Handout: Accounts Receivable FAR0_1st Sem_AY2019-20

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

Related Terms and Definitions

1. Financial Instrument – any contract that gives rise to a financial asset of one entity and a financial liability or an
equity instrument of another entity.
2. Financial Asset – any asset that is (a) cash; (b) a contractual right to receive cash or another financial asset from
another entity; (c) a contractual right to exchange financial instrument with another entity under conditions that are
potentially favorable; or (d) an equity instrument of another entity.
3. Financial Liability – a contractual obligation to (a) deliver cash or another financial asset to another entity; or (b) to
exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to
the entity
4. Equity Security – represents ownership interest in another entity in the form of ordinary shares, preference shares and
rights or options to acquire ownership shares.

Classification of Receivables
1. Trade receivables – pertain to claims arising from sale of merchandise or services in the ordinary course of business.
Trade receivables that are expected to be realized in cash (collected) within the normal operating cycle or one year,
whichever is longer, are classified as current assets.
2. Nontrade receivables – refer to claims arising from sources other than the sale of merchandise services in the ordinary
course of business. Nontrade receivables that are expected to be realized in cash (collected) within one year, the
length of the operating cycle notwithstanding, are classified as current assets.

Financial Statement Presentation of Receivables

Trade receivables that are expected to be realized in cash (collected) within the normal operating cycle or one year,
whichever is longer, and nontrade receivables that are expected to be realized in cash (collected) within one year, the length of
the operating cycle notwithstanding, shall be presented on the face of the statement of financial position as a single line item,
collectively referred to as “trade and other receivables”.

Classification Rules Related to Nontrade Receivables

Type of Nontrade Receivables Classification Rules
Advances to shareholders, officers Classified as current assets if collectible within 1 year from the end of the reporting
and/or employees period; noncurrent if otherwise.
Advances to affiliates Are usually realizable into cash beyond 1 year, hence are classified as long-term
investments; short-term investments if otherwise
Advances to suppliers for the Classified as current assets
purchase of merchandise
Subscriptions receivable Classified as current assets if collectible within 1 year; contra – equity if otherwise
Creditors’ accounts (accounts Normally classified as current assets. Alternatively, the same can be offset against
payable) with debit balances other creditors’ accounts with credit balances if the amount is immaterial.
Special deposits on contract bids Normally classified as noncurrent assets; current assets if collectible within 1 year
from the end of the reporting period
Accrued income Normally classified as current assets since they are usually collectible currently;
noncurrent assets if otherwise
Claims receivable Normally classified as current assets since they are usually collectible currently;
noncurrent assets if otherwise

Rules on customers’ accounts with credit balances

1. Customers’ credit balances resulting from overpayments, returns and allowances, and advance payments from
customers are classified as current liabilities and are not offset against customers’ accounts with debit balances.
2. Alternatively, the same can be offset against other customers’ accounts with debit balances if the amount is
immaterial.

Measurement of Accounts Receivable:

a. Initial – face amount or original invoice amount (fair value)
b. Subsequent – net realizable value (amortized cost)

Net realizable value

The net realizable value of accounts receivable is the outstanding face amount of the receivables reduced by (1) allowance for
freight charge; (2) allowance for sales return; (3) allowance for sales discount; and (4) allowance for doubtful accounts

Accounting for Freight Charge

Owner of the goods
Party that initially
in transit/ Party
Freight Terms pays the cost of Pro-forma entry (seller’s point of view)
liable to shoulder
freight
the cost of freight
FOB Shipping Point, Accounts receivable xx
Buyer Buyer
Freight Collect Sales xx
FOB Destination, Accounts receivable xx
Freight Prepaid Freight out xx
Seller Seller
Sales xx
Cash xx
Handout: Accounts Receivable FAR0_1st Sem_AY2019-20

Owner of the goods

Party that initially
in transit/ Party
Freight Terms pays the cost of Pro-forma entry (seller’s point of view)
liable to shoulder
freight
the cost of freight
FOB Shipping Point, Accounts receivable xx
Freight Prepaid Buyer Seller Sales xx
Cash xx
FOB Destination, Freight Accounts receivable xx
Collect Freight out xx
Seller Buyer
Sales xx
Allowance for freight charge xx

Accounting for Allowances for Sales Return and Sales Discount

Type of Allowance Adjusting Entry at year-end Reversing Entry (optional)
1. Allowance for sales return Sales return xx Allowance for sales return xx
Allowance for sales return xx Sales return xx
2. Allowance for sales discount Sales discount xx Allowance for sales discount xx
Allowance for sales discount xx Sales discount xx

Methods of Recording Credit Sales

1. Gross Method – The accounts receivable and sales are recorded at the gross amount of the invoice (before deducting any
offered cash discount)
2. Net Method – The accounts receivable and sales are recorded at the net amount of the invoice (after deducting any offered
cash discount)

Types of Discounts
1. Trade discount – refer to discounts that are offered to encourage transactions in high volume (sales or purchases in bulk)
and/or to reward customer patronage
2. Cash discount – pertain to discounts that are offered to encourage prompt collection/payment of accounts

Accounting for Doubtful Accounts:

Particulars/ Transactions Allowance Method Direct Write – Off Method
1. Timing on the When accounts become doubtful of When accounts are proven worthless
recording of expense collection
2. Accounts become Doubtful accounts expense xx
No entry
doubtful of collection. Allowance for doubtful accounts xx
3. Accounts are Allowance for doubtful accounts xx Bad debts expense xx
eventually proven Accounts receivable xx Accounts receivable xx
worthless.
4. Recovery of accounts If recovery is made during the same accounting
Re-establishment entry:
previously written off: period where write-off was recognized:
Accounts receivable xx
Reversal entry:
Allowance for doubtful accounts xx
Collection entry: Accounts receivable xx
Bad debts expense xx
Cash xx Collection entry:
Accounts receivable xx
Cash xx
Accounts receivable xx
If recovery is made in subsequent accounting
period:
Cash xx
Miscellaneous income xx

Classification of Doubtful Accounts in the Income Statement

1. Distribution cost (selling expense) – if the credit and collection function is under the charge of the sales department
2. Administrative expense – if the credit and collection function is under the charge of a department other than the sales
department

Methods of Estimating Doubtful Accounts

Method Advantage Disadvantage
1. Percent of sales (income There is proper matching of cost The accounts may not be shown at estimated
statement approach) against revenue. realizable value because the allowance may
prove excessive or inadequate.
2. Percent of accounts receivable Presents fairly the accounts receivable There is no proper matching of cost against
(statement of financial position in the statement of financial position at revenue.
approach) net realizable value.
3. Aging of accounts receivable Presents fairly the accounts receivable There is no proper matching of cost against
(statement of financial position in the statement of financial position at revenue. Further, it is relatively more time
approach) net realizable value. consuming than Methods 1 & 2.
Handout: Notes Receivable, Loans Receivable & Receivable Financing FAR0_1st Sem_AY2019-20

Notes receivable refer to claims supported by formal promises to pay usually in the form of notes.

Measurement of Notes Receivable

Classification Initial Measurement Subsequent Measurement
1. Short-term note receivable Face amount Initially measured amount minus
principal repayment and reduction for
impairment or uncollectibility
2. Long-term, interest-bearing note Face amount Initially measured amount minus
receivable principal repayment and reduction for
impairment or uncollectibility
3. Long-term, non-interest bearing Present value/ discounted value Initially measured amount minus
note receivable principal repayment, plus or minus
cumulative amortization of any
difference between the initial carrying
amount and the principal maturity
amount, minus reduction for
impairment or uncollectibility
*Conceptually, notes receivable are initially measured at present value and subsequently measured at amortized cost.

Accounting for Long-term, Non-interest Bearing Notes

Present Value (PV) of the Unearned Interest Income
Particulars Method of Amortization
Note Receivable (NR) (UII) - Initial measurement
1. Note is payable in lump- PV of NR = cash equivalent UII = Face of NR – PV of Effective interest method
sum; cash equivalent price of the consideration NR
price for the received
consideration received is
available
2. Note is payable in lump- PV of NR = Face of NR UII = Face of NR – PV of Effective interest method
sum; cash equivalent multiply by the PVF of NR
price for the 1@rate for “n” periods
consideration received is
not available
3. Note is payable in equal PV of NR = cash equivalent UII = Face of NR – PV of Outstanding balance method
annual installments; cash price of the consideration NR
equivalent price for the received
consideration received is
available
4. Note is payable in equal PV of NR = annual UII – Face of NR – PV of Effective interest method
annual installments; cash installment multiply by the NR
equivalent price for the PVF of an ordinary annuity
consideration received is of 1@rate for “n” periods
not available
5. Note is payable in PV of NR = individual UII – Face of NR – PV of Effective interest method
uneven annual uneven installments multiply NR
installments; cash by the PVF of 1@rate for
equivalent price for the each “n” period
consideration received is
not available
*Amount to be credited to Sales (if item sold is inventory) or amount to be used as Selling Price in the determination of gain or
loss on sale (if item sold is other than inventory) = Down payment (if any) plus the PV of NR

Pro-forma entry on transactions involving long-term, non-interest bearing notes receivable:

Asset sold is an inventory; Asset sold is not an inventory; with a down payment
with a down payment Sale resulted to a gain on sale Sale resulted to a loss on sale
Entry to record the sale: Cash xx Cash xx
Cash xx Note receivable xx Note receivable xx
Notes receivable xx Accumulated depreciation xx Accumulated depreciation xx
Sales xx Depreciable asset xx Loss on sale xx
Unearned interest income xx Unearned interest income xx Depreciable asset xx
Gain on sale xx Unearned interest income xx
Entry to record subsequent collection:
Cash xx Entry to record subsequent collection: Entry to record subsequent collection:
Notes receivable xx Cash xx Cash xx
Notes receivable xx Notes receivable xx

Entry to record the amortization of Entry to record the amortization of Entry to record the amortization of
interest: interest: interest:
Unearned interest income xx Unearned interest income xx Unearned interest income xx
Interest income xx Interest income xx Interest income xx
Handout: Notes Receivable, Loans Receivable & Receivable Financing FAR0_1st Sem_AY2019-20

Loans receivable refer to financial assets arising from a loan granted by a bank or another financial institution to a borrower or
client.

Measurement of Loans Receivable

Initial Measurement Subsequent Measurement
Fair value plus transaction costs Initially measured amount minus principal repayment, plus or minus cumulative
amortization of any difference between the initial carrying amount and the
principal maturity amount, minus reduction for impairment or uncollectibility

Effects of Amortization
Case Initial Carrying Amount (ICA) VS. Face Effects of Amortization
Amount (FA)
1. Origination fees charged to the ICA = FA Not applicable
borrower are equal to those
shouldered by the lender (bank)
2. Origination fees charged to the ICA < FA Increase in “Interest Income” and
borrower are more than those “Subsequent Carrying Amount” of the
shouldered by the lender (bank) *The difference is recognized as Loans Receivable
“Unearned Interest Income” subject to
periodic amortization
3. Origination fees charged to the ICA > FA Decrease in “Interest Income” and
borrower are less than those “Subsequent Carrying Amount” of the
shouldered by the lender (bank) *The difference is recognized as “Direct Loans Receivable
Origination Costs” subject to periodic
amortization

Credit Risk and Impairment of Loans Receivable

Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to
discharge an obligation.

An entity shall recognize a loss allowance for expected credit losses on financial assets measured at amortized cost. Credit
losses are the present value of all cash shortfalls over the life of the financial instrument.

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.

PRO-FORMA COMPUTATIONS: PRO-FORMA ENTRIES:

Face amount of the loan receivable xx Loan impairment loss xx
Add: Accrued interest (if previously recognized) xx Interest receivable (if accrued) xx
Total carrying amount xx Allowance for loan impairment xx
Less: Present value of future cash flows discounted
using the original effective rate xx Allowance for loan impairment xx
Loan impairment loss xx Interest income xx

RECEIVABLE FINANCING
It refers to the financial flexibility or capability of an entity to raise money out of its receivables other than from the usual
collection of the same.

Forms of Receivable Financing Transfer of Ownership Pro-forma entries

1. Pledging of accounts receivable 1. The borrower retains ownership Cash xx
over the accounts receivable which Discount on note payable xx
were pledged as collateral security Note payable – bank xx
for a loan.
2. Assignment of accounts receivable 2. The borrower retains ownership Entry to identify and segregate assigned
over the accounts receivable which accounts:
were assigned as collateral security Accounts receivable assigned xx
for a loan. Accounts receivable xx

a. Notification basis – customers *Unlike in pledging where all accounts

whose accounts are assigned as receivable are offered as collateral
security for a loan are advised security, assignment requires the
to pay directly to the assignee specific identification of accounts which
are assigned as security for a loan.
b. Nonnotification basis –
customers whose accounts are Entry to record the assignment:
assigned as security for a loan Cash xx
are not notified of the Service charge xx
financing arrangement; hence, Note payable - bank xx
the former still pays to the
assignor
Handout: Notes Receivable, Loans Receivable & Receivable Financing FAR0_1st Sem_AY2019-20

3. Factoring of accounts receivable 3. Ownership over the factored Entry to record casual factoring:
accounts receivable is transferred to Cash xx
the factor. Allowance for doubtful accounts xx
Loss on factoring xx
a. Casual factoring - Loss on Accounts receivable xx
factoring, equal to the
difference between the selling Entry to record factoring as a
price and the net realizable continuing arrangement:
value of the factored accounts Cash xx
receivable, is recognized. Commission expense xx
Receivable from factor xx
b. Factoring as a continuing Accounts receivable xx
arrangement – No loss is
recognized. The fee charged by
the factor on the financing
arrangement is recorded as a
commission expense.

“Receivable from factor

(factor’s holdback)” – a
predetermined amount
withheld by the factor as a
protection against customer
returns and allowances and
other special adjustments.

4. Discounting of notes receivable 4. Transfer of ownership over the Entry to record discounting without
notes discounted is dependent on recourse:
the mode of discounting agreed Cash xx
upon by the parties. Loss on NR discounting xx
Note receivable xx
a. Discounting without recourse Interest income xx
–absolute derecognition of the
notes receivable account
Entry to record discounting with
b. Discounting with recourse, recourse – conditional sale:
accounted for as a Cash xx
conditional sale – the note Loss on NR discounting xx
receivable account is not Note receivable discounted xx
derecognized at the time of Interest income xx
discounting. A contra – asset
account, “Note Receivable
Discounted” account is Entry to record discounting with
recognized with disclosure of recourse – secured borrowing:
the contingent liability. Cash xx
Interest expense xx
c. Discounting with recourse, Liability for NR discounted xx
accounted for as a secured Interest income xx
borrowing - the note
receivable account is not
derecognized at the time of
discounting. An accounting
liability, “Liability for Note
Receivable Discounted”
account is recognized.

Computational Guidelines related to Note Receivable Discounting:

1. Maturity value = Principal + Interest
*Interest = Principal X Original Rate X Original Term
2. Discount = Maturity value X Discount Rate X Discount Term
3. Net proceeds = Maturity value – Discount
4. Carrying amount of NR = Principal + Interest
*Interest = Principal X Original Rate X Expired Term at the time of discounting
5. Loss on NR discounting (Interest Expense) = Carrying Amount of NR – Net Proceeds

DISHONORED NOTES – A note is said to be dishonored if payment is not made at the time of maturity. Theoretically,
dishonored notes should be transferred to Accounts Receivable at an amount equal to the face amount of the note plus interest
and other charges.
Handout: Inventories_Intro FAR0_1st Sem_AY2019-20

INVENTORIES refer to assets that are held for sale in the ordinary course of business, in the process of production for such
sale or in the form of materials or supplies to be consumed in the production process or in the rendering of services (PAS 2).

Classes of Inventories
Type of Operation Class/ Account Title Brief Description
1. Service Supplies Inventory Unused portion of supplies available for use in the rendering
of services
2. Merchandising Merchandise inventories Goods held for sale by a trading concern
a. Finished goods Completed products which are ready for sale
b. Goods in process Partially completed products requiring further process before
they can be sold
3. Manufacturing c. Raw (Direct) materials Goods that are to be used in the production process and are
directly traceable to the finished product
d. Factory or manufacturing supplies Goods that are to be used in the production process but are
not directly traceable to the finished product

Goods Includible in Inventories

As a rule, all goods to which the entity has title (legal test) shall be included in the inventory, regardless of location.
Accordingly, an entity may be considered the legal owner of the goods even if the same are not yet physically held by the
former.

The following inventory items must be included in inventory:

1. Goods owned and on hand 4. Goods out on consignment
2. Goods in transit and sold FOB destination 5. Goods in the hands of salesmen or agents
3. Goods in transit and purchased FOB shipping point 6. Goods held by customers on approval or trial

Accounting for Freight Charge (buyer’s point of view)

Owner of the goods in transit/
Party that initially pays
Freight Terms Party liable to shoulder the cost Pro-forma entry
the cost of freight
of freight
FOB Shipping Point, Purchases xx
Freight Collect Freight in xx
Buyer Buyer
Accounts payable xx
Cash xx
FOB Destination, Purchases xx
Seller Seller
Freight Prepaid Accounts payable xx
FOB Shipping Point, Purchases xx
Freight Prepaid Buyer Seller Freight in xx
Accounts payable xx
FOB Destination, Purchases xx
Freight Collect Cash xx
Seller Buyer
Accounts payable xx

Other Shipping Terms

Maritime
Seller’s Responsibility Buyer’s Responsibility Point of Transfer of Ownership
Shipping Terms
FAS or free Seller bears all expenses and risk Buyer bears the cost of loading When the carrier takes possession
alongside related to delivering the goods to and shipment of the goods
the DOCK next to or alongside
the vessel
CIF or cost, Seller bears the cost of loading Buyer agrees to pay in lump-sum Upon delivery of the goods to the
insurance and the cost of the goods, insurance carrier
freight cost and freight charge
Ex-ship Seller bears all expenses and risk Buyer pays for the cost of the When goods are UNLOADED
of loss until the goods are goods from the ship
UNLOADED from the ship

CONSIGNMENT – an agreement whereby the owner of the goods, called the CONSIGNOR, transfers physical possession of
goods to an agent, called the CONSIGNEE, who sells them on behalf of the former.

Salient Features of Consignment

1. Consigned goods shall be included in the CONSIGNOR’s inventory and excluded from the CONSIGNEE’s inventory.
2. Freight and other handling charges on goods out on consignment are part of the cost of goods consigned.
3. Freight and other distribution costs incurred by the CONSIGNEE in selling the goods of the CONSIGNOR shall be treated
as selling expenses of the former. However, the parties may agree that the costs of distribution shall be reimbursed by the
CONSIGNOR to the CONSIGNEE, in which case, the costs shall be treated as selling expenses of the CONSIGNOR.
4. The CONSIGNOR shall recognize a sale only upon actual sale by the CONSIGNEE to customers which also triggers the
recognition of commission income by the latter.
Handout: Inventories_Intro FAR0_1st Sem_AY2019-20

ACCOUNTING FOR INVENTORIES

Transactions Periodic Method Perpetual Method
1. Purchase of merchandise on Purchases xx Merchandise inventory xx
account Accounts payable xx Accounts payable xx
2. Payment of freight on Freight in xx Merchandise inventory xx
purchase Cash xx Cash xx
3. Return of merchandise to Accounts payable xx Accounts payable xx
suppliers Purchase returns xx Merchandise inventory xx
4. Payment of accounts payable Accounts payable xx Accounts payable xx
within the discount period Purchase discounts xx Cost of sales xx
Cash xx Cash xx
5. Sale of goods to customers on Accounts receivable xx Accounts receivable xx
account Sales xx Sales xx

Cost of sales xx
Merchandise inventory xx
6. Return of merchandise from Sales return xx Sales return xx
account customers Accounts receivable xx Accounts receivable xx

Merchandise inventory xx
Cost of sales xx
7. Collection of customer’s Cash xx Cash xx
account within the discount Sales discount xx Sales discount xx
period Accounts receivable xx Accounts receivable Xx
8. Adjustment at year – end Merchandise inventory, end xx Inventory shortage xx
Income summary xx Merchandise inventory xx

(To set-up the cost of unsold (To recognize the difference

goods at year-end) between the inventory per count and
per record, where RECORD >
COUNT)

Merchandise inventory xx
Inventory overage xx

(To recognize the difference

between the inventory per count and
per record, where RECORD <
COUNT)

Methods of Recording Credit Purchases

1. Gross Method – The accounts payable and purchases accounts are recorded at the gross amount of the invoice (before
deducting any offered cash discount)
2. Net Method – The accounts payable and purchases account are recorded at the net amount of the invoice (after deducting
any offered cash discount). Any discount foregone shall be recorded as “Purchase Discount Lost” and classified among
other expense items.

Types of Discounts
1. Trade discounts – are offered to encourage transactions in high volume and/or to reward customer patronage
2. Cash discounts – are offered to encourage prompt collection/payment of accounts

COST OF INVENTORIES
1. Cost of purchase – comprises the purchase price, import duties and irrecoverable taxes, freight, handling and other costs
directly attributable to the acquisition of finished goods, materials and services.
a. Trade discounts, rebates and other similar items are deducted in determining the cost of purchase
b. Foreign exchange differences on inventory transactions denominated in foreign currency are excluded from
the cost of purchase
c. Financing costs (interest) related to the acquisition of inventories on a deferred settlement basis is excluded
from the cost of purchase and is recognized as interest expense over the period of financing
2. Cost of conversion – includes costs that are necessary in the conversion of materials into finished products such as direct
labor and systematic allocation of fixed and variable production overhead.
a. Direct labor pertains to the cost of labor of workers and employees who have a direct involvement in the
production of goods and/or services (e.g salary of workers in the factory)
b. Fixed production overhead refers to the indirect cost of production that remains relatively constant regardless of
the volume of production (e.g. rent of factory building). It is allocated based on the normal capacity of the
production facilities.
c. Variable production overhead refers to the indirect cost of production that varies directly with the volume of
production (e.g. indirect labor and indirect materials).It is allocated based on the actual use of the production
facilities.
3. Other costs incurred in bringing the inventories to their present location and condition.

Cost of Inventories of a Service Provider - consists of the labor and other costs of personnel directly engaged in the provision
of the service, including supervisory personnel and attributable overhead.
Handout: Inventories_CostFlow_LCNRV FAR0_1st Sem_AY2019-20

PAS 2, paragraph 9, provides that inventories shall be measured at the lower of cost and net realizable value (LCNRV).

Net realizable value or NRV is the estimated selling price in the ordinary course of business less the estimated cost of
completion and the estimated cost of disposal of inventories.
PAS 2, paragraph 25, further provides that the cost of inventories shall be determined by using either: [1] First in, First out
(FIFO) or [2] Weighted average

COST FORMULA MATRIX

Cost Formula Cost of goods sold Ending Inventory
1. First in, First out* Expressed in terms of earlier or old prices Expressed in terms of current or recent prices
2. Last in, First out** Expressed in terms of current or recent prices Expressed in terms of earlier or old prices
3. Weighted average* Expressed in terms of the average price Expressed in terms of the average price during the
during the period period
4. Specific Expressed in terms of specific costs Expressed in terms of specific costs attributed to
identification*** attributed to identified items of inventory identified items of inventory
5. Standard costs*** Expressed in terms of predetermined costs on Expressed in terms of predetermined costs on the
the basis of normal production levels basis of normal production levels
6. Relative sales price
method***
* GAAP ** Not generally accepted *** Accepted as an alternative costing method

Computational Guidelines
1. FIFO, whether applied on a periodic or perpetual method of accounting, yields the same amount of Cost of Sales (COS)
and Ending Inventory (EI).
2. LIFO periodic and LIFO perpetual result in different amounts of COS and EI.
3. A common average unit cost is applied to both sold and unsold units under the Weighted Average – Periodic costing
method in determining the amount of COS and EI. The average unit cost is computed by dividing the Total Cost of
Goods Available for Sale (in Php) during the period by the Total Units Available for Sale.
4. A new weighted average unit cost is computed after every purchase under the Weighted Average – Perpetual costing
method.
5. In a period of rising prices, FIFO yields the highest EI, lowest COS and highest Net Income (NI)
6. In a period of declining prices, FIFO yields the lowest EI, highest COS and lowest NI
7. In a period of rising prices, LIFO yields the lowest EI, highest COS and lowest NI
8. In a period of declining prices, LIFO yields the highest EI, lowest COS and highest Net Income (NI)

MEASUREMENT OF INVENTORIES – inventories shall be measured at LCNRV (PAS 2, par 9)

Accounting for Inventory Writedown
1. Inventories are usually written down to NRV on an item by item or individual basis.
2. A writedown is required if the NRV is lower than the cost of the inventory. Accordingly, the inventory is measured at
NRV and the decrease in value is appropriately recognized.
3. No writedown is recorded if the NRV of the inventory is greater than its cost.

Methods of Accounting for Inventory Writedown

1. Direct Method or Cost of Sales Method
a. The Inventory is measured at the LCNRV
b. Any loss on writedown or gain on subsequent reversal of the same is buried in the Cost of Sales; no separate
accounting for the loss is made

2. Allowance Method or Loss Method

a. The Inventory is measured at COST
b. Any loss on writedown or gain on subsequent reversal of the same is accounted for separately.
c. A valuation account, “Allowance for Inventory Writedown” is maintained
d. “Loss on Inventory Writedown” increases Cost of Sales while “Gain on Reversal of Inventory Writedown” decreases
Cost of Sales
e. The amount of gain on reversal of writedown cannot exceed the cumulative amount of losses on inventory writedown
previously recognized.

Accounting for Purchase Commitments

1. Purchase commitments are obligations of the entity to acquire certain goods sometime in the future at a fixed price and
fixed quantity.
2. No formal accounting entry is made upon signing of the purchase commitment. However, a note disclosure is required in
the notes to FS.
3. At year-end (FS preparation date), a Loss on Purchase Commitment and an Estimated Liability for Purchase Commitment
are recognized if the current price is lower than the committed price. No entry is recognized if it is otherwise.
4. At the time of actual delivery:
a. The “Purchases” account is debited at the lower of the committed price and the current price
b. The “Accounts Payable” account is credited always at the committed price
c. Additional “Loss on Purchase Commitment” is to be recognized if the current price at the time of delivery is lower
than the current price at year-end.
d. “Gain on Purchase Commitment” shall be recognized if the current price at the time of delivery is higher than the
current price at year-end. However, the amount of gain to be recognized should not exceed the losses previously
recognized.
Handout: Inventory Estimation FAR0_1st Sem_AY2019-20

Methods of Inventory Estimation

1. Gross profit method
2. Retail inventory method

GROSS PROFIT (GP) METHOD

1. This inventory estimation method assumes that the rate of gross profit remains approximately the same from period to
period.
2. Accordingly, the ratio of cost of sales to net sales is also assumed to be relatively constant from period to period.
3. Basic formula under the GP method:

Beginning inventory xx
Add: Net cost of purchases
Purchases xx
Freight in xx
Purchase returns & allowances (xx)
Purchase discounts (xx) xx
Total cost of goods available for sale xx
Less: Estimated cost of sales (see Item No. 4) xx
Estimated cost of ending inventory xx

4. The estimated cost of sales is computed as follows:

a. Gross profit rate is based on sales / selling price:

Estimated cost of sales = Net sales x (100% - GP rate)

b. Gross profit rate is based on cost:

Net sales
Estimated cost of sales =
100% + GP rate

5. The Net Sales, for purposes of inventory estimation, is equal to Gross Sales reduced by any Sales Return during the period.
Sales allowances and discounts, which do not result to physical reduction in units sold, are ignored (not deducted from
gross sales) in the determination of net sales.

RETAIL INVENTORY METHOD

1. This method is often used in the retail industry for measuring inventory of large number of rapidly changing items with
similar margin.
2. It is commonly employed by department stores, supermarkets and other retail concerns which maintain a wide variety of
goods in its inventory.
3. Required information to support the use of the retail inventory method:
a. Beginning inventory at cost and at retail price;
b. Purchases during the period at cost and at retail price;
c. Adjustments to the original retail price such as additional mark up, mark up cancelation, markdown and
markdown cancelation; and
d. Other adjustments such as departmental transfers, breakages, shrinkage, theft, damaged goods and employee
discounts.
4. Basic formula under the Retail Inventory Method:

Particulars Cost Retail

Beginning Inventory xx xx
Net purchases xx xx
Total goods available for sale (TGAFS) xx xx
*Cost ratio (TGAFS @cost divided by TGAFS @ retail)
Net sales (xx)
Ending inventory at retail xx
Ending inventory at cost [ EI @ retail multiplied by the cost ratio*] xx

Approaches in the use of retail inventory method

1. Conservative or conventional or lower of cost and net realizable value approach
 Lowest cost of ending inventory and highest cost of sales value.
 Includes net mark ups and excludes net mark downs for purposes of cost ratio computations
2. Average approach
 Higher cost of ending inventory and lower cost of sales value than the conservative approach
 Includes net mark ups and net mark downs for purposes of cost ratio computations
3. FIFO retail approach
 Disregards beginning inventory information in the determination of the cost ratio.
 Assumes that the cost of the ending inventory is reasonably sourced from the current purchases (FIFO)
 Includes net mark ups and net mark downs for purposes of the cost ratio computations
Answer Key & Solutions: Quiz No. 1 - Final Term
1 B 6 C
2 C 7 C
3 B 8 C
4 B 9 B
5 C 10 B

P1-1 Present value of note receivable (Php 125,000 x 2.40) 300,000.00

P1-2 Down payment 125,000.00

Present value of note receivable 300,000.00
Total selling price of the old generator 425,000.00
Carrying amount of the old generator (400,000.00)
Gain on sale 25,000.00

P1-3 Cash 125,000.00

Note receivable 375,000.00
Accumulated depreciation 600,000.00
Equipment 1,000,000.00
Gain on sale of equipment 25,000.00
Unearned interest income 75,000.00

P1-4 Interest income for the year 2019 (Php 300,000 x 12%) 36,000.00

P1-5 Carrying amount, 12.31.2020 [ { [ (300,000 x 1.12) - 125,000 ] x 1.12 } - 125,000 ] 111,320.00

P2-1 Accounts Receivable

Beginning balance 600,000.00 Collections, net of discounts 1,261,000.00
Sales on account 2,000,000.00 Sales discount 39,000.00
Recoveries (re-establishment) 20,000.00 Collections w/o discounts (w/ recoveries) 500,000.00
Accounts written off 30,000.00
Sales returns & allowances 10,000.00
Ending balance 780,000.00
2,620,000.00 2,620,000.00

P2-2 Accounts receivable 780,000.00

Allowance for doubtful accounts (31,200.00)
Allowance for freight charge (8,000.00)
Net realizable value of accounts receivable, 12.31.2019 740,800.00

P2-3 Allowance for doubtful accounts

Accounts written off 30,000.00 Beginning balance 24,000.00
Endinng balance 31,200.00 Recoveries 20,000.00
Provision (doubtful accounts expense) 17,200.00
61,200.00 61,200.00

P2-4 Accounts receivable 200,000.00

Freight out 8,000.00
Sales 200,000.00
Allowance for freight charge 8,000.00

P2-5 Cash 186,000.00

Sales discount 6,000.00
Allowance for freight charge 8,000.00
Accounts receivable 200,000.00

P3-1 Not yet due 200,000.00 0% -

1-30 days past due 150,000.00 5% 7,500.00
31-60 days past due 120,000.00 25% 30,000.00
61-90 days past due 100,000.00 50% 50,000.00
Over 90 days past due 80,000.00 100% 80,000.00
Required allowance per aging 650,000.00 167,500.00

P3-2 Accounts receivable, 12.31.19 650,000.00

Allowance for doubtful accounts, per aging (167,500.00)
Net realizable value of accounts receivable, 12.31.19 482,500.00
P3-3 Allowance for doubtful accounts
Accounts written off 20,000.00 Beginning balance 30,000.00
Endinng balance 167,500.00 Recoveries 60,000.00
Provision (doubtful accounts expense) 97,500.00
187,500.00 187,500.00

Doubtful accounts expense, per aging 97,500.00

Doubtful accounts expense, 2% of net credit sales (2% x Php 5,000,000) 100,000.00
Decrease in doubtful accounts expense (2,500.00)

Allowance for doubtful accounts 2,500.00

Doubtful accounts expense 2,500.00

P4-1 Trade accounts receivables 2,000,000.00

Allowance for doubtful accounts (40,000.00)
Net reallizable value of accounts receivable, 12.31.2019 1,960,000.00

P4-2 Trade accounts receivables 2,000,000.00

Allowance for doubtful accounts (40,000.00)
Trade notes receivable 15,000.00
Advances to suppliers 60,000.00
Creditors' accounts with debit balances 20,000.00
Advances to affiliates, due on July 01, 2020 300,000.00
Trade and other receivables, 12.31.2019 2,355,000.00
Tarlac State University - College of Business & Accountancy
Accountancy Department (FAR0, Quiz No. 1 – Final Term)
The integrity of the upright guides them, but the unfaithful are destroyed by their duplicity. – Proverbs 11:3

Name: ____________________________________ Score: _______

Directions: Encircle the letter choice that corresponds to your answer. Erasures on the letter choices are not allowed.
Provide all necessary solutions on your worksheet.

1. How would the subsequent write-off of an account previously estimated to be uncollectible under allowance method
affect the net realizable value of accounts receivable and allowance for doubtful accounts, respectively? [A]
decrease, decrease [B] no effect, decrease [C] decrease, no effect [D] no effect, no effect

2. The following are classified as current assets except [A] advances to suppliers [B] claims from insurance company
[C] subscription receivable [D] none of the foregoing choices

3. A non-interest bearing, long-term note receivable shall be initially measured at [A] face value [B] present value [C]
maturity value [D] amortized cost

4. Upon recording of the subsequent collection of a prior sale on account under the net method of accounting for sales
transactions, any discount offer not availed by the customer shall be credited to which class of account? [A] contra
asset [B] other income [C] liability [D] retained earnings

5. The following items/transactions will affect the accounts receivable balance at year end, except [A] accounts written
off as worthless [B] sales returns and allowances [C] recovery of accounts previously written off as worthless [D]
dishonored notes receivable

6. KNOWTS Co. manufactures and sells computers. During the year, the company sold computers to an entity which
issued a non-interest bearing, long-term note. How should KNOWTS Co. account for this transaction? [A] The
notes receivable account shall be initially measured at face value since the note is a long-term, non-interest bearing
note. [B] The difference between the face value of the note and its present value shall be accounted for as unearned
interest income which shall be credited at each amortization date. [C] The present value of the note shall be credited
to the sales account [D] The difference between the present value of the note and the related cost of the computers
sold shall be recognized as either gain or loss on sale.

7. Nontrade receivables are classified as current assets if they are reasonably expected to be realized in cash [A] within
1 year or within the operating cycle, whichever is shorter [B] within 1 year or within the operating cycle, whichever
is longer [C] within 1 year, the length of the operating cycle notwithstanding [D] within the normal operating cycle

8. The following items/accounts will increase as a result of the recovery of a previously written off account accounted
for under the allowance method except [A] allowance for doubtful accounts [B] cash [C] accounts receivable [D] not
given

9. How would FOB Destination, Freight Collect freight terms affect the net realizable value of accounts receivable? [A]
increase [B] decrease [c] no effect [D] cannot be determined due to incomplete information

10. Which of the following statements is/are true concerning the accounting for receivables?
1st Statement: Credit balances in customers’ accounts must be offset against those with debit balances to
properly reflect the net realizable balance of accounts receivables.

2nd Statement: Estimated sales returns as at end of the year reduce the net realizable value of accounts
receivable at year end.

[A] 1st statement only [B] 2nd statement only [C] both statements are true [D] none of the statements is true

(Problem No. 1) KNOWTS Co. manufactures and sells electrical generators. On January 1, 2019, the entity sold an
old electrical generator, recorded under the account “Factory - Equipment”, which was installed and used in the
factory costing Php 1,000,000 for Php 500,000. The generator had a carrying amount of Php 400,000 at the time of
sale. The buyer paid a down payment of 25% and signed a non-interest bearing note payable in three (3) equal
annual installments starting December 31, 2019 for the balance. The prevailing interest rate on similar borrowings
was implied at 12%. Present value factors, if relevant, for the foregoing rate and payment term are presented as
follows:

PV of an ordinary annuity of 1 @ 12% for 3 periods 2.40

PV of 1@ 12% for 3 periods 0.71

REQUIRED:
1. Present value/ carrying amount of the note receivable as at January 01, 2019
 2. Gain or (loss) on the sale of the old generator on January 01, 2019
3. Journal entry to record the sale on January 01, 2019
4. Interest income for the year 2019
5. Carrying amount of the note receivable on December 31, 2020
(Problem No. 2) The following transactions affecting the accounts receivable of RICHY BUBBLES Co. took place
during the year ended December 31, 2019:

Sales on account 2,000,000

Cash sales 200,000
Cash received from credit customers who took advantage of the entity’s discount term of 3/10, n/30) 1,261,000
Cash received from credit customers beyond the discount period (inclusive of recoveries) 500,000
Accounts receivable written off as worthless 30,000
Credit memorandum issued to credit customers for sales returns and allowances 10,000
Cash refunds given to cash customers for sales returns and allowances 5,000
Recoveries of accounts receivable written off as uncollectible in prior periods 20,000
Freight on goods sold on account on December 29, 2019 with a selling price of Php 200,000, FOB
destination, freight collect, included in the sales on account indicated above, still uncollected as at end 8,000
of the year ***

The following balances were available at the start of the year:

Accounts receivable 600,000

Allowance for doubtful accounts 24,000

The entity estimates its doubtful accounts consistently as a percentage of its year-end balance of accounts receivable.

REQUIRED:
1. Balance of the accounts receivable account as at December 31, 2019
2. Net realizable value of accounts receivable as at December 31, 2019
3. Doubtful accounts expense for 2019
4. ***Journal entry to record the sale on account, shipped FOB destination, freight collect
5. ***Journal entry to record the subsequent collection of the sale on account within the discount period.

(Problem No. 3) BADET Co. has been practicing the recording of quarterly interim provision for doubtful accounts at
the rate of 2% of net credit sales. The allowance for doubtful accounts as of January 1, 2019 has a credit balance of Php
30,000. Bad debt recoveries and bad debts written off in 2019 were Php 60,000 and Php 20,000, respectively. Net credit
sales totaled Php 5,000,000 for the year 2019. At year end, after recording the interim provision for the 4th quarter of
2019, the management decided to estimate doubtful accounts on the basis of an analysis of the age of the receivables. A
breakdown of the Company’s receivables at year – end is presented as follows:

Percent collectible
Not yet due 200,000 100
1-30 days past due 150,000 95
31-60 days past due 120,000 75
61-90 days past due 100,000 50
Over 90 days past due 80,000 0

REQUIRED:
1. Required allowance for doubtful accounts as at December 31, 2019.
2. Net realizable value of accounts receivable on December 31, 2019
3. Entry to adjust the doubtful accounts expense after the analysis of the age of the receivables at year-end.

(Problem No. 4)The following balances were provided by Richy Bubbles, Inc. as at December 31, 2019.
Trade accounts receivable (net of customers’ credit balances of 35,000) 1,965,000
Allowance for doubtful accounts, per aging 40,000
Trade notes receivable 15,000
Notes receivable on the sale of old equipment (interest bearing, due on December 31, 2021 500,000
Advances to suppliers 60,000
Performance deposit on contract bids 100,000
Subscription receivable 200,000
Creditors’ account with debit balances 20,000
Advances to affiliates, due on July 01, 2020 300,000

REQUIRED:
1. Net realizable value of accounts receivable as at December 31, 2019
2. Trade and other receivables as at December 31, 2019.
Answer Key & Solutions: Quiz No. 1 - Final Term
1 B 6 C
2 D 7 A
3 C 8 D
4 A 9 D
5 A 10 D

P1 Inventory, unadjusted 900,000.00

Goods in transit, purchased FOB shipping point 30,000.00
Goods out on consignment (P20,000 x 80%) 16,000.00
Inventory, adjusted 946,000.00

P2.1 From Jan 20 purchase (5,000 x P8) 40,000.00

From Jan 15 purchase (3,000 x P7) 21,000.00
Ending inventory - FIFO 61,000.00

P2.2 Beginning inventory (40,000 x P5) 200,000.00

Add Purchases:
Jan 5 ( 30,000 x P6) 180,000.00
Jan 5 ( 10,000 x P7) 70,000.00
Jan 5 ( 5,000 x P8) 40,000.00 290,000.00
Total cost of goods available for sale 490,000.00
Less: Ending inventory 61,000.00
Cost of goods sold - FIFO 429,000.00

P3.1 Loss on purchase commitment 10,000.00

Estimated liability - purchase commitment 10,000.00
[ 100 units x (P1,200 - P1,100) ]

P3.2 Accounts payable (Cr) (100 units x P1,200) 120,000.00

P3.3 Purchases (Dr) (100 units x P1,200) 120,000.00

P3.4 Gain on purchase commitment (limited to prior losses recognized) 10,000.00

P4.1 Beginning inventory (10,000 units x P9) 90,000.00

Add Net cost of purchases:
Purchases 1,000,000.00
Freight in 10,000.00
Purchase returns (25,000.00) 985,000.00
Total cost of goods available for sale 1,075,000.00
Less: Ending inventory (8,000 units x P11) 88,000.00
Cost of goods sold (DIRECT Method) 987,000.00

OR Beginning inventory (10,000 x P10) 100,000.00

Add Net cost of purchases 985,000.00
Total cost of goods available for sale 1,085,000.00
Less: Ending inventory (8,000 units x P11) 88,000.00
Cost of goods sold - before adjustment 997,000.00
Gain on reversal of inventory writedown (limited to prior year losses recognized) (10,000.00)
Cost of goods sold - adjusted (ALLOWANCE Method) 987,000.00

P4.2 EI at cost, end (8,000 x P11) 88,000.00

EI at NRV, end [ 8,000 x (P16 - P2) ] 112,000.00
Required allowance for inventory writedown -
Allowance, 01.01.19:
EI at cost, beginning (10,000 x P10) 100,000.00
EI at NRV, beginning [ 10,000 x (P12 - P3) ] 90,000.00 10,000.00
Gain on reversal of inventory writedown 10,000.00

P5 Particulars Inventory Accounts payable Net sales

Unadjusted balances 1,000,000.00 500,000.00 4,000,000.00
Adjustments:
A (150,000.00) (150,000.00)
B 200,000.00 (240,000.00)
C 300,000.00
D 180,000.00
Adjusted balances 1,350,000.00 350,000.00 3,940,000.00
Tarlac State University College of Business & Accountancy
Accountancy Department Quiz on Inventories

Proverbs 3:5-6
“Trust in the Lord with all your heart and lean not on your own understanding; in all your ways acknowledge Him, and He will make your paths
straight.”

Name: Score:
Directions: Encircle the letter choice that corresponds to your answer. Any form of erasures on the letter
choices will render your answers invalid.

1. The following goods must be excluded from inventories except [A] Goods in transit, sold FOB shipping
point [B] Goods in transit, purchased FOB shipping point [C] Goods held on consignment [D]
Undelivered finished goods to a customer, covered by a special order, fabricated based on the
requirements of the customer

2. Under the perpetual method of inventory accounting, the “Inventory” account is debited for the following
transactions, except [A] purchase of merchandise on account [B] return of goods by the customers [C]
adjustment for inventory overage at year-end [D] return of goods to suppliers

3. Under the net method of recording of account purchases, any discount foregone shall be recorded as
“Purchase discount lost” and accounted for as [A] an addition to cost of sales [B] deduction from cost of
sales [C] other expense [D] contra – purchase item

4. In a period of constantly increasing prices, which of the following inventory costing methods will yield the
highest ending inventory value? [A] FIFO [B] moving average [C] LIFO [D] average periodic

5. In a period of constantly decreasing prices, which of the following inventory costing methods will yield
the highest cost of sales value? [A] FIFO [B] moving average [C] LIFO [D] average periodic

6. Which of the following transactions will cause a change in the average unit cost under the average
perpetual costing method? [A] sale [B] sales return [C] purchase [D] sales discount

7. In accounting for purchase commitments, the accounts payable on the date of delivery shall be credited at
[A] the committed price [B] the prevailing price on the date of delivery [C] the committed price or the
prevailing price on the date of delivery whichever is higher [D] the committed price or the prevailing price
on the date of delivery whichever is lower

8. Inventories are measured at [A] cost [B] net realizable value [C] lower of cost or fair value less cost to sell
[D] lower of cost or net realizable value

9. When determining the unit cost of an inventory item, which of the following should not be included? [A]
depreciation of plant equipment used in manufacturing the item [B] labor cost of the item when
manufactured [C] commission paid when purchased [D] interest on loan obtained to purchase the item

10. An entity is a large manufacturer of machines. A major customer has placed an order for a special machine
for which it has given a deposit to the entity. The parties have agreed on a price for the machine. When
should the revenue be recognized by the entity? [A] when the customer orders the machine [B] when the
deposit is received [C] when the machine is delivered to the customer [D] when the machine is completely
manufactured without regard to delivery

PROBLEMS
(P1) The inventory on hand at December 31, 2019 of Inventor Yee Company is valued at a cost of Php
900,000. The following items were not included in this inventory amount:

A. Goods in transit, purchased FOB shipping point, invoice price Php 30,000, including freight cost of P
1,000.
B. Goods out on consignment to ConSai Knee at a sales price of Php 20,000, including mark up of 20% of
the sales price.
C. Items purchased costing Php 50,000, invoice received but goods are still in transit. Freight was paid by the
seller
D. Goods in transit, sold to Sasa Lee Company, FOB shipping point, invoiced for Php 17,500. The goods
were sold with a gross profit of 40% based on cost.

REQUIRED:
1. Adjusted amount of Inventory as at December 31, 2019.
(P2) Kooze Ting Co. provided the following information relating to its inventory for the month of January:
 Date Particulars Units Unit Cost Total Cost
Jan 01 Beginning balance 40,000 5 200,000
Jan 05 Purchases 30,000 6 180,000
Jan 10 Sale 50,000
Jan 15 Purchases 10,000 7 70,000
Jan 20 Purchases 5,000 8 40,000
Jan 31 Sale 27,000

REQUIRED:
1. Ending inventory – FIFO costing method, as at end of January
2. Cost of sales for the month of January under the FIFO costing method

(P3) On November 30, 2019 Inventor Yee Company entered into a commitment to purchase 100 units of
Product X from Comet Mint Company on March 31, 2020 at a price of Php 1,200 per unit. On December 31,
2019, the market price of the product is Php 1,100 per unit and Php 1,150 on February 28, 2020. On March 31,
2020, the price of the product is Php 1,210 per unit.

REQUIRED:
1. Entry to record the “Loss on purchase commitment”, if any, on December 31, 2019.
2. Amount to be credited to “Accounts payable” account on March 31, 2020.
3. Amount to be debited to “Purchases” account on March 31, 2020.
4. Gain or loss on purchase commitment to be recognized on the date of delivery.

(P4) The following data were provided by WRITE-UP Corp. for the year 2019:
Particulars Beginning inventory (10,000 units) Ending inventory (8,000 units)
Cost per unit Php 10 Php 11
Estimated selling price 12 16
Estimated cost to sell 3 2

Purchases for the year 2019 1,000,000

Freight – in – 2019 10,000
Purchase returns – 2019 25,000

REQUIRED:
1. Cost of sales for the year ended December 31, 2019.
2. Loss on inventory writedown or gain on reversal of inventory writedown to be reported for the year
ended December 31, 2019.

(P5) As at December 31, 2019, INVENTOR YEE Company had inventory of Php 1,000,000 (based on a
physical count conducted at year-end), accounts payable of Php 500,000 and sales of Php 4,000,000 before
considering the following data:

A. Php 150,000 in goods located in the company’s warehouse that are held on consignment from another
entity were recorded as on account purchases and were included in the inventory count.

B. Goods costing Php 200,000 that were sold by the company and shipped on December 30, terms FOB
destination, and were in transit on December 31, 2019. The goods were received by the customer on
January 2, 2020. The related sale for Php 240,000 was recorded in 2019.

C. Php 300,000 in goods that were purchased by the company and shipped on December 30 and were in
transit on December 31, 2019. The related invoice was received and recorded by INVENTOR YEE on
December 31, 2019. The goods were received by the company on January 2, 2020. Terms were FOB
shipping point.

D. Goods costing Php 150,000 that were sold by the company and shipped on December 30 and were in
transit on December 31, 2019. The goods were received by the customer on January 2, 2020. Terms
were FOB shipping point. The related sale for Php 180,000 was recorded in 2020.

REQUIRED:

1. Adjusted inventory as at December 31, 2019

2. Adjusted accounts payable balance as at December 31, 2019
3. Adjusted sales for the year ended December 31, 2019
Answer Key & Solutions: FTE_1stSem AY1920
1 C 6 D 11 C
2 B 7 A 12 B
3 A 8 A 13 C
4 C 9 C 14 C
5 B 10 C 15 B

P1.1 Accounts Receivable

Beginning balance 700,000.00 Collections, net of discounts 1,764,000.00
Sales on account 4,000,000.00 Sales discount 36,000.00
Recoveries (re-establishment) 12,000.00 Collections w/o discounts 2,150,000.00
Accounts written off 20,000.00
Sales returns & allowances 18,000.00
Recoveries (collections) 12,000.00
Ending balance 712,000.00
4,712,000.00 4,712,000.00

P1.2 Accounts receivable 712,000.00

Allowance for doubtful accounts [(P35,000 / P700,000) * P712,000 ] (35,600.00)
Net realizable value of accounts receivable, 12.31.2019 676,400.00

P2.1 Not yet due 150,000.00 0% -

1-30 days past due 200,000.00 5% 10,000.00
31-60 days past due 100,000.00 20% 20,000.00
61-90 days past due 80,000.00 50% 40,000.00
Over 90 days past due 50,000.00 100% 50,000.00
Required allowance per aging 580,000.00 120,000.00

Allowance for doubtful accounts

P2.2 Beginning balance 10,000.00 Recoveries 30,000.00
Accounts written off 50,000.00 Provision (doubtful accounts expense) 150,000.00
Endinng balance 120,000.00
180,000.00 180,000.00

P3.1 Maturity value (note is non-interest bearing) 1,000,000.00

P3.2 Credit to NR-discounted account -

(Note: Credit is to NR account at P1M)

P4 Downpayment 100,000.00
PV of NR (P 100,000 x 2.4) 240,000.00
Total credit to the "Sales" account 340,000.00

P5 Principal amount of loan 8,000,000.00

Direct origination costs 123,000.00
Origination fees received from the borrower (700,000.00)
CA of LR 01.01.19 7,423,000.00

P6 Particulars Inventory Accounts payable Net sales

Unadjusted balances 1,200,000.00 600,000.00 5,000,000.00
Adjustments:
A 160,000.00 (200,000.00)
B 200,000.00
C (210,000.00)
D
Adjusted balances 1,560,000.00 390,000.00 4,800,000.00

P7.1 Total goods available for sale - Peso 360,000.00

Divide by the total goods available for sale - Units 60,000.00
Average unit cost - periodic 6.00
Units on hand (60,000 - 52,000) 8,000.00
Ending inventory - Average periodic 48,000.00

P7.2 EI at cost 48,000.00

EI at NRV [ (P 9 - P4) * 8,000 units ] 40,000.00
Required allowance - IWD 8,000.00
Allowance of IWD, January 01, 2019 (5,000.00)
Loss on IWD 2019 3,000.00

P8 Inventory, Jan 1 275,000.00

Add Net purchases 1,500,000.00
Total goods available for sale 1,775,000.00
Less Estimated cost of sales [ (P,1810,000 + P 10,000) / 125% ] 1,456,000.00
Estimated ending inventory at the time of fire 319,000.00
Less Net realizable value of salvaged inventories 10,000.00
Fire loss 309,000.00

P9 Purchases 03.31.19 1,130,000.00

 Program: Accountancy 1st Semester A.Y. 2019 – 2020
Subject: Financial Accounting & Reporting_FAR 0 Final Term Examination
Name: Score:

PART 1 Directions: Encircle the letter choice that corresponds to your answer. Erasures on the letter
choices shall render your answers invalid.

1. Which of the following goods should NOT be included in inventory at the end of the accounting
period? [A] goods sold, in transit, FOB destination [B] goods purchased, in transit, FOB shipping point
[C] goods held on consignment from other entities [D] goods out on approval

2. How are sales discount and sales return dealt with in respect of Sales in the determination of Net Sales
for purposes of inventory estimation, respectively? [A] deducted, deducted [B] ignored, deducted [C]
added, deducted [D] deducted, ignored

3. The following statements are true concerning the retail inventory method of estimating inventory,
except [A] Conservative retail approach provides a higher ending inventory value than the average
retail approach. [B] The FIFO retail approach disregards beginning inventory in the determination of
the cost ratio applied to the year-end inventory. [C] Employee discounts, normal shrinkage and losses
are added to the reported sales in the determination of adjusted sales for ending inventory estimation
purposes. [D] The average retail method provides a lower cost of sales value than the conservative
retail approach.

4. In accounting for purchase commitments, the accounts payable account at the date of delivery is
credited at what amount? [A] committed price or prevailing price at the time of delivery, whichever is
lower [B] committed price or prevailing price at the time of delivery, whichever is higher [C]
committed price [D] prevailing price at the time of delivery

5. Which of the following is false concerning the accounting for inventory writedown? [A] The direct
method and allowance method of recording inventory writedown provide the same amount of cost of
sales for the period. [B] Inventory writedown is recognized if the net realizable value of an inventory is
higher than its cost as at end of the accounting period. [C] The amount of gain to be recognized in the
event of market recovery cannot exceed the amount of loss on inventory writedown previously
recognized. [D] Under the allowance method, any gain on reversal of inventory writedown is deducted
from the unadjusted cost of sales to reflect the adjusted cost of sales for the period.

6. An entity is a large manufacturer of machines. A major customer has placed an order for a special
machine, fabricated based on the specifications provided by the customer. The parties have agreed on
a price for the machine. When should the revenue be recognized by the entity? [A] when the customer
orders the machine [B] when the deposit is received [C] when the machine is delivered to the customer
[D] when the machine is completely manufactured without regard to delivery

7. In a period of constantly decreasing prices, which of the following inventory costing methods will
yield the highest cost of sales value? [A] FIFO [B] moving average [C] LIFO [D] average periodic

8. Goods purchased, in transit as at year-end, were appropriately recorded as purchases but were not
included in the ending inventory. How would this treatment affect the accounts and balances for the
year? [A] cost of sales for year is overstated [B] profit for the year is overstated [C] total purchases for
the year is overstated [D] total purchases for the year is understated

9. The following items are classified as current assets except [A] advances to suppliers [B] claims from
insurance company [C] subscription receivable [D] none of the foregoing choices

10. Which of the following statements is true if discounting of a certain interest – bearing note receivable
is done without recourse? [A] the difference between the net proceeds from discounting and the
carrying amount of the note at the time of discounting is debited to interest expense [B] the note
receivable – discounted account is credited at the maturity value of the note [C] the note receivable
account is credited at the principal amount of the note [D] the expired term of the note at the time of
discounting is used in the determination of the amount of discount

Form No: TSU-CBA- SF-02 Revision No.: 00 Effectivity Date: September 25, 2019 Page 1 of 4
Proverbs 3:5-6
“Trust in the Lord with all your heart and lean not on your own understanding; in all your ways acknowledge Him, and He will make your paths straight.”
 11. Which of the following receivable financing methods will result to the absolute transfer of ownership
of the receivable? [A] pledging of accounts receivable [B] assignment of accounts receivable [C]
factoring of accounts receivable [D] discounting of note receivable with recourse

12. The amount to be credited to the "Sales" account for the sale of inventories covered by a long-term
non-interest bearing note with a down payment shall be equal to [A] the face amount of the note less
the down payment received [B] present value of the note plus the down payment received [C] the face
amount of the note pus the down payment received [D] present value of the note less the down
payment received

13. Nontrade receivables are classified as current assets if they are reasonably expected to be realized in
cash [A] within 1 year or within the operating cycle, whichever is shorter [B] within 1 year or within
the operating cycle, whichever is longer [C] within 1 year, the length of the operating cycle
notwithstanding [D] within the normal operating cycle

14. At the start of the year, the allowance for doubtful accounts had a debit balance. The company
estimates the allowance through the aging method. No account was written off or recovered during the
current year. The required allowance at the end of the year is equal to [A] the allowance per aging
minus the beginning allowance balance [B] the allowance per aging plus the beginning allowance
balance [C] the allowance balance at year end per aging without regard to the beginning allowance
balance [D] whichever is lower between the allowance balance at the beginning of the year and the
balance per aging at the end of the year

15. Which of the following statements is/are true concerning the accounting for receivables?

1st Statement: Credit balances in customers’ accounts must be offset against those with debit balances
to properly reflect the net realizable balance of accounts receivables.

2nd Statement: Estimated sales returns reduce the net realizable value of accounts receivable at year
end.

[A] 1st statement only [B] 2nd statement only [C] both statements are true [D] none of the statements
is true

PART II – PROBLEMS
Directions: Write your final answers on the space provided for each requirement. Provide all necessary
solutions on your solution (worksheets) sheets.

(Problem No. 1) The following transactions affecting the accounts receivable of RICHY BUBBLES Co.
took place during the year ended December 31, 2019:

Sales on account 4,000,000

Cash sales 500,000
Cash received from credit customers who took advantage of the entity’s discount term of 1,764,000
2/10, n/30)
Cash received from credit customers beyond the discount period 2,150,000
Accounts receivable written off as worthless 20,000
Credit memorandum issued to credit customers for sales returns and allowances 18,000
Cash refunds given to cash customers for sales returns and allowances 5,000
Recoveries of accounts receivable written off as uncollectible in prior periods (not 12,000
included in the above collections)

The following balances were available at the start of the year:

Accounts receivable 700,000

Allowance for doubtful accounts 35,000

REQUIRED:
1. Balance of the accounts receivable account as at December 31, 2019 _____________________
2. Net realizable value of accounts receivable as at December 31, 2019 _____________________

Form No: TSU-CBA- SF-02 Revision No.: 00 Effectivity Date: September 25, 2019 Page 2 of 4
Proverbs 3:5-6
“Trust in the Lord with all your heart and lean not on your own understanding; in all your ways acknowledge Him, and He will make your paths straight.”
 (Problem No. 2) BADET Co. has previously estimated doubtful accounts as a certain per cent of total
credit sales. The allowance for doubtful accounts as of January 1, 2019 has a debit balance of Php 10,000.
Bad debt recoveries and bad debts written off in 2019 were Php 30,000 and Php 50,000, respectively. At
year end, the management decided to estimate doubtful accounts on the basis of an analysis of the age of
the receivables. A breakdown of the Company’s receivables at year – end is presented as follows:

Percent Uncollectible
Not yet due 150,000 0
1-30 days past due 200,000 5
31-60 days past due 100,000 20
61-90 days past due 80,000 50
Over 90 days past due 50,000 100

REQUIRED:
1. Required allowance for doubtful accounts as at December 31, 2019 __________________
2. Doubtful accounts expense for the year 2019 ______________________

(Problem No. 3) DESK-COUNT Co. received a 6-month non-interest bearing promissory note from a
customer on July 01, 2019 for Php 1,000,000. On November 01, 2019, after holding the note for 4 months,
the note was discounted at 12%, without recourse.

REQUIRED:
1. Maturity value of the note ____________________
2. Amount credited to “Note receivable – discounted” account on the date of discounting
_________________

(Problem No. 4) KNOWTS Co. manufactures and sells electrical generators. On January 1, 2019, the
entity sold an electrical generator for Php 400,000. The buyer paid a down payment of Php 100,000 and
signed a non-interest bearing note payable in three (3) equal annual installments starting December 31,
2019 for the balance. The prevailing interest rate on similar borrowings was implied at 12%. Present value
factors, if relevant, for the foregoing rate and payment term are presented as follows:

PV of an ordinary annuity of 1 @ 12% for 3 periods 2.40

PV of 1@ 12% for 3 periods 0.71

REQUIRED:
1. Amount credited to the “Sales” account on January 01, 2019 __________________

(Problem No. 5) BANK-AROTE granted a loan to a borrower on January 01, 2019. The interest rate on
the loan is 10% payable annually starting December 31, 2019. The loan matures in five (5) years on
December 31, 2023.
Principal amount 8,000,000
Direct origination costs incurred by the bank 123,000
Origination fees received from borrower 700,000

The effective rate on the loan after considering the direct origination costs and origination fees received is
12%.

REQUIRED:
1. Carrying amount of the loan receivable on January 01, 2019 ____________________

(Problem No. 6) As at December 31, 2019, IMBENTOR YEE Company had inventory of Php 1,200,000
(based on a physical count conducted at year-end), accounts payable of Php 600,000 and sales of Php
5,000,000 before considering the following data:

A. Goods costing Php 160,000 that are out on consignment to various consignees and were recorded
as sales in 2019 for Php 200,000. The goods were not included in the ending inventory as at
December 31, 2019.

B. Goods costing Php 200,000 that were sold by the Company and shipped on December 30, terms
FOB destination, and were in transit on December 31, 2019. The goods were received by the
customer on January 2, 2020. The related sale for Php 240,000 was recorded in 2020. The goods
were not included in the ending inventory as at December 31, 2019.

Form No: TSU-CBA- SF-02 Revision No.: 00 Effectivity Date: September 25, 2019 Page 3 of 4
Proverbs 3:5-6
“Trust in the Lord with all your heart and lean not on your own understanding; in all your ways acknowledge Him, and He will make your paths straight.”
 C. Goods purchased, costing Php 210,000, which were shipped by the vendor on December 30 and
were in transit on December 31, 2019. The related invoice was received and recorded as accounts
payable by INVENTOR YEE on December 31, 2019. The goods were received by the Company
on January 2, 2020 and were not included in the ending inventory as at December 31, 2019. The
freight related to the purchase was paid by the seller.

D. Goods costing Php 150,000 that were sold by the Company and shipped on December 30 and were
in transit on December 31, 2019. The goods were received by the customer on January 2, 2020.
Terms were FOB shipping point. The related sale for Php 180,000 was recorded in 2019. The
goods were not included in the ending inventory as at December 31, 2019.

REQUIRED:

1. Adjusted inventory as at December 31, 2019 ________________

2. Adjusted accounts payable balance as at December 31, 2019 ________________
3. Adjusted sales for the year ended December 31, 2019 _______________

(Problem No. 7) Kooze Ting Co. uses the average-periodic method to determine the cost of its inventory.
During the month of December 2019, Kooze Ting recorded the following information pertaining to its
inventory:
Units Unit cost Total cost
Balance on December 1 40,000 5 200,000
Purchases on December 10 20,000 8 160,000
Sales on December 15 52,000

REQUIRED:
1. Inventory at cost, as at December 31, 2018 measured under average - periodic costing method
____________________
2. Loss on inventory writedown for the year 2019 if at December 31, 2019, the estimated selling
price of the inventory was Php 9 per unit and related estimated costs of disposal were determined
at Php 4 per unit. Assume further that at the start of 2019, the allowance for inventory writedown
account had a balance of Php 5,000 _____________________

(Problem No. 8) On March 31, 2019 a fire at FROZEN Co.’s only warehouse caused severe damaged to its
entire inventory. Based on recent history, FROZEN has a gross profit of 25% based on cost of sales. The
following information is available from the records for the 3-month period ended March 31, 2019:

Inventory – January 1, 2019 275,000

Net purchases (net of purchase discounts) 1,500,000
Purchase discounts 20,000
Net sales (net of sales discounts and returns) 1,810,000
Sales discount 10,000
Sales return 30,000

A physical inventory disclosed salvaged, damaged goods with selling price of Php 50,000 but with
estimated net realizable value of Php 10,000.

REQUIRED:
1. Estimated fire loss ____________

(Problem No. 9) On November 30, 2019 Inventor Yee Company entered into a commitment to purchase
1,000 units of Product X from Comet Mint Company on March 31, 2020 at a price of Php 1,200 per unit.
On December 31, 2019, the market price of the product is Php 1,150 per unit. On March 31, 2020, the price
of the product further declined to Php 1,130 per unit.

REQUIRED:
1. Amount to be debited to “Purchases” account on March 31, 2020.

Form No: TSU-CBA- SF-02 Revision No.: 00 Effectivity Date: September 25, 2019 Page 4 of 4
Proverbs 3:5-6
“Trust in the Lord with all your heart and lean not on your own understanding; in all your ways acknowledge Him, and He will make your paths straight.”