DISCUSSION QUESTIONS – ACCOUNTS RECEIVABLE & DOUBTFUL ACCOUNTS

1. What is meant by normal operating cycle?

Cash conversion cycle – time it will take to convert Cash – Inventory – Receivable – Cash
2. What are trade receivables?
Receivables arising from normal business activity, Accounts Receivable, Notes Receivable, Loans
Receivable in the case a financing
3. Give the rule regarding the balance sheet classification of trade receivables.
Current Assets – as long as they are realizable (converted to cash) within 1 year or operating
cycle whichever is longer.
4. What are non-trade receivables? Residual definition – all receivables that are not classified as
trade.
5. Give the rule regarding the balance sheet classification of non-trade receivables.
Current Assets – as long as they fall due within 1 year.

6. to 13. are based on the following:

Give the proper balance sheet classification for each number. Assume the balance sheet date is
December 31, 2019 and the normal operating cycle of the business is two years. Choose from the
following classifications:

TRADE AND OTHER RECEIVABLES

OTHER NON-CURRENT ASSET

LONG-TERM INVESTMENT

TRADE AND OTHER PAYABLES

NEGATIVE SHAREHOLDERS’ EQUITY ITEM

6. A P50,000 promissory note received from a customer for sale of merchandise. It is dated Dec. 1, 2019
and is due Nov. 30, 2021.

7. A P100,000 promissory note received from the president of the company for cash advances given to
him. The note is dated Nov. 1, 2019 and is due on Oct. 31, 2021.

8. P1,000,000 advances to subsidiary which is due on Sept. 30, 2020.

9. Subscription Receivable which is due on March 31, 2021.

10. Advances to supplier. The merchandise will be delivered in April 2021.

11. Cash deposit for the purchase of equipment. The equipment will be delivered in January 2020.

12. A customer’s account in the accounts receivable ledger with a P20,000 credit balance on Dec. 31,
2019.

13. A supplier’s account in the accounts receivable ledger with a P15,000 debit balance on Dec. 31,
2019.

14. to 17.
What is the basis for the initial measurement of:

14. Accounts Receivable – Fair Value, subsequently at Net Realizable Value

15. Short-term non-interest bearing promissory note. Face Amount = Fair Value

16. Long-term interest bearing promissory note. Face Amount

17. Long-term non-interest bearing promissory note. Present Value/Discounted Value

18 to 20.

What is the basis for subsequent measurement of:

18. Accounts Receivable – Net Realizable Value (NRV) = Gross receivable – Allowances for Sales
Discount, Freight, Sales Returns, Doubtful Accounts.

19. Long-term interest bearing promissory note. Face Value

20. Long-term non-interest bearing promissory note. Amortized Cost Model using effective interest
method.

21. On Dec. 31, 2019, a customer purchased P100,000 merchandise, 2/10, n/30. On Dec. 31, 2019, it is

expected that the customer will pay within 10 days. Give the adjusting entry on Dec. 31, 2019.

To record the transaction.

Accounts Receivable 100,000

Sales 100,000

To record the adjustment for sales discount.

Sales Discount 2,000

Allowance for Sales Discount 2,000

22. Refer to no. 21. Give the journal entry upon payment of the customer within the 10-day discount
period.

Cash 98,000

Allowance for Sales Discount 2,000

Accounts Receivable 100,000

23. A customer purchases P1,000,000 merchandise, 2/10, n/30. The P20,000 freight related to the
purchase is paid by the customer. Give the journal entry to record the sale assuming the term of the sale
is FOB Shipping Point.

Shipping Terms Owner of the goods Freight is shoulder Freight Payment Term

1) FOB Shipping Point Buyer Buyer Freight Prepaid – Seller will pay
2) FOB Destination Seller Seller Freight Collect – Buyer will pay
 Accounts Receivable 1,000,000

Sales 1,000,000

No entry for the freight

24. Refer to no. 23. Give the journal entry to record the collection within the discount period.

Cash 980,000

Sales Discount 20,000

Accounts Receivable 1,000,000

25. Refer to no. 23. Give the journal entry to record the sale assuming the term of the sale is FOB
Destination.

Accounts Receivable 1,000,000

Sales 1,000,000

Freight-out 20,000

Allowance for Freight Charges 20,000

26. Continuation of no. 25. Give the journal entry to record the collection within the discount period.

Cash 960,000

Sales Discount 20,000

Allowance for Freight Charges 20,000

Accounts Receivable 1,000,000

27. to 29. Using the net method of recording credit sales, give the journal entry to record:

27. Sale of merchandise, P100,000, 2/10, n/30.

Accounts Receivable 98,000

Sales 98,000

28. Collection of accounts receivable within the discount period.

Cash 98,000

Accounts Receivable 98,000

29. Collection of accounts receivable beyond the discount period.

Cash 100,000

Accounts Receivable 98,000

Sales Discount Forfeited 2,000 → Other Income

30. to 32.

Accounting for Bad Debts

1) Direct Write-off Method (Bad Debts Expense)

Bad Debts Expense XXX
Accounts Receivable XXX
2) Allowance Method (Allowance for Doubtful Accounts)
Doubtful Account Expense XXX
Allowance For Doubtful Accounts XXX

Entry to record write-off

Allowance for Doubtful Accounts XXX
Accounts Receivable XXX

Entry to record recovery

Accounts Receivable XXX
Allowance for Doubtful Accounts XXX

Cash XXX
Accounts Receivable XXX

Basis to determine the amount of doubtful accounts.

1) Percentage of Sales ( % X Sales = Doubtful Account Expense)

2) Percentage of Receivable (% X Receivables = Required Allowance/Allowance for doubtful
accounts ending balance)
3) Aging of Receivable = Required Allowance

Allowance for Doubtful Accounts

Write-off Beg Balance

Doubtful Account Exp.
Recovery
Required Allowance/End
= =

Assume the following account balances at year-end:

DR. CR.

Accounts Receivable P 400,000

Allowance for Doubtful Accounts (Unadjusted ending balance) 5,000

Sales P2,000,000

Give the journal entry to recognize Doubtful Accounts Expense based on the following:
30. It is estimated that 5% of accounts receivable will prove to be uncollectible.

31. It is estimated that 2%of sales will prove to be uncollectible.

32. Estimated doubtful accounts per aging of account receivable is P12,000.

33. to 41.

ABC Co.’s adjusted trial balance on Dec. 31, 2019 showed the following:

Accounts Receivable P 5,000,000

Allowance for Doubtful Accounts 300,000

Transactions for 2020 included the following:

-Total sales (including P10,000,000 credit sales) P 20,000,000

-Collection of Accounts Receivable (net of 2% discount) 8,820,000

-Accounts Receivable written off during the year 100,000

-Recovery of accounts previously written off (not included in the P8,820,000 collection) 20,000

33. to 37. Give the journal entries to record the transactions for 2020.

38. What is the accounts receivable balance on Dec.31, 2020?

39. What is the allowance for doubtful accounts unadjusted balance on Dec. 31, 2020? Indicate whether
it is a

debit or credit balance.

40. Give the adjusting entry to recognize doubtful accounts expense. Assume that ABC Co. recognized

doubtful accounts expense at 2% of gross sales.

41. On Dec. 31, 2020, assume that an aging of A/R revealed that the net realizable value of accounts

receivable is P5,700,000. Give the entry to correct the allowance for doubtful accounts.

PROBLEM No. 1 – ACCOUNTS RECEIVABLE

ABC Co. reported the following accounts in its Dec. 31, 2019 balance sheet:

Accounts Receivable P 200,000

Allowance for Doubtful Accounts 10,000

Transactions for 2020:

A. Credit Sales (2/10, n/30) P 700,000

B. Total cash collections from credit customers.

Note: Of the P600,000 collection, P490,000 was collected net of 2% discount. Make separate entries
for collections made within the discount period and collections made beyond the discount period.

600,000

C. Credit Memo for sales returns and allowances 40,000

D. Accounts written off 30,000

E. Recoveries of accounts previously written off.

Note: Not included in the B.

15,000

The company uses aging of accounts receivable in estimating doubtful accounts expense. At the end of
2020,

accounts receivable was classified as follows:

Age Group Balance Estimated Percentage Uncollectible

Not yet due P ? 2%

1-30 days past due 74,000 3%

31-60 days past due 27,000 5%

61-90 days past due 21,000 10%

More than 90 days past due 15,000 20%

Required:

1. Give the journal entries for 2020 transactions.

2. What is the accounts receivable balance on Dec. 31, 2020?

3. What is the unadjusted allowance for doubtful accounts on Dec. 31, 2020? Indicate whether it is a
debit or

credit balance. Ex: 12,300 CREDIT

4. Give the adjusting entry to record doubtful accounts expense for 2020.

5. What is the net realizable value of accounts receivable on Dec. 31, 2020.

PROBLEM No. 2 – ACCOUNTS RECEIVABLE (1 point each)

ABC Co. reported the following balances on Dec. 31, 2019:

Accounts Receivable P 500,000

Allowance for Doubtful Accounts 25,000

Summary of Transactions for 2020:

1. Collections of accounts receivable from beginning balance:

Within the discount period (net of 2% discount) P 294,000

Beyond the discount period 150,000

Make separate entries for collections made within the discount period and collections made beyond the
discount period.

2. Accounts written off during the year, P50,000

3. Recoveries of accounts previously written off, P10,000

Note: This is already included in the P150,000 collection in No. 1)

4. Credit sales for 2020 (all on terms of 2/10, n/30):

Customer Invoice Amount Shipping Terms

D Co. P400,000……. FOB destination, freight prepaid, P20,000

E Co. 200,000……. FOB shipping point, freight collect, P10,000

F Co. 600,000……. FOB shipping point, freight prepaid, P30,000

G Co. 800,000……. FOB destination, freight collect, P40,000

Note: Prepare one journal entry for each customer.

5. Collections of accounts receivable from 2020 credit sales:

Customer Collections (within discount period)

D Co. P350,000

E Co. 150,000

F Co. 430,000 (including freight of P30,000)

G Co. 200,000 (P10,000 related freight was offset against payments)

Note: Prepare one journal entry for each customer. Collections represent face value of accounts
receivable.

Required:

1. Give the journal entries to record the 2020 transactions.

2. Give the adjusting entries on Dec. 31, 2020 to take up:

A. Doubtful accounts expense for 2020. ABC Co. uses the percentage of accounts receivable in

determining doubtful accounts expense.

B. 30% of the accounts receivable balance is expected to be collected within the discount period.
3. Compute the net realizable value of accounts receivable.