ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY FARAP-4902

CPA Review Batch 49  May 2025 CPA Licensure Examination

FINANCIAL ACCOUNTING & REPORTING / AUDITING PRACTICE S. IRENEO  G. MACARIOLA  C. ESPENILLA  J. BINALUYO

RECEIVABLES
Nature of receivables
Receivables are financial assets arising from contractual rights to receive cash or another financial asset from
another company.
Types of receivables
Trade receivables arise from the sale of merchandise or service in the ordinary course of business. This
may be evidenced by a promise to pay called Notes Receivable, or not evidenced by a promise to pay,
termed Accounts Receivable
Non-trade receivable are claims arising from sources other than from sale of goods and services in the
normal course of business.
Nature of note receivable
A note receivable is evidenced by a written promise to pay. The note receivable may either be interest-bearing
or non-interest-bearing. A note receivable is said to be interest bearing if it has a nominal interest rate. The
nominal interest rate is sometimes referred to as the stated interest rate or the coupon interest rate. On the other
hand, a non-interest- bearing note is a note that does not have a stated interest rate.
Initial valuation
Receivables are initially recognized when the entity becomes a party to the contractual provision of the
instrument. Accounts Receivable are initially valued at the transaction price, which is the amount an entity
expects to be entitled in exchange for the transfer of goods and services.
Notes receivable are initially valued at:
a. Face value if stated interest rate is equal to the prevailing market interest rate or the effective interest
rate or the yield rate. In this scenario, the Present Value of the Note equals its Face Value. Thus, there
is neither a discount nor a premium on Notes Receivable. Interest Revenue is computed by multiplying
Face Value by the nominal interest rate and by time.
b. Present value that is lower than the face value, if stated interest rate is lower than prevailing market
interest rate. Falling under this scenario is a non-interest bearing note. The discount recognized is
amortized as additional Interest Revenue under the effective interest method.
c. Present value that is higher than the face value, if stated interest rate is higher than the prevailing market
interest rate. The premium recognized is amortized as a deduction from Interest Revenue under the
effective interest method.
Valuation at reporting date
Receivables are valued at amortized cost, which is the face value of the note plus the unamortized balance of
the Premium on Note Receivable or minus the unamortized balance of the Discount on Note Receivable less any
allowance for estimated credit losses.
Presentation of receivables in the financial statements
Trade receivables are classified as current assets.
Non-trade receivables expected to be collected within 12 months from reporting date are classified as current;
while those expected to be collected beyond are classified as non-current.
Impairment of Loans and Receivables:
The impairment loss model under IFRS 9 provides for allowance for estimated credit losses (ECLs)by estimating
the probability of default by taking into account macro-economic factors. ECL is the probability-weighted
estimate of credit losses (i.e., the PV of all cash shortfalls) over the expected life of a financial instrument.

Lifetime ECL is the ECL that results from all possible default events over the expected life of a financial
instrument.
12-month ECL is a portion of the lifetime ECL and represents the lifetime ECL resulting from a default occurring
in the 12 months after the reporting date weighted by the probability of that default occurring.
Stages in the Measurement and Recognition of Impairment
Stage 1 – Recognize the impairment loss in P/L thru an allowance account based on a 12-month ECL after
reporting period for receivables that are not credit impaired and with no significant increase in credit risk from
initial recognition
Stage 2 -- Recognize in P/L, lifetime ECL for receivables that are not credit impaired but with significant
increase in credit risk. There is a rebuttable presumption that the credit risk has increased significantly since
initial recognition if contractual payments are more than 30 days past due.
Stage 3 -- Assess individually the receivables to determine whether they are credit-impaired.

Receivable Financing
Pledging/General Assignment of Account receivable
1. Accounting for receivable is not affected, disclosure is required for the receivables pledged or assigned.
2. Recognize the proceeds of the borrowing as a liability
3. Charge interest on the carrying value of the liability
4. Any transaction cost incurred is a finance cost

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
RECEIVABLES
FARAP-4902
Specific Assignment of Account receivable
1. Reclassify the Accounts Receivable to Receivable -Assigned
2. Recognize the proceeds of the borrowing as a liability and charge interests accordingly.
3. Any transaction cost incurred is treated as a finance cost.
Factoring of Accounts receivable
1. Risks and Rewards of ownership are transferred to the Buyer, thus the transaction is treated as an outright
sale.
2. Risks and Rewards of ownership not transferred to the Buyer – treated as borrowings
Discounting of Notes Receivable
1. If the discounting is With Recourse, the cash received is treated as a borrowing
2. If discounting is Without Recourse, the transaction is treated as an outright sale.
Computation of Cash Proceeds of Notes Receivable Discounting
1. Compute for the maturity value of the note receivable: Principal Plus Total Interest
2. Compute for the discount: Maturity Value x Discount Rate x Discount Period
3. Compute the proceeds: Maturity Value – Discount

FINANCIAL ACCOUNTING & REPORTING - THEORIES

1. Which of the following should be recorded as Accounts Receivable?
a. Receivables from officers
b. Receivables from subsidiaries
c. Dividend receivable
d. Sale of goods to a customer on account
2. Which of the following transactions reduces the balance of accounts receivable?
a. Sale of goods on account.
b. Collection of accounts previously written off.
c. Return of goods sold to a customer on account.
d. Cash discount availed under the net method.
3. Jed Company gets 2% of the total peso balance of accounts aged as 1-60 days past due and adds this to 5%
of the total peso balance of accounts aged 61-120 days past due. The total amount computed represents the
a. amount of uncollected accounts expense for the year.
b. amount that should be added to the allowance for uncollectible accounts at year-end.
c. amount of the desired credit balance of the allowance for uncollectible accounts to be reported in the
year-end financial statements.
d. Amount to be added to the total accounts written off during the year to arrive at the desired credit balance
of the allowance account.
4. When the allowance method of recognizing uncollectible account expense is used, the entries at the time of
collection of an account that was previously written off would
a. Increase profit.
b. Increase the amortized cost of accounts receivable.
c. Decrease profit.
d. Decrease the amortized cost of accounts receivable.
5. If Courage Co. will write-off the receivable from a bankrupt customer, and the balance of the allowance before
this write-off is greater than the amount to be written off, the effect of the write-off will
a. Have no effect on total current assets
b. Reduce net income for the period
c. Reduce total current assets
d. Reduce the amount of total equity
6. On July 1, 2024, an entity received an interest bearing, one-year note receivable, the stated interest of which
is the same as the market interest rate. The face amount of the note receivable and the entire amount of the
interest are due on June 30, 2025. On December 31, 2024, the entity should report in the statement of
financial position
a. A zero-interest receivable
b. A deferred credit for interest applicable for 2025
c. Interest receivable for the interest accruing in 2024
d. Interest receivable for the entire amount of the interest due on June 30, 2025
7. The amortization of the discount on note receivable
a. Increases the amount of interest received to arrive at interest income.
b. Decreases the amount of interest received to arrive at interest income.
c. Decreases the carrying value of the note receivable.
d. Increases the face value of the note receivable.
8. Ding Inc. received a three-year, non-interest-bearing note for P50,000 on January 1, 2023. The current
interest rate at that time was 15% for similar notes. The only entry made in 2023 was:
Notes Receivable 50,000
Sales 50,000
The effects of the above entry on Ding’s profits for the years 2023, 2024 and 2025 and its retained earnings
at the end of 2025, respectively shall be
a. overstated, overstated, understated, no effect
b. overstated, understated, understated, understated
c. overstated, understated, understated, no effect
d. no effect on any of these

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
RECEIVABLES
FARAP-4902
9. Statement 1: When a note receivable is discounted with recourse, the transaction is treated as a
borrowing. True
Statement 2: The amount of finance charge (interest expense) recognized on the discounting of notes
receivable is always equal to the amount of discount.
a. Only statement 1 is true
b. Only statement 2 is true
c. Both statements are true
d. Both statements are false
10. At initial recognition, which of the following is deducted from the face value of the receivable to arrive at its
amortized cost?
a. direct origination costs.
b. direct origination fees.
c. discount on loan receivable.
d. premium on loan receivable.
11. Statement 1: The loan will have a new effective interest after effecting direct origination costs and fees.
Statement 2: The loan receivable shall be amortized using the original nominal interest.
a. only statement 1 is true
b. only statement 2 is true
c. both statements are true
d. both statements are false
12. Which of the following indicators should be present to shift the expected credit loss from stage 1 to stage 2?
a. an increase in credit risk
b. a significant increase in credit risk
c. an objective evidence of impairment
d. financial difficulties of the borrower
13. Where there is an objective evidence of impairment, the amount of interest income should be?
a. computed based on the gross carrying value of the loan.
b. computed based on the net carrying value of the loan.
c. no interest shall be recognized.
d. no correct answer.

FINANCIAL ACCOUNTING & REPORTING - PROBLEMS

Problem 1: The following Receivables as of December 31, 2023 were taken from the books of Toga Company:

1 Trade installment receivable due in 18 months, including interest receivable of P15,000 P900,000
2 Receivables from the officers due December 31, 2024 300,000
3 Claims against shipping company, due in 15 months 180,000
4 Past due trade accounts receivables 700,000
5 Past due notes receivable including accrued interest of 10,000 280,000
6 Customer’s NSF check returned by bank 100,000
7 Advances to employees 25,000
8 Receivable from customer arising from sale of goods 500,000
9 Interest receivable on bonds 150,000
10 Interest receivable on notes 45,000
11 Other trade accounts receivable – unassigned 280,000
12 Trade accounts receivable – assigned 550,000
13 Subscriptions receivable for ordinary shares due in 24 months 1,000,000
14 Trade accounts on which post-dated check is held 490,000
15 Trade accounts known to be worthless in 2023 90,000
The company estimates that 10% of all outstanding trade receivables is doubtful of collection. The allowance for
bad debt has a beginning balance of P56,500 and during the year, P5,400 was recovered from the accounts that
were previously written off in prior years.
Compute for the following:
1. The amortized cost of the trade receivables to be reported on the December 31,2023 SFP.
a. 3,506,500 b. 3,406,500 c. 3,425,500 d. 3,416,500
2. The bad debt expense for 2023.
a. 412,000 b. 406,600 c. 426,600 d. 432,600

Problem 2: On January 1, 2023, Orca Company’s accounts receivable has an outstanding balance of P1,000,000.
Below are the transactions for the current year:

1 Total Sales including cash sales of P500,000 8,000,000

2 Account receivable written-off 60,000
3 Total Sales Returns of which P30,000 pertains to sales made on cash basis 80,000
4 Amount received from credit customers 5,100,000
5 Sales discount availed of by customers (Orca uses the Gross Method) 70,000
6 Amounts received representing recovery, not included in the P5,100,000 above 120,000

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
RECEIVABLES
FARAP-4902
Compute for the amount of the amortized cost of the accounts receivable on December 31, 2023, assuming that
the company’s policy is to provide 5% allowance based on outstanding balance.
a. 3,220,000 b. 3,320,000 c. 3,059,000 d. 3,159,000

PROBLEM 3: (GL AND SL RECONCILIATION WITH AGING OF RECEIVABLES)-

In line with your audit of Harry Corp.’s receivable balances as of December 31, 2023, the client’s
accountant provided you with the following SL to GL reconciliation:
Balance Per Subsidiary Ledger 3,890,000
Charge for deliveries on December 29, goods still in-transit under FOB 39,000
1
Shipping Point
Charge for goods delivered on January 2, 2024 but is covered by a bill and hold
2
agreement with a customer, contract completed in December 2023. (20,000)
Subscriptions receivable from shareholders of P80,000 and Deposits on Long-Term
3 Contracts of P500,000 and Cash advances to an affiliated company of 200,000 or a total of
P780,000. 780,000
Charge for deliveries on December 30, goods still in-transit under FOB Destination term (18,000)
4
Credit memos for merchandise returns for invoice originally dated August 10. Age as at
5 (12,000)
year end is 61 to 120 days.
Portion of an October 10 outstanding invoice that was returned by the customer. Age as
6 (6,000)
at year end is 1 to 60 days.
Write-off of a receivable from customer who recently declared bankruptcy. Outstanding
7 (135,000)
invoices were dated April 5. Age as at year end is more than 120 days.
8 Selling price for the unsold consigned goods delivered in December 2023. Age is
Current as at year-end.
(56,000)
Selling price of the sold consigned goods. Age is Current as at year-end. (84,000)
9
Balance Per General Ledger 4,378,000
The client’s accountant also provided you the following aging of accounts receivable, along with the
company’s policy of providing allowance for doubtful accounts:

Age Amount % Uncollectible

Current (60 days) P1,550,000 -
1-60 days past due 1,100,000 5%
61-120 days past due 740,000 10%
More than 120 days past due 500,000 20%
Total 3,890,000

All sales were made under the terms 10/30, n/60. The company estimates based on past experience that 30%
of the accounts that are still current (60 days) will probably be paid within the discount period over the next
year, and another 2% of the accounts that are still current (60 days) is a fair estimate for customer returns.
The company has not recorded any bad debt expense for the year. During the year, however, it had a P23,500
recovery of a previously written-off account and a P135,000 write-off of uncollectible accounts.

Compute for the following:

1. Carrying value/amortized cost of the accounts receivable–trade.
a. 3,409,790 b. 3,415,790 c. 3,405,750 d. 3,425,750
2. Correct bad debt expense for the year assuming that the allowance for doubtful accounts had a balance
of P105,700 as of January 1, 2023.
a. 206,300 b. 200,500 c. 205,300 d. 205,000

PROBLEM 4: (CONFIRMATION OF RECEIVABLES WITH AGING OF RECEIVABLES)

You are assigned to audit Bonifacio Inc. for the year ended June 30, 2023. Prior to any adjustments, you were
able to extract the following balances from the client’s records:
Accounts receivable, control account P221,250
Allowance for doubtful accounts (7,500)
Amortized cost P213,750
Accounts receivable, subsidiary records
60 days old and below P110,625
61 – 120 days 66,375
> 120 days 51,750
Credit balance (7,500)
P221,250

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
RECEIVABLES
FARAP-4902
The credit balance in the accounts receivable represents collection from a customer whose account had been
written off as uncollectible in the previous year. Upon investigation, the only entry made by the client upon
the recovery was to debit cash and a credit to accounts receivable.

Certain Accounts Receivable balances were circularized/confirmed as at June 30, 2023 and the
following exceptions/replies have not been disposed of as at the date of your examination.
Customer Balance Customer’s Comments Audit Findings
A 4,000 This balance for invoice dated June 5, Bonifacio received the mailed check on July 2,
2023 was paid on June 29, 2023 2023.
B 13,800 The balance for invoice dated June 1 Bonifacio erroneously credited Accounts
was offset by our June 10 shipment of Payable for its purchase of tires.
tires.
C 16,600 This balance for invoice dated April 20 The collection was credited to the account of
has been paid. Customer D.
D 20,000 The records show a bigger balance, All outstanding invoices to Delta are dated
please check. June 2023.
E 14,000 Our deposit of P18,000 should cover The deposit was credited to Sales. The P14,00
this balance is for a June 2023 shipment.
F 1,200 CM cancels this balance. The CM dated April 30, 2023 was recorded
by Bonifacio in July 2023. The amount is
for an April 15 sales invoice.
G 22,400 No reply for the 2 sets of confirmation letters
sent. Management agreed to write-off this
balance. This pertains to an invoice dated May
19, 2022.

Based on your discussions with the client, the following estimated rates are appropriate for computing the
uncollectible accounts:
60 days and below 2%
61 to 120 days 10%
More than 120 days 20%
Compute for the following:
1. The amortized cost of accounts receivable balance.
a. 177,350 b. 164,634 c. 175,250 d. 162,634

2. The required allowance for bad debts as of June 30.

a. 12,716 b. 15,716 c. 13,617 d. 14,217

3. Assuming that there were no other entries affecting the allowance account during the fiscal year, the
amount of bad debt expense.
a. 19,116 b. 16,116 c. 14,119 d. 20,116

Problem 5: On January 1, 2023, Shoto Company sold its equipment with a carrying value of P600,000 and
received a down-payment of P200,000 and a 4-year, 3%, P500,000 note to be collected on December 31, 2026.
Interest is to be collected at the end of each year. Effective interest on the note on this date is 5%.

The PV of the note on January 1, 2023 is correctly computed as:

Principal: P500,000 x 0.8227 411,350
Annual Nominal Interest: 500,000 x 3% x 3.546 53,190
Total PV of Notes Receivable 464,540

Below is the amortization table: P500,000 Face Value, 3% SIR; 5% EIR, payable end of 4th Year
Date Nom Effect Non-
Int. Int. Disct. Present Current Current
3% x 500k 5% Amort Collect Value Asset Asset
01.01.23 464,540
12.31.23 15,000 23,227 8,227 472,767
12.31.24 15,000 23,638 8,638 481,405
12.31.25 15,000 24,070 9,070 490,475
12.31.26 15,000 24,525 9,525 (500,000) -0-

Compute for the following:

1. Gain (loss) on sale of equipment.
a. 64,540 b. 46,540 c. 56,450 d. 45,560

2. Interest income for the period ended December 31, 2024.

a. 23,638 b. 23,227 c. 24,070, d. 24,525

3. The total amount of Receivable that is to be classified as Current as at December 31, 2024 .
a. 490,475 b. 481,405 c. 472,767 d. Zero

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
RECEIVABLES
FARAP-4902

Problem 6: Endeavor Inc. sold its building on March 1, 2022. The building has an estimated useful life of 5 years
with a carrying value of P9,500,000 at the date of sale. Endeavor received a P12,000,000, 3-year non-interest
bearing note to be collected in equal annual installment of P4,000,000 every March 1 of each year starting 2023.
There is no available fair value for the building but on March 31, 2022, effective interest for similar note was at
6%. On December 31, 2023, effective interest increased to 7%. The present value factor for ordinary annuity at
6% for 3 periods is 2.6730.

The present value of the note at initial recognition date is P10,692,000, computed by multiplying the annual
installment of P4,000,000 by the present value factor of 2.6730.

The applicable amortization table is shown below:

Date Eff. Int./ Interest Interest Income
Disct. Amort Present Income 2/12 Current Non-Current
6% Collect. Value 10/12 Asset Asset
03.01.22 10,692,000
12.31.22
03.01.23 641,520 (4M) 7,333,520 (2022) (2023)
12.31.23
03.01.24 440,011 (4M) 3,773,531 (2023) (2024)
12.31.24
03.01.25 226,469 (4M) -0- (2024) (2025)

Compute for the following:

1. The amount taken to profit or loss for the year ended December 31, 2022.
a. 534,600 b. 1,192,000 c. 1,726,600 d. 1,673,140
2. The current portion of the note receivable as of December 31, 2023.
a. 3,358,480 b. 3,559,989 c. 3,926,665 d. 3,773,531
3. The non-current portion of the note receivable as of December 31, 2023.
a. 3,358,480 b. 3,559,989 c. 3,926,665 d. 3,773,531

Problem 7: On January 1, 2023, Aizawa Company received a 10%, P14,000,000 note, collectible in installment
plus interest every December 31 of each year until December 31, 2027. The effective interest rates on January
1, 2023 and December 31, 2023 were 14% and 15%, respectively.

Below are the installment collections at the end of each year. Likewise indicated are the present value factors:

Date Face Value Collection Present value of 1 at 14%

December 31, 2023 4,000,000 0.8772 (for 1 Period)
December 31, 2024 3,500,000 0.7695 (for 2 Periods)
December 31, 2025 3,000,000 0.6750 (for 3 Periods)
December 31, 2026 2,500,000 0.5921 (for 4 Periods)
December 31, 2027 1,000,000 0.51.94 (for 5 Periods)

The present value of the note at initial recognition is P12,922,205, as computed below:
12.31.23 (14M x 10% + 4.0M) x 0.8772 4,736,880
12.31.24 (10M x 10% + 3.5M) x 0.7695 3,462,750
12.31.25 (6.5M x 10% + 3.0M) x 0.6750 2,463,750
12.31.26 (3.5M x 10% + 2.5M) x 0.5921 1,687,485
12.31.27 (1.0M x 10% + 1.0M) x 0.5194 571,340
Total PV, 01.01.2023 12,922,205

The applicable amortization table is presented below:

Date Nominal Effective Discount Collection Present Current Non-Current
Interest (10%) Interest (14%) Amortization Value Asset Asset
01.01.23 12,922,205
12.31.23 1,400,000 1,809,109 409,109 (4,000,000) 9,331,314
12.31.24 1,000,000 1,306,384 306,384 (3,500,000) 6,137.698
12.31.25 650,000 859,278 209,278 (3,000,000) 3,346,976
12.31.26 350,000 468,577 118,577 (2,500,000) 965,553
12.31.27 100,000 134,447 34,447 (1,000,000) -0-

Compute for the following:

1. The current portion of the note receivable that is reported as current as of December 31, 2023.
a. 3,500,000 b. 3,193,616 c. 3,000,000 d. 2,791,722
2. The non-current portion of the note receivable that is reported as non-current as of December 31, 2025.
a. 3,346,976 b. 965,553 c. 2,500,000 d. 1,000,000
3. The interest revenue for the year-ended December 31, 2024
a. 1,809,109 b. 1,306,384 c. 1,400,000 d. 1,000,000

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RECEIVABLES
FARAP-4902
PROBLEM 8: LOANS RECEIVABLE – FINANCING CONCERN/EXPECTED CREDIT LOSS RECOGNITION
On January 1, 2023, Monoma Inc. extended a loan to Nieto Co. amounting to P1,000,000 and received a
three-year, 6% note. The note calls for annual interest to be paid each December 31, beginning 2023. The
company incurred origination costs and the company charged Nieto Co. P80,000 as origination fees. As a
result, the yield on the loan was at 8%. Based on company’s initial estimates on initial recognition date, the
present value of the 12-month expected credit loss discounted at 8% is P100,000. The probability of default
is 12%.
At the end of 2023, there was no evidence of significant increase in credit risk, the note is determined to have
a “low credit risk”, and there were no changes in the estimate of the 12-month expected credit loss.
On December 31, 2024, the interest for the period was collected. On this date, based on available forward-
looking information, there is evidence that there was a significant increase in credit risk, thus the entity had
to change its basis of calculating loss allowance from a 12-month expected credit loss to a lifetime expected
credit loss. The PV of the lifetime expected credit loss discounted at 8% is at P400,000. The probability of
default is at 20%.
On December 31, 2025, due to the financial crisis Nieto Co. is experiencing, Monoma was not able to collect
the receivables at maturity date and that only P600,000 of the principal and interest due on December 31,
2025 will be collected. The amount is expected to be collected in two equal installments on December 31,
2026 and December 31, 2027. After reviewing all available evidence on December 31, 2025, it was determined
that the receivable is credit-impaired and that an impairment loss should be recognized.

Compute for the following:

1. The amount of the origination cost on January 1, 2023 in relation to the loans receivable.

2. The initial carrying value of the loans receivable and the amount of bad debt/credit loss that
should be immediately recognized on January 1, 2023?

3. The carrying value of the loans receivable as of December 31, 2024 and the amount of the
bad debt/credit loss that should be recognized in 2024?

4. The impairment loss in 2025?

Problem 9: On October 31, 2023, Ingrid Corp. had the following transactions:

• Obtained a P500,000, 6-month loan from Citibank, discounted at 12%. The company pledged P600,000 of
its accounts receivable as a security for the loan.
• Factored P1,000,000 of accounts receivable without recourse on a notification basis with Nice Finance
Company. Nice Finance charged a factoring fee of 5% of the amount of the receivable factored and withheld
10% of the receivable factored.

Compute for the amount of cash received from the financing of the receivables and the amount of loss recognized.
a. 1,320,000 and zero
b. 1,320,000 and 50,000
c. 1,350,000 and zero
d. 1,350,000 and 50,000

Problem 10: Beryl Corp. received a P1M, 10%, 6-month note receivable for goods sold on November 1, 2023.
On December 1, 2023, the company discounted the note to BPI Bank at a 12% discount rate. The discounting
was made on a without recourse basis.

Compute for the following:

1. The gain or loss on discounting to be recognized in the profit or loss for 2023.
a. zero b. 8,333 c. 10,833 d. 13,333

2. Assuming that the discounting agreement is on a with recourse basis, compute for the amounts taken
to profit or loss for the year ended December 31, 2023 and December 31, 2024.
a. 6,167; (8,667) b. 16,667; 33,333 c. (10,500); (42,000) d. (10,833); zero

- END -

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