By Prof.

Vhinson Garcia, CPA

Receivables – right to receive cash
• Trade receivables – directly related to primary operations / revenue generating
activities
o Accounts receivable – mutual understanding, default if no classification
o Notes receivable – formal, have label (related to selling goods and render
services)
o Loans receivable – financial institutions
• Non – trade receivables
o E.g., notes receivable (related to selling of land, building
o All others
o Accrued interest receivable
o Advances to employees/offices (current)
o Subscription receivable (share that you sell na hindi pa bayad) (depends)
o Advances to affiliates (related parties) (non – current)
o Claims against insurer (current)
o Advances to suppliers (current)
o And so on…
Trade and other receivable – all trade receivables, current non – trade receivables
✓ Current – less than or equal to 12 months
✓ Non – current – more than 12 months
From reporting date until maturity date

Accounts receivable
Support of A/R is invoice

Initial measurement = face amount

– if immaterial the discount you can measure it at face value
Subsequent measurement = net realizable value (kasi hindi mo ma cocollect lahat ngg A/R
mo)
– Expected cash to be received from A/R
How to determine the ending balance of A/R
Accounts receivable
Beg. bal. Coll. from credit sales
Credit sales Sales discount
Recoveries Sales allowance
Sales discount
Write – off
Recoveries
N/R received (as payment of A/R)
Ending balance (squeeze amount)
Total of debits must equal to the total of The total squeeze amount of the credits
credits subtract all the credit accounts to get the
ending balance

Imagine the transactions that can affect the A/R balances

Cash sales (no effect sa A/R Credit sales (with effect) Collection of A/R from
balance) credit sales (with effect)
A/R
Cash Sales Cash
Sales A/R
Collection of net of sales Sales allowance (reduction of initial bill to customer for
discount (with effect) mistake, for example. Walang na return sayu na physical)
Sales return (may physical return na goods)
Cash 95
Sales 5 Arising from unpaid credit sales, you have to credit (with
discount effect)
A/R 100
Sales return
Sales allowance
A/R
Sales allowance and sales Write off – worthless Recoveries – bigla nag
discount na refunded (no receivable, hindi na nag bayad yung customer (with
effect) bayad ng utang (with effect) effect)

Sales return Allowance for bad debts A/R

Sales allowance A/R Allowance for bad
Cash debts

Cash
A/R
Customer has a overdue
accounts, the customer
write promissory note

N/R
A/R
Sample problem Legend credit xxx, debit xxx, no effect
GRANADA Company reported the following transactions for the year just ended:
Credit sales, 2/10, 1/20, n/60 5,000,000
Cash sales 800,000
Accounts proved to be worthless 50,000
Promissory notes received as payment of accounts 300,000
Sales allowance allowed on credit sales 60,000
Refunds made to cash/paid customers 100,000
Sales returns from credit sales 80,000
Cash received from customers paying within 10 days 2,450,000
Cash received from customers paying beyond 20 days but within 15
days 1,485,000
Cash received from customers paying beyond 20 days 495,000
Recoveries from accounts written-off (not yet included from the cash
receipts above) 19,000
Accounts receivable, beg. 650,000

Determine the ending balance of accounts receivable.

Accounts receivable
Begging balance 650,000 50,000 write off
Credit sales 5,000,000 300,000 N/R received (as payment of A/R)
Recoveries 19,000 60,000 unpaid
80,000 arising from credit sales
2,450,000 cash collections 2/10
50,000 sales discounts
1,485,000 cash collections 1/20
15,000 sales discounts
495,000 cash received from customer
19,000 recoveries
665,000 ending accounts receivable balance
5,669,000 5,669,000
Alternative computation for ending balance
Accounts receivable
Begging balance 650,000 50,000 write off
Credit sales 5,000,000 300,000 N/R received (as payment of A/R)
Recoveries 19,000 60,000 unpaid
80,000 arising from credit sales
2,450,000 cash collections 2/10
50,000 sales discounts
1,485,000 cash collections 1/20
15,000 sales discounts
495,000 cash received from customer
19,000 recoveries
5,669,000 5,004,000
665,000 ending accounts receivable balance
Cash collections entry
Cash 2,450,000
Sales discount 50,000
A/R (2,450,000 / 98%) 2,500,000

Cash 1,485,000
Sales discount 15,000
A/R (2,450,000 / 98%) 1,500,000

Net realizable value

Accounts receivable, Gross 1,000,000
Less:
Allowance for bad debts (50,000)
Allowance for sales discounts (10,000)
Allowance for goods return (6,000)
Allowance for freight (12,000)
Net realizable value, A/R 922,000

Direct write-off method – bad debts (no allowance maintained) expense when there is
actual write-off (worthless)
Allowance method – recognizes bad debts expense (have allowance maintained) even
though there is no actual write-off

Allowance for bad debts (contra asset, credit)

Write-off Beg. bal.
Ending bal. (squeeze) Recoveries
Bad debts expense

Write-off, hindi na talaga Recovery, yung ni write-off

mag babayad mo nag bayad na siya this
year
Allowance
A/R A/R
Allowance
Estimation of bad debts
Estimation method
• Percentage of sales
• Percentage of accounts receivable
• Aging method
Percentage of
Percentage of sales
accounts receivable Aging method
(I/S)
(B/S)
Basis Credit sales A/R, ending bal. A/R, ending bal.
Allowance for bad
debts (contra asset Based on T-account Basis (A/R, end) * % ∑ (basis) * %
acc., IS)
Bad debts expense Squeeze amount on Squeeze amount on
Basis (credit sales) * %
(expense acc., BS) T-account T-account
Matching of expense to
Focus NRV of A/R NRV of A/R
the related sale

Sample problem
On January 1, 2023, TULIPS Company reported a balance in its allowance for bad debts
amounting to P100,000. For the current year, accounts written-off and recoveries amounted
to P75,000 and P15,000, respectively. In addition, the Company reported net credit sales of
P5,000,000, while ending receivables amounted to P2,500,000, which can be aged as follows:
Age Balance
(A/R)
Less than one month 1,750,000
More than one month but less than a year 500,000
More than a year 250,000
2,500.000

Under each of the following scenarios, compute for the bad debts expense and the allowance
for bad debts after the adjustment:
1. Bad debts expense is estimated at 3.50% of credit sales
2. Allowance for bad debts is 5% of accounts receivable balance.
3. Allowance for bad debts is based on the estimated percentage per age bracket as follows:
Probability of
Age
Collection
Less than one month 98%
More than one month but less than a year 90%
More than a year 80%
Scenario 1 Bad debts expense is estimated at 3.50% of credit sales. (5,000,000 * .035 =
175,000)
Allowance for bad debts
Write-off 75,000 100,000 beg. bal.
15,000 recoveries
175,000 bad debts expense
215,000 allowance for bad debts,
ending

A/R, gross 2,500,000

Allowance for bad debts 215,000
A/R, carrying amount 2,285,000

Bad debts expense 175,000

Allowance for bad debts 175,000

Scenario 2 Allowance for bad debts is 5% of accounts receivable balance.

(2,500,000 * 5% = 125,000)
Allowance for bad debts
Write-off 75,000 100,000 beg. bal.
15,000 recoveries
40,000 unadjusted allowance for bad
debts
85,000 bad debts expense (squeeze)
125,000 Adjusted all. bad debts

A/R, gross 2,500,000

Allowance for bad
debts 125,000
A/R, carrying amount 2,375,000

Bad debts expense 85,000

Allowance for bad debts 85,000
Scenario 3 Allowance for bad debts is based on the estimated percentage per age bracket as
follows:
Probability of
Age
Collection
Less than one month 98%
More than one month but less than a year 90%
More than a year 80%

Allowance for bad debts

Write-off 75,000 100,000 beg. bal.
15,000 recoveries
40,000 unadjusted allowance for bad
debts
95,000 bad debts expense
135,000 adjusted all. bad debts

Age Balance Percentage

(A/R) uncollectible
Less than one month 1,750,000 2% 35,000
More than one month but less than a year 500,000 10% 50,000
More than a year 250,000 20% 50,000
2,500.000 Adj.all.BD 135,000

A/R, gross 2,500,000

Allowance for bad 135,000
debts
A/R, carrying amount 2,365,000

Bad debts expense 95,000

Allowance for bad debts expense 95,000
Notes receivable – formal, primarily based on interest bearing and noon-interest
bearing
Maker – required mag bayad, N/Pay.
Payee – beneficiary, N/R

Initial measurement (I.M.) = fair value

How to determine the fair value of N/R
Non – interest
Interest bearing Interest bearing bearing (no stated
(stated rate) (stated rate) rate, but included in
the face amount)
Stated rate = market stated rate ≠
rate market rate
PV of cash flows
I.M. Face amount using MR on initial
recognition
Face amount * Based on
Interest income
stated rate amortization table
Subsequent Based on
Face amount
measurement amortization table
Accrued interest Accrued interest
receivable receivable

Sample problem
On January 1, 2023, SHEEP Company received a 6% interest-bearing promissory note with
face amount of P6,000,000 and maturity date of December 31, 2025 from selling its land with
carrying amount of P4,500,000. Interest is payable every December 31 of each year, starting
in 2023.
Under each of the following independent scenarios, determine the annual interest income
from 2023 to 2025:
1. Principal is payable on maturity date.
2. Principal is payable in equal annual installments every December 31, starting in 2023.
How to compute for the interest
Interest = principal * rate * time
• Principal – determined as of the beginning of the period
• Rate – annual rate
• Time – proportion of a year
Scenario 1: Principal is payable on maturity date.
Year Rate Interest income
2023 6,000,000 6% 360,000
2024 6,000,000 6% 360,000
2025 6,000,000 6% 360,000

Scenario 2: Principal is payable in equal annual installments every December 31, starting
in 2023.
Year Principal Rate Interest income
2023 6,000,000 6% 360,000
2024 4,000,000 6% 240,000
2025 2,000,000 6% 120,000

Computation for the annual payments

6,000,000 / 3 years = 2,000,000

Computation for the principal amount every year

2024.) 6,000,000 – 2,000,000 = 4,000,000
2025.) 4,000,000 – 2,000,000 = 2,000,000
Sample problem
At the beginning of 2023, MISTLETOE Company sold its land with carrying amount of
P5,000,000 for a total amount of P7,000,000. Cash of P1,000,000 was received as a down
payment while a three-year noninterest- bearing note was received for the remaining portion
of the selling price. Market rates averaged 8% on that date.
Under each of the following independent scenarios, determine the interest income for 2023
and carrying amount of the note receivable as of December 31, 2023:
1. Principal is payable on maturity date.
2. Principal is payable in equal annual installments every December 31, starting in 2023.

How to determine present value?

Payment of principal
1. One-time payment on maturity date = PV factor of single payment
2. Equal amount and equal interval = PV factor of ordinary annuity
3. Installments at unequal amount and/or irregular interval = series of PV factor of
single payment

PV factor of single payment using 9% for 5 years (period)

1. Input 1.09 in the calculator
2. Double press the divide sign (÷)
3. Press the equal sign 5 times (depends on the period)
4. PV factor of single payment = 0.64993138628

PV factor of ordinary annuity using 9% for 5 years (period)

1. Use the PV factor of single payment without rounding off
➢ PV factor ordinary annuity = (1 – PV factor of single payment) ÷ discount
rate
➢ (1 – 0.64993138628 / .09)
➢ PV factor ordinary annuity = 3.88965126355

PV factor of single payment * face amount = initial face value (FV)

PV factor of ordinary annuity * periodic payment of principal = initial face value (FV)

Scenario 1. Principal is payable on maturity date. (one-time payment on maturity date)

PV factor of single payment using 8% for 3 periods
1. Input 1.08 in the calculator
2. Double press the divide sign (÷)
3. Press the equal sign 3 times (depends on the period)

PV factor of single payment = 0.793832241

 Computation for initial measurement
(7,000,000 – 1,000,000 down payment) 6,000,000
Multiply by PV factor of single payment 0.793832241
Initial measurement 4,762,993

Amortization table (single payment)

Interest Amortization Carrying value
Payment
Date income 8% (Payment received (amortization +
received
(CV beg * 8%) – interest income) previous CV)
1/1/2023 4,762,993
12/31/2023 0 381,040 381,040 5,144,033
12/31/2024 0 411,523 411,523 5,555,556
12/31/2025 0 444,444 444,444 6,000,000

Scenario 2. Principal is payable in equal annual installments every December 31, starting in
2023. (annual installment)
PV factor of ordinary annuity using 8% for 3 periods
PV factor of single payment = 0.793832241 from scenario 1
Use the PV factor of single payment without rounding off
➢ PV factor ordinary annuity = (1 – PV factor of single payment) ÷ discount
rate
➢ (1 – 0.793832241 / .08)
➢ PV factor ordinary annuity = 2.5770969875

Computation for the annual payments

(7,000,000 – 1,000,000 down payment = 6,000,000)
6,000,000 / 3 years = 2,000,000

Computation for initial measurement

6,000,000 / 3 years 2,000,000
Multiply by PV factor of single payment 2.5770969875
Initial measurement 5,154,194

Amortization table (annual installment)

Interest Amortization Carrying value
Payment
Date income 8% (Payment received (amortization –
received
(CV beg * 8%) – interest income) previous CV)
1/1/2023 5,154,194
12/31/2023 2,000,000 412,336 1,587,664 3,566,530
12/31/2024 2,000,000 285,322 1,714,678 1,851,852
12/31/2025 2,000,000 148,148 1,851,852 0
Receivable financing
Receivables as security or collateral Selling of receivables
• Using your receivables as your • Transfer of receivables by selling
collateral to have better chance na acquiring cash
pautangin ka ng banko.

Pledging – general A/R balance are Factoring – company that buying

collateral receivables then they will collect

Assignment – specific receivables Discounting of note – maturity value will

be discounted (advanced interest)

General formula of proceeds (assignment) – no gain or loss

Face amount of A/R assigned P xxx
Less: Haircut (%) (xxx)
Service charge (xxx)
Other charges (xxx)
Proceeds P xxx

General formula of proceeds (assignment) – with gain or loss

Face amount of A/R assigned P xxx
Less: Factors holdback (xxx)
Finance charge (xxx)
Commission (xxx)
Proceeds P xxx

General formula of proceeds (discounting)

1. Obtain the total interest until maturity
[interest = principal * rate (stated rate) * time]

2. Determine the maturity value

(maturity value = principal + total interest)

3. Compute for the discount amount

[discount amount = maturity value * discount rate * time (from date of discounting
to maturity date) / 12 months]

4. Net proceeds = maturity value – discount amount

Sample problem (assignment)
On July 1, 2023, IRELAND Company assigned P4,000,000 of its accounts receivable to a
bank. Due to high quality of the accounts, the bank lent 90% of the assigned receivable and
charged P12,000 service charge. The loan bears 12% annual interest that is payable at the
end of each month.
During the month of July 2023, P1,800,000 accounts were collected less P50,000 sales
discount. On the other hand, during the month of August 2023, the remaining accounts were
collected, less P60,000 sales discount.
Required: Determine the journal entries for the months of July and August 2023 assuming
the assignment is made under (a) non-notification basis and (b) notification basis.

Non – notification basis

Face amount 4,000,000
Less: Haircut of 10% (100% - 90% bank lent) (400,000)
Service charge (12,000)
Net proceeds 3,588,000

Entry to record the net proceeds (Non – notification basis)

07/01/2023
Cash 3,588,000
Service charge 12,000
Loan payable (4,000,000 – 400,000) 3,600,000

Reclassification of assigned A/R

Accounts receivable – assigned 4,000,000
Accounts receivable (face amount) 4,000,000

07/31/2023 During the month of July 2023, P1,800,000 accounts were collected less P50,000
sales discount.
Cash 1,750,000
Sales discount 50,000
Accounts receivable – assigned 1,800,000

Loan payable 1,750,000

Interest expense (3.6M * 12% *1/12) 36,000
Cash 1,786,000
 Computation for loan payable balance
Loan payable balance, 07/01/2023 3,600,000
Less: loan payable, 07/31/2023 1,750,000
Loan payable balance 1,850,000

Loan payable balance 1,850,000

A/R – assigned (4,000,000 – 1,800,000) 2,200,000

08/31/2023
Cash (2,200,000 – 60,000) 2,140,000
Sales discount (given) 60,000
Accounts receivable – assigned (remaining) 2,200,000

Entry to remit to the bank

Loan payable 1,850,000
Interest expense (1,850,000 * 12% * 1/12) 18,500
Cash 1,868,500

Notification basis
Face amount 4,000,000
Less: Haircut of 10% (100% - 90% bank lent) (400,000)
Service charge (12,000)
Net proceeds 3,588,000

Entry to record the net proceeds (Notification basis)

Cash 3,588,000
Service charge 12,000
Loan payable (4,000,000 – 400,000) 3,600,000

Reclassification of assigned A/R

Accounts receivable – assigned 4,000,000
Accounts receivable (face amount) 4,000,000
07/31/2023 During the month of July 2023, P1,800,000 accounts were collected less P50,000
sales discount.
Loan payable 1,750,000
Sales discount 50,000
Accounts receivable – assigned 1,800,000

Interest expense (3.6M * 12% *1/12) 36,000

Cash 36,000

08/31/2023
Loan payable 1,850,000
Receivable from bank 271,500 (squeeze)
Interest expense 18,500
Sales discount 60,000
Accounts receivable – assigned 2,200,000
Sample problem (factoring)
On June 1, 2023, PRIMATE Company is in a very tight cash position and decided to casually
factor on a without recourse basis P1,800,000 of its accounts receivable balance. The factor
withheld 20% of the factored receivables and charged 6% commission on the factored
accounts. – (casual factoring)
By the end of June 2023, the factor collected all of the receivables, except for the sales
discount of P25,000 and uncollectible accounts of P55,000. Consequently, the remaining
factor's holdback was settled with the entity.
Required: Determine the journal entries related to the factoring.
1. On June 1, 2023, PRIMATE Company is in a very tight cash position and decided to
casually factor on a without recourse basis P1,800,000 of its accounts receivable balance. The
factor withheld 20% of the factored receivables and charged 6% commission on the factored
accounts. – (casual factoring)
Computation of proceeds
Face amount 1,800,000
Less: Holdback (1,800,000 * 20%) (360,000)
Commission (1,800,000 * 6%) (108,000)
Proceeds from factoring 1,332,000

06/01/2023
Entry to record the proceeds
Cash (proceeds) 1,332,000
Loss on factoring (commission) 108,000
Factor’s holdback 360,0000
Accounts receivable 1,800,000

2. By the end of June 2023, the factor collected all of the receivables, except for the sales
discount of P25,000 and uncollectible accounts of P55,000. Consequently, the remaining
factor's holdback was settled with the entity.
06/30/2023
Sales discount 25,000
Allowance for bad debts 55,000
Factor’s holdback 80,000

Cash 280,000
Factor’s holdback 280,000
Sample problem (discounting of note)
At the beginning of 2023, TESLA Company received a nine-month, 8% interest-bearing note
with face amount of P3,500,000. On July 1, 2023, the note was discounted with a bank at a
discount rate of 10%.
Required: Determine the journal entry to record the discounting under each of the following
independent assumptions:
1. the note is discounted without recourse
2. the discounting is considered as conditional sale; and
3. the discounting is considered as a secured borrowing.

Computation of proceeds
Face amount 3,500,000
Add: Total interest (3.5M * 8% * 9/12) 210,000
Maturity value 3,710,000

Less: Discount amount (MV * 10% * 3/12) (92,750)

Net proceeds 3,617,250

Computation for maturity date

Maturity date 09/30/2023
Date of discounting 07/01/2023
Discount period 3 months

Scenario 1. the note is discounted without recourse

Cash 3,617,250
Loss on discounting 22,700
Notes receivable 3,500,000
Interest income (3.5M * 8% * 6/12) 140,000

Computation for interest income

Beginning of 2023 (January) up to June (hindi July kasi
simula palang naman, hindi pa siya counted) = 6 months

Computation for loss on factoring

Cash 3,617,250
Less: Notes receivable (3,500,000)
Interest income (140,000)
Loss on discounting 22,750
Scenario 2. the discounting is considered as conditional sale
Cash 3,617,250
Loss on discounting 22,700
Notes receivable – discounted 3,500,000
Interest income (3.5M * 8% * 6/12) 140,000

Scenario 3. the discounting is considered as a secured borrowing.

Cash 3,617,250
Interest expense 22,700
Loan payable 3,500,000
Interest income 140,000
Loans receivable – trade receivables of the banks, usual source of income using
interest income
Origination cost – cost of generating a loan, by background checking of the potential
borrowers
Origination fees – fees that collected from the potential borrowers for the background
checking
Face amount / principal xxx
Add: Direct origination cost xxx
Less: Origination fees (xxx)
Initial measurement (of loan receivable) xxx

Indirect origination cost – expense outright

Direct origination cost > Origination fees = Initial measurement > Face amount : Stated
rate > Effective interest rate
D.O.R. > O. F. = I.M. > F.A. : S.R. > E. I. R.
If the stated rate is greater than (>) the effective interest rate, the Interest received is
higher than > the Interest income
Interest received > Interest income

Direct origination cost < Origination fees = Initial measurement < Face amount : Stated
rate < Effective interest rate
D.O.R. < O. F. = I.M. < F.A. : S.R. < E. I. R.
If the stated rate is lower than (<) the effective interest rate, the Interest received is
lower than < the Interest income
Interest received < Interest income

Sample problem
At the beginning of 2023, BANCO Bank granted a 7% interest-bearing, P3,000,000 face
amount loan to a borrower. The loan has a maturity of December 31, 2026. The interest is
payable every December 31 of each year. In connection with the loan, the Bank incurred total
origination costs of P150,637, including P50,000 indirect origination costs. In addition, the
Bank also charged the borrower origination fee of P200,000. After considering the relevant
amounts, the loan has an effective interest rate of 8%.
Required: Determine the interest income for the years 2023 and 2024 and carrying amount
of the loan receivable as of December 31, 2023 and 2024.
 Face amount / principal 3,000,000
Add: Direct origination cost (150,637 – 50,000) 100,637
Less: Origination fees (200,000)
Initial measurement (of loan receivable) 2,900,637

PV using 8% for
Optional step (to check)
4 periods
PV of single payment for the face
amount 3,000,000 0.73503 2,205,090
PV of ordinary annuity for the
interest (3,000,000 * 7%) 210,000 3.31213 695,547
2,900,637

Amortization table
Carrying amount
Interest income (EIR Amortization
Interest (beg. carrying
Date 8% * beg. carrying (interest income –
received amount +
amount) interest received)
amortization)
01/01/2023 2,900,637
12/31/2023 210,000 232,051 22,051 2,922,688
12/31/2024 210,000 233,815 23,815 2,946,503
12/31/2025 210,000 235,720 25,720 2,972,223
12/31/2026 210,000 237,778 27,778 3,000,000