

GHI Co. reported the following information at the end of its first year of operations, December
31, 2012:

Bad debt expense for 2012 P 271,000

Uncollectible accounts written off during 2012 35,400
Net realizable value of accounts receivable 895,000

3. What is the accounts receivable balance at December 31, 2012?

JKL Co. sells a variety of imported goods. By selling on credit, JKL cannot expect to collect all of
its accounts receivable. At December 31, 2011, JKL reported the following in its statement of
financial position:

Accounts receivable P 2,197,500

Less: Allowance for doubtful accounts (133,500)
Accounts receivables, net P 2,064,000

During the year ended December 31, 2012, JKL earned sales revenue of P 537,702,500 and
collected cash of P 528,070,500 from customers. Assume bad debt expense for the year was
1% of sales revenue and that JKL wrote off uncollectible accounts receivable totaling P
5,439,500.

4. What is the accounts receivable balance at December 31, 2012?

5. What is the December 31, 2012, balance of the allowance for doubtful account?

The policy of MNO, Inc. is to debit bad debt expense for 3% of all new sales. The following are
the companys sales and allowance for uncollectible accounts for the past four years:

Year Sales Allowance for uncollectible accounts year-

end balance
2009 P 3,000,000 P 45,000
2010 2,950,000 56,000
2011 3,120,000 60,000
2012 2,420,000 75,000

Determine the amounts of accounts written off in:

6. 2010

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7. 2011
8. 2012

On December 5, 2012, PQR, Inc. sold its accounts receivable with net realizable value of P
260,000 for P 230,000 cash. Ten percent of the proceeds was withheld by the factor to allow
for possible customer returns and other account adjustments. The related allowance for bad
debts is P 40,000.

9. What amount of loss on factoring should be recognized?

On January 1, 2012, STU Co. sells its equipment with a carrying amount of P 160,000. The
company receives a non-interest bearing note due in 3 years with a face amount of P 200,000.
There is no established market value for the equipment. The prevailing interest rate for a note
for this type is 12%. (Round off present/future value factors to five decimal places.)

10. What is the gain or loss to be recognized on the sale of the equipment?
11. What is the discount on notes receivable on January 1, 2012?
12. What is the discount amortization at the end of the third year?

On January 2, 2012, a tract of land that originally cost P 800,000 was sold by VWX Co. the
company received a P 1,200,000 note as payment. It bears interest rate of 4% and is payable
in three annual installments of P 400,000 plus interest on the outstanding balance. The
prevailing rate of interest for a note of this type is 10%. (Round off present/future value factors to five
decimal places.)

13. What amount of gain or loss on sale of land should be recognized on January 2, 2012?
14. How much interest income should be reported for 2012?

The notes receivable account of YZ Co. consisted of the following:

60-day note of P 10,000 dated May 15 with a 9% interest rate, discounted at QC bank
on June 8 at 12%.

120-day note of P 100,000 dated October 1 with no stated interest rate and a market
rate of 9%, discounted at Metrobank on November 30 at 12%. This note was received
from the sale of equipment.

15. Determine the total proceeds from discounting of notes receivable.

XYZ Bank loaned P 5,500,000 to R&D Inc. on January 1, 2012. The initial loan repayment terms
include a 10% interest rate plus annual principal payments of P 1,100,000 on January 1 each
year. R&D made the required interest payment in 2012 but did not make the required payment
for 2013. XYZ is preparing its annual financial statements on December 31, 2013. R&D is having
financial difficulty, and XYZ concluded that the loan is impaired.

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Analysis of R&Ds financial condition on December 31, 2013, indicates the principal payments
will be collected, but the collection of interest is unlikely. XYZ did not accrue the interest on
December 31, 2013. (Round off present/future value factors to four decimal places)

The projected cash flows are:

December 31, 2014 P 1,750,000

December 31, 2015 2,000,000
December 31, 2016 1,750,000

16. What is the loan impairment loss on December 31, 2013?

17. What is the interest income to be reported by XYZ bank in 2014?
18. What is the carrying value of the loan receivable on December 31, 2015?
19. What is the interest income in 2015?
20. What is the interest income in 2016?

On January 1, 2010, Guardian Corporation loaned P 3 million to Star Company. Under the loan
agreement, Star is to make an annual principal payment of P 600,000 for five years plus
interest at 8%. The first payment is due on January 1, 2011. The required payments were
made by Star for 2011 and 2012. However, during 2012, Star began to face financial difficulties,
requiring Guardian to reevaluate the collectability of the loan. On December 31, 2012, Guardian
determines that it will be able to collect the remaining principal, but it is unlikely that the
interest will be collected. (Round off present/future value factors to five decimal places.)

21. What is the present value of the expected future cash flows as of December 31, 2012?
22. What is the amount of loan impairment on December 31, 2012?

Red Company provided some information on their financial records on December 31, 2011:

Accounts receivable, January 1 P 1.92 million

Collections of accounts receivable 6.24 million
Bad debts 0.2 million
Inventory, January 1 2.88 million
Inventory, December 31 2.64 million
Accounts payable, December 31 1.5 million
Accounts payable, January 1 1.0 million
Cash sales 1.2 million
Gross profit on Sales 2.16 million
Purchases 4.8 million
Cash, January 1 0.76 million

23. What is the ending balance of accounts receivable on December 31, 2011?

The balances of selected accounts taken from the December 31, 2010 of Void Co. are shown
below:

Accounts receivable P 674,000

Allowance for bad debts 24,000

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The following transactions affecting accounts receivable occurred during the year ended
December 31, 2011:

Sales (all on account, 2/10, 1/15, n/60) P 3.0 million

Cash received from customers 3.2 million
The cash received includes the following:
Customers paying w/in the 10-day discount period 1.764 million
Customers paying w/in the 15-day discount period 0.99 million
Recovery of accounts written off 0.006 million
Customers paying beyond the discount period ?
Accounts receivable written off as worthless 0.022 million
Credit memo for sales returns 0.012 million

It is the companys policy to provide for uncollectible accounts equal to of 2% of sales.

24. How much is the carrying amount of the accounts receivable as of December 31, 2011?

On December 31, 2011, Swisstech Company assigned P 400,000 of accounts receivable to

France Company as a security for a loan of P 335,000. Swisstech charged a 2% commission on
the amount of the loan; the interest rate on the note was 10%. During December, Swisstech
collected P 110,000 on assigned accounts after deducting P 380 of discounts. Swisstech
accepted returns worth P 1,350 and wrote off assigned accounts totaling P 2,980.

25. How much cash did Swisstech receive from France at the time of transfer?
26. What is the carrying value of the accounts receivable assigned as of December 31,
2011?

On December 1, 2011, Air Force company assigned on a non-notification basis accounts

receivable of P 3.0 million to a bank in consideration for a loan of 80% less a 5% service fee on
the accounts assigned. The interest rate of the loan is 12%. The company collected assigned
accounts of P 2.0 million and remitted the collections to the bank in partial payment for the
loan. The bank applied first the collection to the interest and the balance to the principal.

27. In its December 31, 2011 statement of financial position, what amount of note payable
should the company report as current liability?

Brock received from a customer a one-year, P 375,000 note bearing interest of 8%. After
holding the note for six months, Brock discounted the note at BPI at an effective rate of 10%.

28. How much did Brock receive from the bank?

29. If the discounting is treated as a sale, what amount of loss on discounting should Brock
recognize?
30. If the discounting is treated as a borrowing, what amount of loss on discounting should
Brock recognize?

On July 1, 2011, RHM corp. sold equipment to BP co. for P 250,000. RHM accepted a 10%
notes receivable for the entire sales price. This note is payable in two equal installments plus

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Financial Accounting

accrued interest on December 31, 2011 and December 31, 2012. On July 1, 2012, RHM
discounted the note at a bank at an interest rate of 12%.

31. How much was RHMs proceeds from the discounted note?

On December 31, 2011, Bail Company finished consultation services and accepted in exchange
a promissory note with a face value of P 200,000, a due date of December 31, 2014, and a
stated rate of 5%, with interest receivable at the end of each year. the fair value of the services
is not readily determinable and the note is not readily marketable. Under the circumstances, the
note is considered to have an appropriate imputed rate of interest of 10%. (Round off
present/future value factors to five decimal places.)

32. What is the present value of the note?

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. Nontrade receivables are classified as current assets only if they are reasonably
expected to be realized in cash
A. With one year or within the operating cycle, whichever is shorter.
B. Within one year or within the operating cycle, whichever is longer.
C. Within the normal operating cycle.
D. Within one year, the length of the operating cycle notwithstanding.

3. If the ideal measure of short-term receivables in the statement of financial position is

the discounted amount of the cash to be received in the future, failure to follow this
practice usually does not make the statement of financial position misleading because
A. Most short-term receivables are not interest-bearing.
B. The allowance for doubtful accounts includes a discount element.
C. The amount of the discount is not material.
D. Most receivables can be sold to a bank or factor.

4. Credit balances in accounts receivable shall be classified as

A. Current liabilities
B. Part of accounts payable
C. Long term liabilities
D. Deduction from accounts receivable

5. Which method of recording bad debt loss is consistent with accrual accounting?
A. Allowance method
B. Direct writeoff method
C. Percentage of sales method
D. Percentage of accounts receivable method

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6. The interest on a non interest bearing note is equal to

A. The excess of the face value over the present value
B. The excess of the present value over the face value
C. The excess of the market value over the present value
D. Zero

7. Accounting for the interest in a non-interest bearing note receivable is an example of

what aspect of accounting theory?
A. Matching
B. Verifiability
C. Substance over form
D. Form over substance

8. If there is evidence that an impairment loss on loan receivable has been incurred, the
loss is equal to the
A. Excess of the carrying amount of the loan receivable over the present value of the
cash flows related to the loan.
B. Excess of the present value of cash flows related to the loan over the carrying
amount of the loan receivable.
C. Excess of the carrying amount of the loan over the principal amount of the loan.
D. Excess of the principal amount of the loan over the carrying amount.

9. If accounts receivable are pledged against borrowings, the amount of accounts

receivable pledged shall be
A. Excluded from total receivables with disclosure
B. Excluded from total receivables without disclosure
C. Included in total receivables with disclosure
D. Included in total receivables without disclosure

10. It is a financing arrangement whereby one party formally transfers its rights to accounts
receivable to another party in consideration for a loan
A. Pledge
B. Assignment
C. Factoring
D. Discounting

11. The equity of the assignor in assigned accounts is equal to

A. Assigned accounts receivable
B. Bank loan balance
C. Assigned accounts receivable less the bank loan balance
D. Bank loan balance less assigned accounts receivable

12. When accounts receivable are factored

A. Accounts receivable shall be credited
B. Payable to factor is credited
C. A contingent liability is ordinarily created
D. The factoring is accounted for as a borrowing

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13. Which of the following is used to account for probable sales discounts, sales returns,
and sales allowances?
[1] Due from factor
[2] Recourse liability

A. [1]
B. [2]
C. [1] and [2]
D. None

14. Which of the following is not an objective in accounting for transfer of financial asset?
A. To derecognize asset when control is gained
B. To derecognize liability when extinguished
C. To recognize liability when incurred
D. To derecognize asset when control is given up

15. It is a financing arrangement that is usually done on a without recourse, notification

basis.
A. Pledge
B. Assignment
C. Factoring
D. Discounting

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Suggested answers
1. P 441,000 17. P 455,850
2. P 275,100 18. P 1,590,785
3. P 1,130,600 19. P 326,435
4. P 6.39 million 20. P 159,079
5. P 71,025 21. P 1,669,962
6. P 77,500 22. P 130,038
7. P 89,600 23. P 1.68 million
8. P 57,600 24. P 362,000
9. P 30,000 25. P 328,300
10. P (17,644) 26. P 285,290
11. P 57,644 27. P 424,000
12. P 21,428 28. P 384,750
13. P 276,847 29. P 5,250
14. P 107,635 30. 0
15. P 108,028 31. P 129,250
16. P 941,500 32. P 175,133

1. D 9. C
2. D 10. B
3. C 11. C
4. A 12. A
5. A 13. A
6. A 14. A
7. C 15. C
8. A

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