REPORTING AND
ANALYZING
RECEIVABLES
Part 1 Accounts Receivable
Part 2 Notes Receivable
Part 3 Other Receivables
Accounting for Receivables
Types of Receivables
Accounts
receivable
Notes receivable
Other receivables
Accounts Receivable
Recognizing
accounts
receivable
Valuing accounts
receivable
Disposing of
accounts
receivable
Notes Receivable
Determining
maturity date
Computing
interest
Recognizing notes
receivable
Disposing of
notes receivable
Statement Presentation
Analysis
Presentation
Analysis
Receivables Defined
Amounts due from individuals and companies- expected
to be collected in cash;
Assets that represent contractual rights to receive cash
or other asset from another entity.
Frequently classified as:
Accounts receivable
Notes receivable
Other receivables
3
Learning Objectives (Accounts
Receivable)
Identify the proper presentation of receivables as
either current or noncurrent assets;
2. Know the timing of recognition and measurement of
trade receivables;
3. Differentiate gross method from net method of
recording sales;
4. Know the accounting for doubtful accounts, worthless
accounts written off and recoveries of accounts
written off.
1.
Accounts Receivable...
Amounts owed by customers on account.
Result from the sale of goods/services in the
ordinary course of business.
Classified as current assets when they are
expected to be realized in cash within the normal
operating cycle or one year, whichever is longer.
Supported by informal or oral promises to pay.
Often called trade receivables.
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Valuing Accounts Receivable
A/R that do not have a significant financing component are
measured initially at their transaction price in accordance
with PFRS 15. After initial recognition, accounts receivable
shall be measured at amortized cost (net realizable value).
Generally, trade receivable may not be discounted if it is due
within 1 year.
Under FOB Shipping point, ownership is transferred to the
buyer upon shipment. Therefore, sales and accounts
receivable are recognized on shipment date.
Valuing Accounts Receivable (cont.)
Under FOB Destination, ownership
is transferred only upon
receipt of goods by the buyer. Therefore, sales and accounts
receivable are recognized only when the buyer receives
delivery of the goods.
The allowance method of recognizing bad debts on
accounts receivable is used for financing reporting purposes.
Valuing Accounts Receivable (cont.)
Doubtful accounts may be estimated using:
Percentage of credit sales
b. Percentage of receivables
c. Aging of receivables
The amount computed under the percentage of credit sales
method is the doubtful accounts expense for the period.
The amount computed under the percentage of receivables
and aging methods is the required balance of the
allowance account.
a.
Accounts Receivable...
Are recorded when service is provided or
at point of sale of merchandise on
account.
Accounts Receivable 1,000
Sales
1,000
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Cash (Net) Realizable Value
Is the net amount expected to be collected in
cash.
Excludes amounts the company estimates it will
not collect.
Keeps Receivables from Being Overstated
on the Balance Sheet.
10
Accounting for Cash Discounts (GAAP)
Gross Method
Net Method
Accounts receivable
Accounts receivable and Sales are
and
Sales are initially recorded at
gross amount of the invoice.
Cash discounts are recorded
only when they are taken by
the buyer.
initially recorded at amounts net
of cash discounts.
Cash discounts NOT taken by the
buyer are credited to the Sales
Discounts Forfeited account and
included as part of Other Income.
Cash discounts taken by the buyer
ARE NOT ACCOUNTED FOR.
Illustrative Problem
An entity sells inventory with a list price of P10,000 on
account under credit terms of 20%, 10%, 2/10, n/30.
Journalize the entry using both the gross and net method for
the following:
1.
Sale on account
2.
Collection is made within the discount period
3.
Collection is made beyond the discount period
2 Methods of Accounting for
Uncollectible Accounts
The Direct Write-off Method
The Allowance Method
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Direct Write-off Method
Bad debt losses are not estimated.
No allowance account is used.
Accounts are written off when determined
uncollectible as
follows:
Bad Debts Expense
Accounts Receivable- Santos
200
200
Bad debt expense will show only actual losses.
Accounts receivable will be reported at gross amount.
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Allowance Method
Uncollectible accounts receivable are estimated and
matched against sales in the same accounting period in
which the sales occurred.
Uncollectible accounts receivable may be estimated
using:
Percentage of sales
Aging of accounts receivable
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Uncollectible Accounts Expense...
Is an expense to record estimated
uncollectible receivables.
Keeps Expenses from Being Understated
on the Income Statement.
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Recording Estimated Uncollectibles
Hampton Furniture has credit sales of P1,200,000, of
which P200,000 remains uncollected. The credit
manager estimates P12,000 will prove uncollectible.
Uncollectible Accounts Expense
12,000
Allowance for Uncollectible Accounts
12,000
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Recording Estimated Uncollectibles
Uncollectible Accounts Expense
12,000
Allowance for Uncollectible Accounts
Accounts Receivable
Jan 1 Bal 200,000
12,000
Allowance for Uncollectible Accounts
Jan 1 Bal 12,000
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Cash (Net) Realizable Value...
Is the net amount expected to be collected in cash.
Excludes amounts the company estimates it will
not
collect.
Keeps Receivables from Being Overstated
on the Balance Sheet.
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HAMPTON FURNITURE
Balance Sheet (partial)
Current assets
Cash
$ 14,800
Accounts receivable
$200,000
Less: Allowance for uncollectible accounts
Cash (net) Realizable Value
12,000
188,000
Write-off of an Uncollectible Account
The vice president of finance authorizes a write-off of
P500 owed by [Link].
Allowance for Uncollectible Accounts
Accounts Receivable-Ware
500
500
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Write-off of an Uncollectible Account
Allowance for Uncollectible Accounts
Accounts Receivable-Ware
Accounts Receivable
Jan 1 Bal 200,000
Mar 1 Bal 199,500
Mar 1 500
500
500
Allowance for
Uncollectible Accounts
Mar 1 500
Jan 1 Bal 12,000
Mar 1 Bal 11,500
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Aging of Accounts Receivable
The analysis of customer balances by the
length of time they have been unpaid. The
longer a debt is outstanding the less likely it
is to be paid.
23
Aging of Accounts Receivable
Uncollectible Accounts is computed as the difference
between the required balance of the allowance for
uncollectible accounts and the unadjusted carrying amount
similar to the percentage of receivables.
Illustrative Problem
(Based on Days Outstanding)
MCL Co. has the following information:
Days outstanding
0 60
Receivable balances
% Uncollectible
P120,000
1%
61 120
90,000
2%
Over 120
100,000
6%
Total Accounts Receivable
P 310,000
During the year, MCL wrote-off P7,000 receivables and recovered P4,000 that had
been written-off in prior years. The allowance for doubtful accounts has a beginning
balance of P2,000.
Required: Compute the doubtful accounts expense and net realizable value of
accounts receivable.
Days
Outstanding
Receivable
balances
0 -60
P 120,000
1%
P 1,200
90,000
2%
1,800
100,000
6%
6,000
61 - 120
Over 120
Totals
%
Uncollectible
P 310,000
P 9,000
Allowance for Doubtful Accounts
Write-offs 7,000
Required
allowance
2,000 beg. bal.
4,000 recoveries
10,000 DAE (squeeze)
End. Bal. 9,000
Net realizable value = 310,000 9,000
Illustrative Problem
(Based on Days Past Due)
MCL Co. sells to wholesalers on terms 2/15, n/30. An analysis of MCL Co.s trade
receivable balances at Dec. 31, 20xx revealed the following:
Age in days
Receivable balances
0 - 15
P100,000
16 30
60,000
31 60
50,000
61 90
40,000
91 120
30,000
121 150
20,000
MCL Co. uses the aging of receivables method. The estimated percentages of
collectability based on past experience are shown below:
Accounts which are overdue for <31 days
97%
Accounts which are overdue 31 60 days
90%
Accounts which are overdue 61 90 days
85%
Illustrative Problem
(Based on Days Past Due cont.)
Accounts which are overdue 91 120 days
65%
Accounts which are overdue for over 120 days 40%
The allowance for doubtful accounts has a balance of P8,000 as of Jan.
1, 20xx. No write-offs or recoveries were made during the year.
Required: Compute: (a) balance of allowance for doubtful accounts
(b) doubtful accounts expense
Days Past Due
Receivable Balance
% Uncollectible
Current
160,000
1 30 days
50,000
3%
1,500
31 60
40,000
10%
4,000
61 - 90
30,000
15%
4,500
91 - 120
20,000
35%
7,000
Total
Doubtful Accounts Expense = 17,000 8,000
Required Allowance
17,000
Abnormal Balances in Accounts
If abnormal balance occurs, adjustment is needed to eliminate it prior to the preparation
of financial statements.
Credit balance in customers accounts should be presented as part of current liabilities
and should NOT be offset against receivables.
Example:
ABC Co. has an outstanding receivable of P10,000 from Customer X.
Subsequently, X remits P16,000 to ABC as payment for an existing receivable and the
excess as advance payment for future delivery of goods.
Entry to record receipt of payment:
Entry to eliminate credit balance in Xs account:
Cash on Hand
Accounts Receivable X
16,000
Accounts Receivable x
16,000
6,000
Advances from Customers
(non-trade payable)
6,000
Disposing of Accounts Receivable
Reasons why companies sell their receivables:
1.
They may be the only reasonable source of cash;
2.
Billing and collection are often time-consuming and costly.
Sale of Receivables
A common sale of receivables is a sale to a factor.
Factor is a finance company or bank that buys receivables
from businesses and then collects the payments directly
from the customers.
Factor charges a commission to the company that is selling
the receivables.
2 Types of Accounts Receivable Factoring
With Recourse
In a with-recourse arrangement, if the
customer does not pay the factor, the
transferor must pay the factor the
amount due on the account.
The rules for transfer of receivables with
recourse vary by jurisdiction; therefore,
transfers with recourse may or may not
qualify for sale treatment.
If the factoring with recourse
arrangement qualifies as a sale, the
recourse liability is treated as reduction
of the proceeds received in the transfer.
Without Recourse
Factor assumes the risk of loss from
noncollection. Thus, once a factoring
arrangement is completed, the entity
has no further involvement with the
receivables, unless the customer
decides to return the merchandise. In
its simplistic form, the receivables are
sold and the difference between the
cash received and the carrying value
of the receivables is recognized as a
gain or loss.
Illustrative Problem
Cabal Furniture factors P6,000,000 of receivables to Singh Factors
that charges 3% of the amount of receivables sold.
Entry to record sale by Cabal Furniture:
Cash
5,820,000
Service Charge Expense
180,000
Accounts Receivable
6,000,000
Note: If the company often sells receivables, it records service
charge expense otherwise, it may just report it as Other Expenses
and Losses.
Illustrative Problem (2)
Thirsty Corp., on July 1, year 1, enters into an agreement with Rich Company (the
factor) to sell a group of its receivables without recourse. A total face value of
$200,000 of accounts receivable are involved. The factor charges 20% interest
computed on the weighted-average time to maturity of the receivables of thirtysix days plus a 3% fee.
The entries required by the transferor are as follows:
Cash
Interest expense (or prepaid) (200,000 .20 36/365)
Factoring fee (200,000 .03)
Accounts receivable
190,055
3,945
6,000
200,000
The interest expense and factors fee can be combined into a $9,945 loss on the
sale of receivables.
Pledging of Accounts Receivable
is short-term
borrowing from financial institutions where the
loan is secured by accounts receivable. The lender may physically
take the accounts receivable but typically has recourse to the
borrower; also called discounting of accounts receivable.
Account receivable financing can be allowed
preferably
against charge or hypothecation of receivables whereby
the lenders is vested with the right to collect or recover
the Receivables either in the normal course of business or in
the event of default by the borrower.
Credit Card
A common type of credit
card is a national credit
card such as:
Visa
Master Card
American Express.
37
Credit Card
Three parties are involved when national credit
cards are used in making retail sales:
the credit card issuer
the retailer
the customer
38
Bank Credit Card
Sales resulting from the use of VISA and MasterCard
are considered cash sales by the retailer.
Upon receipt of credit card sales slips from a retailer,
the bank immediately adds the amount to the seller's
bank balance.
39
Advantages of Credit Cards to the Retailer
Advantages of Credit Cards to the
Retailer
41
Advantages of Credit Cards to the
Retailer
42
Advantages of Credit Cards to the
Retailer
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Impairment of Accounts Receivable
Accounts Receivable considered uncollectible
are deemed to be impaired.
Impairment assessment:
1.
Individually significant accounts receivable should be considered for
impairment separately and if impaired, the impairment loss is
recognized.
2.
Accounts receivable not individually significant should be collectively
assessed for impairment.
3.
Accounts receivable not considered impaired should be included with
other accounts receivable with similar credit-risk characteristics and
collectively assessed for impairment.
Notes Receivable...
Represents claims for which formal instruments of
credit are issued as evidence of debt.
2015
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Learning Objectives (Notes Receivable)
1.
2.
3.
4.
5.
State the initial and subsequent measurement of note
receivables;
Account for noninterest bearing and interest bearing
note receivable;
Learn how to compute for present value factors and
how to properly apply them;
Be able to prepare amortization table;
Compute for the effective interest rate.
Notes Receivable...
A claim supported by a formal promise to pay a
certain sum of money at a specific future date.
Result from sale of goods
and services on account
that extends payment period of the said account.
Often called trade receivable.
Give holder
a stronger legal claim to assets than
accounts receivable.
Are negotiable instruments and may be transferred
to another party by endorsement.
47
Notes Receivable...
Credit instrument normally requires:
payment of interest
extends for time periods of 60-90 days or longer.
48
Notes Receivable...
Are often accepted
from customers who need
to extend payment of an account receivable.
Are often required
from high-risk
customers.
49
Types of Notes Receivable
Interest Bearing
Noninterest Bearing
Notes that have stated
Notes that do not have a stated
interest rate on the face of
the note.
interest rate because they include
interest element as part of the face
amount.
Face amount pertained here
represents an unspecified principal
and an unspecified interest. Present
value computation is needed to
separate the interest element from
the principal element.
Initial Measurement of Notes Receivable
Initially at present
value which is the sum of all future cash flows
discounted using the prevailing market rate of interest for similar
notes.
Prevailing market rate is the same effective interest rate.
Short-term notes receivable shall be measured at face value.
Long-term receivables that bears a reasonable interest rate are
recorded at face value present value upon issuance.
Long-term receivable that bears no interest; at present value
which is the discounted value of the future cash flows using the
effective interest rate.
Subsequent Measurement
Subsequent to initial recognition, long-term notes receivable
shall be measured at amortized cost using the effective
interest method.
Amortized Cost
The amount at which the note receivable is measured initially:
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.
Notes Receivable
The life of a note may be expressed in months or days.
When the life of a note is expressed in terms of months,
the due date is found by counting the months from the
date of issue.
When the due date is stated in terms of days, count the
exact number of days to determine the maturity date.
In counting, the date the note is issued is omitted but
the due date is included.
Dishonored notes should be removed from the notes
receivable account and transferred to accounts
receivable.
53
Notes Receivable Valuation
are recorded at face value.
are reported at cash (net)
realizable value.
are honored when paid in
full at maturity.
are dishonored when not
paid in full at maturity.
54
Notes Receivable...
Interest revenue is recorded when the note is paid.
If interim financial statements are prepared,
interest on notes receivable is accrued.
Each type of receivables should be identified in
the balance sheet or in the notes to the financial
statements.
Short-term receivables are reported in the
current asset section of the balance sheet below
short-term investments.
The gross amount of receivables and the
allowance for doubtful accounts should be
reported.
55
Illustrative Problem on
Interest Bearing Note
ABC Co. owns a farm land costing P2,000,000 and was sold for P3,000,000. The firm
received a 3-year note for P3,000,000 plus 6% interest compounded annually.
Year 1: Notes receivable
3,000,000
Land
2,000,000
Gain on sale of land
1,000,000
Accrued interest receivable
Interest Income
180,000
180,000
Other Receivables
Nontrade including:
interest receivable
loans to company officers
advances to employees
income taxes refundable
57
Presentation in the financial statements
Trade receivables and non-trade receivables currently
collectible are combined and presented in a single line item
described as Trade and other receivables on the face of
the financial position. The breakdown of this line item is
disclosed in the note.
