INTERMEDIATE ACCOUNTING I

ASSETS
 Intermediate Accounting I: ASSETS
• CASH (Ch 1 – 3)
PRELIM • INVENTORIES (Ch 10 – 14)
• RECEIVABLES (Ch 4 – 9)
MIDTERM • PROP., PLANT and EQPT. (Ch 25 – 32)
• INVESTMENTS (15 – 24)
FINAL • INTANGIBLE ASSETS ++ (Ch 33 – 38)
ACCOUNTS RECEIVABLE
Chapter 4
Definition of Receivables
• Receivables are financial assets that represent a contractual
right to receive cash or another financial asset from another
entity.
• 2 Classes
1. trade receivables
2. non trade receivables
 Trade Receivables
• claims arising from sale of merchandise or services in the ordinary
course of business
• Accounts receivables
• open accounts arising from the sale of goods and services in the
ordinary course of business and not supported by promissory
notes.
• customer’s accounts, trade debtors, and trade accounts receivables
• Notes receivable
• those supported by formal promises to pay in the form of notes.
Nontrade Receivables
• represent claims arising from sources other than the sale of
merchandise or services in the ordinary course of business
 Loan Receivables
• For banks and other institutions, receivables result primarily from
loans to customers.
• The loans are made to heterogeneous customers and the repayment
periods are frequently longer or over several years.
• Chapter 7
 Classification
• Trade receivables which are expected to be realized in cash within
the normal operating cycle or one year, whichever is longer, are
classified as current assets.
• Nontrade receivables which are expected to be realized in cash
within one year, the length of the operating cycle notwithstanding,
are classified as current assets.
• If collectible beyond one year, are noncurrent assets.

• PAS 1, Presentation of Financial Statements, paragraph 66:

• “An entity shall classify an asset as current when the entity expects
to realize the asset or intends to sell or consume it in the entity’s
normal operating cycle, or when the entity expects to realize the
asset within twelve months after the reporting period.”
 Presentation
• Trade receivables and nontrade 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.
• details are disclosed in the notes to financial statements
Accounts receivable 5,000,000
Allowance for doubtful accounts ( 200,000)
Notes receivable 1,000,000
Accrued interest on note receivable 150,000
Advances to officers and employees 100,000
Dividends receivable 250,000
Total Trade and Other Receivables 6,300,000
 Examples of nontrade receivables
• Advances to or receivables from shareholders, directors, officers or
employees.
• collectible in one year: current assets
• otherwise, as noncurrent assets (other)
• Advances to affiliates (subsidiaries)
• treated as long-term investments
• Advances to supplier for the acquisition of merchandise are current
assets.
• Subscriptions receivable
• current assets if collectible within one year
• Otherwise, deduction from subscribed share capital.
 Examples of nontrade receivables
• Creditors’ account may have debit balances as a result of overpayment or
returns and allowances: current assets
• If the debit balances are not material, an offset may be made against the creditors’
accounts with credit balances and only the net accounts payable may be presented.
• Special deposits on contract bids normally are other noncurrent assets
• likely to remain outstanding for considerable long period of time.
• If collectible currently should be classified as current assets.
• Accrued income are current assets
• dividends receivable, accrued rent income
• accrued royalties income, accrued interest on bond investment.
• Claims receivable are current assets
• claims against common carriers for losses or damages,
• claim for rebates and tax refunds, claims from insurance companies
 Customers’ Account with Credit Balances
• credit balances in accounts receivable resulting from
overpayments, returns and allowances, and advance payments
from customers
• classified as current liabilities (other payables)
• 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.
• Creditor’s Accounts with debit balances
• Classified as current assets (other receivables)
• not offset against the credit balances in other creditors’ or
suppliers’ accounts
 Schedule of Accounts Receivable
The accounts receivable controlling Customer A 400,000
account reports a balance of P500,000. Customer B 150,000
The subsidiary ledgers reveals the Customer C ( 50,000)
following details: TOTAL 500,000

• The accounts receivable should be presented as current asset at P550,000

representing the accounts of A and B.
• The credit balance of P50,000 in the account of C is classified as current
liability (other payables) and not offset against the debit balances in the
accounts of A and B.
• An adjustment (reclassification adjustment) may be made only for worksheet
purposes, meaning, not formally journalized and posted to the ledger
Accounts receivable 50,000
Customers’ credit balances 50,000
 Initial Measurement of Receivables
• PFRS 9, par 5.1.1, (financial asset)
• provides that a financial asset shall be recognized initially at fair value
plus transaction costs that are directly attributable to the acquisition
• The fair value of financial asset is usually the transaction price, meaning,
the fair value of the consideration given.
• For short-term receivables,
• fair value is equal to the face value or original invoice amount
• Cash flows relating to short-term receivables are not discounted
because the effect of discounting is usually immaterial.
• Thus, accounts receivable shall be measured initially at face
value or original invoice amount.
 Subsequent Measurement
• PFRS 5, paragraph 5.2.1
• After initial recognition, accounts receivable shall be measured at
amortized cost.
• the net realizable value of accounts receivable
• Net Realizable Value (NRV)
• the amount of cash expected to be collected or the estimated
recoverable amount
• The term “amortized cost” has more relevance in long-term note
receivable.
Accounts Receivable (summary)
• open accounts arising from sale of merchandise or services
in the ordinary course of business
• measured initially at face value or original invoice amount.
• Subsequently shall be measured at net realizable value
(NRV)
• classified as Current Asset and presented as part of Trade
and Other Receivables
 NET REALIZABLE VALUE (NRV)
• The initial amount recognized for accounts receivable shall be
reduced by adjustments which in the ordinary course of business will
reduce the amount recoverable from the customer.
• established basic principle
• “assets shall not be carried at above their recoverable amount”
• Deductions made in estimating the NRV of trade accounts receivable:
a. Allowance for freight charge
b. Allowance for sales return
c. Allowance for sales discount
d. Allowance for doubtful accounts
Terms related to Freight Charge
• FOB Destination
• ownership of the goods purchased is vested in the buyer upon receipt
• seller shall be responsible for the freight charge
FOB Shipping Point
• ownership of the goods purchased is vested in the buyer upon shipment
• buyer must pay for the freight charge
• freight collect
• freight charge on the goods shipped is not yet paid.
• common carrier shall collect from the buyer
• freight prepaid
• freight charge on the goods shipped is already paid by the seller
 Accounting for freight charge
When goods are sold To record the sale:
“FOB destination” but Accounts receivable 100,000
shipped “freight collect”
Freight out 5,000
• An entity has a
P100,000 account Sales 100,000
receivable at the end of Allowance for freight charge 5,000
accounting period.
• The terms are 2/10, To record the collection within the discount period:
n/30, FOB destination
and freight collect. Cash 93,000
• The customer paid Sales discount 2,000
freight charge of Allowance for freight charge 5,000
P5,000. Accounts receivable 100,000
 Problem 4-3
• Affectionate Company sold merchandise on account for P500,000. The
terms are 3/10, n/30.
• The related freight charge amounted to P10,000. The account was
collected within the discount period.
• REQUIRED: Prepare journal entries to record the transactions under the
following freight terms:
1. FOB Destination and Freight Collect
2. FOB Destination and Freight Prepaid
3. FOB Shipping Point and Freight Collect
4. FOB Shipping Point and Freight Prepaid
 1. FOB Destination and Freight Collect

Accounts Receivable 500,000

Freight Out 10,000
Sales 500,000
Allowance for Freight Charge 10,000
To record sales, 3/10, n/30 Dest, Collect

Cash 475,000
Sales Discount 15,000
Allowance for Freight Charge 10,000
Accounts Receivable 500,000
To record collection
 2. FOB Destination and Freight Prepaid

FOB Destination and Freight Prepaid

Accounts Receivable 500,000
Freight Out 10,000
Sales 500,000
Cash 10,000
To record sales, 3/10, n/30 Dest, Prepaid

Cash 485,000
Sales Discount 15,000
Accounts Receivable 500,000
To record collection
 3. FOB Shipping Point and Collect

Accounts Receivable 500,000

Sales 500,000
To record sales, 3/10, n/30 SP, Collect

Cash 485,000
Sales Discount 15,000
Accounts Receivable 500,000
To record collection
 4. FOB Shipping Point and Prepaid

Accounts Receivable 510,000

Sales 500,000
Cash 10,000
To record sales, 3/10, n/30 SP, Prepaid

Cash 495,000
Sales Discount 15,000
Accounts Receivable 510,000
To record collection
 Allowance for sales returns
• recognize the probability that some customers will return goods
that are unsatisfactory or will make other claims requiring
reduction in the amount due as in the case of shipment shortages
and defects.
• An amount of P50,000 of the total accounts receivable at year-end
represents selling price of goods that will probably be returned.
• The adjusting entry to recognize the probable return
Sales Return and Allowance 50,000
Allowance for sales return 50,000
Sales Discount
• Entities usually offer cash discounts to credit customers.
• A cash discount is a reduction from an invoice price by reason of prompt
payment.
• sales discount on the part of the seller
• purchase discount on the part of the buyer.
• expressed as 5/10, n/30
• entitled to a 5% discount if payment is made in 10 days from the
invoice date.
• failure to pay within the 10-day discount period, the gross amount of
the invoice price must be paid within 30 days from the invoice date.
Methods of recording Credit Sales
• Gross method
• The accounts receivable and sales are recorded at gross
amount of the invoice.
• common and widely used method because it is simple to
apply
• Net method
• accounts receivable and sales are recorded at net amount
of the invoice, meaning the invoice price minus the cash
discount.
GROSS METHOD
• Sales of merchandise for P100,000, terms 5/10, n/30.
Accounts receivable 100,000
Sales 100,000

• Assume collection is made within the discount period.

Cash 95,000
Sales discount 5,000
Accounts receivable 100,000

• Assume collection is made beyond the discount period.

Cash 100,000
Accounts receivable 100,000
Net Method
• Sale of merchandise for P100,000, terms 5/10, n/30.
Accounts receivable 95,000
Sales 95,000

• Assume collection is made within the discount period.

Cash 95,000
Accounts receivable 95,000

• Assume collection is made beyond the discount period.

Cash 100,000
Accounts receivable 95,000
Sales discount forfeited 5,000
The sales discount forfeited is classified as other income.
 Allowance for Sales Discount
• If customers are granted cash discounts for prompt payment, then,
conceptually estimates of cash discounts on open accounts at the end of
the period based on past experience shall be made.
• Of the accounts receivable of P1,000,000 at the end of the period, it is
reliably estimated that discounts to be taken will amount to P50,000.
• adjustment
Sales Discount 50,000
Allowance for sales discount 50,000
• may be reversed at the beginning of the next period in order
that discounts can then be charged normally to sales discount
amount.
PROBLEM 4-4
Accounting for Bad Debts
• Business entities sell on credit rather than only for cash to increase
total sales and thereby increase income.
• assumes the risk that some customers will not pay their accounts
• When an account becomes uncollectible, the entity has sustained a
bad debt loss.
• costs of doing business on credit
• Two methods in accounting for this bad debt :
1. Allowance method
2. Direct writeoff method
Allowance Method
• requires recognition of a bad debt loss (expense account) if the
accounts are doubtful of collection.
• entry to recognize the doubtful accounts expense
Doubtful accounts expense xx
Allowance for doubtful accounts xx

• The allowance for doubtful accounts is deduction from accounts

receivable.
Allowance Method
• If the doubtful accounts are subsequently found to be worthless or
uncollectible, the accounts are written off as follows:

Allowance for doubtful accounts xx

Accounts receivable xx

• Generally accepted accounting principles require the use of the

allowance method because it conforms with the matching principle.
• Moreover, accounts receivable would be properly measured at net
realizable value.
Recoveries of accounts written off
• If a collection is made on account previously written off as
uncollectible, the customary procedure is first to recharge the
customer’s account with the amount collected and possibly the entire
amount previously charged off if it is now expected that collection will
be received in full.
• Accepted Procedure
1. reverse the original entry of writeoff regardless of
whether the recovery is during the year of writeoff or
subsequent thereto.
2. record the collection
 Accounts of P30,000 are considered doubtful of collection.
Illustration Doubtful accounts 30,000
Allowance Allowance for doubtful accounts 30,000
Method The accounts are subsequently worthless or uncollectible.
Allowance for doubtful accounts 30,000
Accounts receivable 30,000

Accounts previously written off are recovered or collected.

Accounts receivable 30,000
Allowance for doubtful accounts 30,000

Cash 30,000
Accounts receivable 30,000
 Direct Writeoff method
• requires recognition of a bad debt loss only when the accounts
proved to be worthless or uncollectible.
• Worthless accounts are recorded by debiting bad debts and
crediting accounts receivable.
• If the accounts are only doubtful of collection, no entry is necessary.
• often used by small businesses because it is simple to apply.
• the Bureau of Internal Revenue recognizes only this method for
income tax purposes.
NOT PERMITTED under IFRS
• violates the matching principle
• because the bad debt loss is often recognizes in later accounting
period than the period in which the sales revenue was recognized.
 • Accounts of P30,000 are considered doubtful of collection.
Illustration NO ENTRY
Direct • The accounts proved to be worthless.
writeoff Bad debts 30,000
Accounts receivable 30,000
method • The same accounts that are previously written off as
worthless are recovered or collected.
Accounts receivable 30,000
Bad debts 30,000
Cash 30,000
Accounts receivable 30,000
• If the recovery is subsequent to the year of writeoff and the
direct write off method is used,
• May be credited to other income
Doubtful Accounts in the Income Statement
• Distribution cost
• If the granting of credit and collection of accounts are under the
charge of the sales manager,
• Administrative expense
• If the granting of credit and collection of accounts are under the
charge of an officer other than sales manager,

• In the absence of any contrary statement, doubtful accounts shall be

classified as administrative expense.
 Problem 10-3
• Infra Company provided the following data for the current year:
• Sales on account 3,600,000
• Notes received to settle accounts 400,000
• Provision for doubtful accounts 90,000
• Accounts receivable determined to be worthless 20,000
• Merchandise returned by customer 15,000
• Collections received to settle accounts 2,450,000
• Discounts permitted to be taken by customers 45,000
• Collections received in settlement of notes 180,000
• REQUIRED:
1. Prepare journal entries to record the transactions
2. Compute the net realizable value of accounts receivable
Problem 10-3
• Sales on account 3,600,000
Accounts Receivable 3,600,000
Sales 3,600,000

• Notes received to settle accounts 400,000

Notes Receivable 400,000
Accounts Receivable 400,000
Problem 10-3
• Provision for doubtful accounts 90,000
Doubtful Accounts Expense 90,000
Allowance for Doubtful Accounts 90,000

• Accounts receivable determined to be worthless 20,000

Allowance for Doubtful Accounts 20,000

Accounts Receivable 20,000
Problem 10-3
• Merchandise returned by customer 15,000
Sales Return and Allowance 15,000
Accounts Receivable 15,000

• Collections received to settle accounts 2,450,000

Cash 2,450,000
Accounts Receivable 2,450,000
 Problem 10-3
• Discounts permitted to be taken by customers 45,000

Sales Discounts 45,000

Accounts Receivable 45,000

• Collections received in settlement of notes 180,000

Cash 180,000
Notes Receivable 180,000
 Compute Net Realizable Value
Accounts Receivable 670,000
Less: Allowance for Doubtful Accounts 70,000
Net Accounts Receivable 600,000

Credit Sales 3,600,000

To Note ( 400,000)
Provision 90,000
Write-off ( 20,000) Write-Off (20,000)
Sales Return ( 15,000) Allowance 70,000
Collection (2,450,000)
Sales Disct. ( 45,000)
AR 670,000
Problem
10 – 8 • Honduras Company revealed a balance of P8,200,000 in the accounts
receivable control account at year-end.
• An analysis of the accounts receivable showed the following:
• Accounts known to be worthless 100,000
• Advance payments to creditors on purchase orders 400,000
• Advances to affiliated entities 1,000,000
• Customers’ accounts reporting credit balances arising
from sales returns (600,000)
• Interest receivable on bonds 400,000
• Trade accounts receivable 3,500,000
• Subscription receivable due in 30 days 2,200,000
• Trade installments receivable due 1 - 18 months,
including unearned finance charge of P50,000 850,000
• Trade accounts receivable from officers, due currently 150,000
• Trade accounts on which postdated checks are held
and no entries were made on receipt of checks 200,000
• Total 8,200,000
• What is the correct balance of trade accounts receivable?
Accounts known to be worthless 100,000 Write-off
Advance payments to creditors 400,000 Other receivables
Advances to affiliated entities 1,000,000 Long Term Investments
Customers’ accounts reporting credit
Other Payables
balances arising from sales returns (600,000)
Interest receivable on bonds 400,000 Other receivables
Trade accounts receivable 3,500,000 3,500,000
Subscription receivable due in 30 days 2,200,000 Other receivables
Trade installments receivable
due 1 - 18 months, including unearned
finance charge of P50,000 deducted 850,000
800,000
Trade accounts receivable from
150,000
officers, due currently 150,000
Trade accounts on which postdated checks
TRADE 200,000
are held and no entries were made on
receipt of checks 200,000 ACCOUNTS 4,650,000
RECEIVABLES
Estimation of Doubtful
Accounts
CHAPTER 5
Methods of estimating doubtful accounts
• Doubtful accounts are recognized when the loss is probable and the
amount can be established reliably (measurable).
• parallel to the recognition of a “provision” which is both “probable
and measurable” in accordance with PAS 37.
• 3 methods of estimating doubtful accounts
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
• involves an analysis of the accounts where they are classified into not
due or past due.
• Past due accounts are further classified in terms of the length of the
period they are past due.
• The common classifications are:
Not due 91 to 120 days past due
1 to 30 days past due 121 to 180 days past due
31 to 60 days past due 181 to 365 days past due
61 to 90 days past due More than 1 year past due
Aging of Accounts Receivable
• allowance is determined by multiplying the total of each classification
by the rate or percent of loss experienced by the entity for each
category.
• major argument
• more accurate and scientific computation of the allowance for
doubtful accounts,
• the accounts receivable are fairly presented at net realizable value
• objection
• violates the matching process
• time consuming if a large number of accounts are involved
 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.
• rate used is usually determined from past experience of the entity
• advantage
• presenting the accounts receivable at estimated NRV
• simple to apply
• objection
• violates the principle of matching bad debt loss against the sales
revenue.
• loss experience rate may be difficult to obtain and may not be
reliable.
Percent of Sales
• The amount of sales for the year is multiplied by a certain rate to get
the doubtful accounts expense.
• may be applied on credit sales or total sales
• Rate to be used is computed by dividing the bad debt losses in
prior years by charge sales of prior years (like Gross Profit Method
of inventory estimation)
• Rate obtained is multiplied by current year’s charge sales to arrive
at the doubtful accounts expense.
Percent of Sales
• no substantial difference if in the computation of the rate, the basis is
total sales of the prior periods.
• This procedure of determining the rate has the advantage of
eliminating the extra work of making a record of cash sales and
credit sales.
• This approach may prove unsatisfactory when there is a
considerable fluctuation in the proportion of cash and credit sales
periodically.
 Percent of Sales
• Advantage
• proper matching of cost against revenue is achieved
• the bad debt loss is directly related to sales and reported in the year
of sale
• Objection
• the accounts receivable may not be shown at estimated realizable
value because the allowance for doubtful accounts may prove
excessive or inadequate
• Thus, it becomes necessary that from time to time the accounts
should be “aged” to ascertain the probable loss.
• As a consequence, the rate applied on sales should be revised
accordingly.
 Problem 5 - 1
• Marvelous Company reported the following information before adjustments at
year-end: Accounts Receivable 500,000
Notes Receivable 200,000
Allowance for Doubtful Accounts 20,000
Sales 5,000,000
Sales Return and Allowance 30,000
Sales Discounts 20,000

• REQUIRED: Prepare adjusting entry to provide for doubtful accounts under each
of the following independent assumptions:
a. Past experiences indicates that 75% of sales are credit sales and that an
average 2% of credit sales may prove uncollectible.
b. One percent of gross sales may prove uncollectible.
c. An analysis of aging of trade receivables indicates that accounts receivable
in the amount of P80,000 may prove uncollectible.
d. The policy is to maintain an allowance for doubtful accounts equal to 10%
of the outstanding accounts receivable.
 Past experiences indicates
Credit Sales (5,000,000 * 75%) 3,750,000
that 75% of sales are credit
sales and that an average Multiply by rate 2%
2% of credit sales may Doubtful Accounts Expense 75,000
prove uncollectible.
Doubtful Accounts Expense 75,000
Allowance for Doubtful Accounts 75,000
To record allowance
Allowance before adjustment 20,000
Add: provision 75,000
Allowance for Doubtful Accounts 95,000
Accounts Receivable 500,000
Less: Allowance for Doubtful Accounts 95,000
Net Accounts Receivable 405,000
One percent of gross Gross Sales 5,000,000
sales may prove Multiply by rate 1%
uncollectible. Doubtful Accounts Expense 50,000
Doubtful Accounts Expense 50,000
Allowance for Doubtful Accounts 50,000
To record allowance
Allowance before adjustment 20,000
Add: provision 50,000
Allowance for Doubtful Accounts 70,000

Accounts Receivable 500,000

Less: Allowance for Doubtful Accounts 70,000
Net Accounts Receivable 430,000
An analysis of aging of Required Allowance – aging 80,000
trade receivables indicates Allowance before adjustment 20,000
that accounts receivable in Doubtful Accounts Expense 60,000
the amount of P80,000
may prove uncollectible.
Doubtful Accounts Expense 60,000
Allowance for Doubtful Accounts 60,000
To record allowance

Accounts Receivable 500,000

Less: Allowance for Doubtful Accounts 80,000
Net Accounts Receivable 420,000
The policy is to maintain Accounts Receivable 500,000
an allowance for Multiply by rate 10%
doubtful accounts equal
Allowance for Doubtful Accounts 50,000
to 10% of the
outstanding accounts Allowance before adjustment 20,000
receivable. Doubtful Accounts Expense 30,000
Doubtful Accounts Expense 30,000
Allowance for Doubtful Accounts 30,000
To record allowance
Accounts Receivable 500,000
Less: Allowance for Doubtful Accounts 50,000
Net Accounts Receivable 450,000
• On January 1, 2016, Jocose Company reported the following
Accounts Receivable 2,000,000 Problem 5-3
Allowance for Doubtful Accounts 100,000
• Additional information for the current year
1. Cash sales of the entity amount to P800,000 and represent 10% of gross sales.
2. 90% of the credit sales customers do not take advantage of the 5/10, n/30 terms.
3. Customers who did not take advantage of the discount paid P5,940,000.
4. Sales returns amounted to P80,000. All returns were from charge sales.
5. During the year accounts totalling P60,000 were written off as uncollectible.
6. Recoveries during the year amounted to P10,000. This amount is not included in the
collections.
7. The allowance for doubtful accounts is adjusted so that it represents a certain
percentage of the outstanding accounts receivable at year-end.
• REQUIRED:
a. Prepare journal entries to record the transactions.
b. What is the net realizable value of accounts receivable on December 31, 2016?
Cash sales of the entity amount to P800,000 and represent 10% of gross
sales.
Cash 800,000
Accounts Receivable 7,200,000
Sales 8,000,000
SALES = 800,000 / 10% = 8,000,000
CREDIT SALES = 8,000,0000 – 800,000 = 7,200,000
90% of the credit sales customers do not take advantage of the 5/10,
n/30 terms.
Cash 684,000
Sales Discounts 36,000
Accounts Receivable 720,000
took the discount = 100% – 90% = 10%
= 7,200,000 * 10% = 720,000
Customers who did not take advantage of the discount paid P5,940,000.

Cash 5,940,000
Accounts Receivable 5,940,000

It is expected that cash discounts of P10,000 will be taken on accounts

receivable outstanding on December 31, 2016.

Sales Discount 10,000

Allowance for Sales Discount 10,000
Sales returns amounted to P80,000. All returns were from charge sales.

Sales Return and Allowance 80,000

Accounts Receivable 80,000

During the year accounts totalling P60,000 were written off as

uncollectible.

Allowance for Doubtful Accounts 60,000

Accounts Receivable 60,000
Recoveries during the year amounted to P10,000. This amount is not
included in the collections.
Accounts Receivable 10,000
Allowance for Doubtful Accounts 10,000

Cash 10,000
Accounts Receivable 10,000

The allowance for doubtful accounts is adjusted so that it represents a

certain percentage of the outstanding accounts receivable at year-end.
Doubtful Accounts Expense ?
Allowance for Doubtful Accounts ?
COMPUTATION:
Accounts Receivable ( 2,000,000 + 7,200,000
– 720,000 – 5,940,000 – 80,000 – 60,000 ) 2,400,000
% of AR ( 100,000 / 2,000,000) Beginning 5%
balances
Required Allowance 120,000
Allowance before Adjustment 50,000
Doubtful Accounts Expense 70,000

Allowance for DA – beginning 100,000

Write – Off ( 60,000)
Recovery 10,000
Allowance before Adjustment 50,000
The allowance for doubtful accounts is adjusted so that it represents a
certain percentage of the outstanding accounts receivable at year-end.
Doubtful Accounts Expense 70,000
Allowance for Doubtful Accounts 70,000

PRESENTATION
Accounts Receivable 2,400,000
Less: Allowance for Doubtful Accounts 120,000
Allowance for Sales Discounts 10,000 130,000
Net Accounts Receivable 2,270,000

PROBLEM 5-6
 Correction in allowance for doubtful accounts
• the percent of sales method of estimating doubtful accounts has the
disadvantage of the allowance for doubtful accounts being inadequate or
excessive
• Aging the accounts is then necessary to test the reasonableness of the
allowance.
• Where the allowance is inadequate or excessive, a question arises as to the
proper treatment of the discrepancy, whether to consider it as an error or a
component of profit or loss.
• `The correction of the discrepancy is to be reported in the income statement
either as an addition to or subtraction from doubtful accounts expense.
• the correction is the natural result of a change in accounting estimate
• Changes in estimate are treated currently and prospectively (part of profit
or loss)
• Accordingly, an inadequate allowance is adjusted as follows:
Doubtful accounts expense xx
Allowance for doubtful accounts xx

• An excessive allowance is recorded as follows:

Allowance for doubtful accounts xx
Doubtful accounts expense xx

• When the allowance is excessive, there is a corollary problem when the

discrepancy is more than the debit balance in doubtful accounts expense
account.
• shall not be treated as a prior period error but included in the
determination of the income of the current period
 Correction in allowance for doubtful accounts
• amount of correction due to excessive allowance is P30, 000
• doubtful accounts expense account has a debit balance of P20,
000
• correction will result to a credit balance in the doubtful accounts
expense account of P10, 000 (abnormal balance)
• the P10, 000 difference shall not be treated as a prior period error
but included in the determination of the income of the current
period.
Allowance for doubtful accounts 30, 000
Doubtful accounts expense 20, 000
Miscellaneous income 10, 000
 Debit balance in allowance account
• The allowance for doubtful accounts normally has a credit
balance.
• may have a debit balance (policy of the entity )
• adjusting the allowance at the end of the period
• recording of accounts written off during the year
• On January 1, the allowance account before adjustment has a credit
balance of P30, 000 and during the year an account of P50, 000 is written
off and recorded as follows:

Allowance for doubtful accounts 50, 000

Accounts receivable 50, 000

• On December 31, the allowance account has debit balance of P20, 000
before adjustment.
• The debit balance does not indicate that the allowance is inadequate
because the accounts written off during the year and charged to the
allowance may have arisen from current year sales.
• The charge to the allowance account simply predates the recording of
doubtful accounts.
• At the end of the period when adjustments are made, the debit balance
should be considered.
 Debit balance in allowance account
• if on December 31, the required allowance is P40, 000,
Required allowance 40, 000
Add: Debit balance in allowance 20, 000
Doubtful accounts expense 60, 000
• the adjustment should be:
Doubtful accounts expense 60, 000
Allowance for doubtful accounts 60, 000
• Note that after the adjustment for doubtful accounts, the
allowance account has a credit of P40, 000, which is the required
allowance.
Problem • From inception of operation, Paramount Company provided for
5-8 uncollectible accounts expense under the allowance method
using percentage of sales method.
• Effective with the year ended December 31, 2016, the entity
adopted a new accounting method for estimating the allowance
for doubtful accounts at the amount indicated by the year-end
aging of accounts receivable.
• REQUIRED
1. Determine the allowance for doubtful accounts before
adjustment.
2. Determine the required allowance for doubtful accounts on
December 31, 2016.
3. Prepare the adjusting entry to record doubtful accounts
expense for 2016.
 • The balance in the allowance for doubtful accounts was P500,000 on
January 1, 2016. 20,000,000*2% = 400,000 (ADD)
• During the current year, credit sales totaled P20,000,000, interim
provisions for doubtful accounts were made at 2% of credit sales,
(DED P300,000 of bad debts were written off, and recoveries of accounts
UCT) previously written off amounted to P50,000. (ADD)
• A summary of aging is as follows:
Classification Balance Collectible multiply ALLOWANCE
November – December 5,000,000 95% 5% 250,000
July – October 2,000,000 90% 10% 200,000
January – June 1,000,000 75% 25% 250,000
Prior to January 1, 2016 500,000 400,00025% 75% 300,000
8,400,000 1,000,000
• Based on the review of collectability of the account balances in the “prior
to January 1, 2016” aging category, additional accounts totaling
P100,000 are to be written off on December 31, 2016.
DEDUCT – Allowance (to get
Allowance before adjustment)
 1. Determine the allowance for doubtful accounts before
adjustment.

Allowance for Doubtful Accounts – Jan 1 500,000

Add: Interim Provision (20M*2%) 400,000
Recovery 50,000 450,000
TOTAL 950,000
Less: Write-Off (300,000 + 100,000) 400,000
Allowance for Doubtful Accounts 550,000
– before adjustment
Determine the required allowance for doubtful accounts on
December 31, 2016.
The required allowance for doubtful accounts on December 31,
2016 is P 1,000,000 based on the aging schedule.
Classification Balance % Uncollectible Allowance
Nov to Dec 5,000,000 5% 250,000
Jul to Oct 2,000,000 10% 200,000
Jan to Jun 1,000,000 25% 250,000
Prior to Jan 1, 2016 400,000 75% 300,000
TOTAL 8,400,000 1,000,000

PRESENTATION
ACCOUNTS RECEIVABLE 8,400,000
LESS: ALLOWANCE for DA 1,000,000
NET ACCOUNTS RECEIVABLE 7,400,000
Prepare the adjusting entry to record doubtful accounts expense
for 2016.
Required Allowance 1,000,000
Allowance – before adjustment 550,000
Doubtful Accounts Expense 450,000

Doubtful Accounts Expense 450,000

Allowance for Doubtful Accounts 450,000
To record adjustment
IMPAIRMENT OF ACCOUNTS
RECEIVABLE
 Impairment of Accounts Receivable
• Many entities record allowance for doubtful accounts using aging of
accounts receivable, percentage of accounts receivable and percentage of
sales.
• The approach is relatively direct and uncomplicated.
• Actually, accounts receivable considered uncollectible are deemed to be
“impaired”.
• PFRS 9, paragraph 5.5.1,
• provides that an entity shall recognize a loss allowance for expected
credit losses on financial asset measured at amortized cost.
• Paragraph 5.5.3
• provides that an entity shall measure the loss allowance for a financial
instrument at an amount equal to the lifetime expected credit losses if
the credit risk on that financial instrument has increased significantly
since initial recognition.
 Credit Losses
• Credit losses are the present value of all cash shortfalls.
• Expected credit loses are an estimate of credit losses over the life of
the financial instrument.
• PFRS 9 does not prescribe particular method of measuring expected
credit losses.
• An entity may use various sources of data both internal or entity-
specific and external in measuring expected credit losses.
Impairment assessment
• Guidelines that will help in assessing whether accounts receivable
should be considered impaired:
a. Individually significant accounts receivable should be
considered for impairment separately and if impaired, the
impairment loss is recognized.
b. Accounts receivable not individually significant should be
collectively assessed for impairment.
c. Accounts receivable not considered impaired should be
included with other accounts receivable with similar credit-risk
characteristics and collectively assessed for impairment.
• An entity had the following accounts receivable at year-end:
Customer A 1,000,000
Customer B 1,500,000 ILLUSTRATION
Customer C 2,500,000
Customer D 3,000,000
Customer E 2,000,000
Other customer’s accounts 4,000,000
TOTAL 14,000,000

• All of the accounts receivable are individually significant, except the other
customer’s accounts receivable.
• The entity has determined the impairment loss as follows:
Customer A not impaired 0
Customer B not impaired 0
Customer C partly impaired 1,500,000
Customer D partly impaired 1,000,000
Customer E totally impaired 2,000,000
 Computation of impairment loss
• It is reliably determined that a composite rate of 5% is appropriate to
measure impairment on all other accounts receivable.
• The impairment loss is computed as follows:
Customer C 1,500,000
Customer D 1,000,000
Customer E 2,000,000
Other accounts receivable (5% x 6,500,000) 325,000
Total impairment loss 4,825,000

• Collective Assessment
Customer A 1,000,000
Customer B 1,500,000
Other customer’s accounts 4,000,000
Total other accounts receivable 6,500,000
 Journal entry for the Impairment loss
Doubtful Accounts Expense 4,825,000
Allowance for Doubtful Accounts 4,825,000
To record impairment of receivables

• Note that the accounts receivable from customers A and B which are not
considered impaired should be included in the collective assessment of all
other accounts receivable.
• The rationale for including the unimpaired accounts receivable in the
collective assessment is that an entity does not have all the necessary
information to make an informed decision for individual assessment.
 Impairment of Receivables
• The percentage of accounts receivable and percentage of
sales method can be considered “collective assessment
approach” of measuring impairment.
• On the other hand, the aging method is an “individual
assessment approach”.
End…
Credit Losses
• When measuring expected credit losses, an entity
should consider:
a. The probability-weighted outcome. The estimate should
reflect the possibility that a credit loss occurs and the
possibility that no credit loss occurs.
b. The time value of money. The expected credit losses
should be discounted.
c. Reasonable and supportable information that is
available without undue cost or effort.