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RECEIVABLES
Definition of Receivables
Financial Asset (As defined by IAS 32: Financial Instruments: Presentation)
a. Cash
b. Equity instrument (investment from other entity)
c. CONTRACTUAL RIGHT (the topic)
- to receive cash or another financial asset
- to exchange financial instruments under potentially favorable conditions)
- *derivatives
d. Contract to be settle by a varying number (not fixed) of the entity’s own equity (if fixed number of shares will be
received, it is not a financial asset, but an equity)

1. TRADE RECEIVABLES – arising from ordinary course of business

a. Accounts Receivable – oral/verbal promise by the customer to pay cash
b. Notes Receivable – written promise by the customer to pay cash (includes the terms, interests, maturity date, etc.)
2. OTHER RECEIVABLES/NON-TRADE RECEIVABLES - not arising from ordinary course of business
a. Accrued income – income earned but not yet received
i. Interest receivable- related to bonds, notes and other long-term receivables; if the entity is a financial
institution, then it is considered as trade receivable
ii. Rent receivable
iii. Royalty – received for artistic works or professional services
iv. Dividend receivables – when the entity has investment to other entity
b. Advances to employees
c. Advances to suppliers – the entity pays early; may arise from debit balance in Accounts Payable and turns to a
receivable
d. Advances to officers, shareholders, directors, and affiliates – entity gives loan to them
i. Officers – high-ranking employees
ii. Shareholders – investors
iii. Directors – ultimately responsible to the management of business
iv. Affiliates - parents and subsidiaries of an entity
e. Deposits – normally about bottles and containers; entity does not buy them but only returns them when the
product is consumed.
f. Subscriptions receivable – from subscribed shares (buyer of shares not yet paid)

MEASUREMENT AND PRESENTATION

I. Presentation
A. Trade Receivables – current asset, except when subject to unusual credit arrangement exceeding 12 months
B. Other Receivables/Non-trade receivables – most are current asset, except: (if silent, normally these are
noncurrent assets)
1. Advances to officers, shareholders, directors, and affiliates – usually large amount of money
2. Deposits
Special case
Subscription receivable – not currently collectible, reduction to equity (within 12 months-CA; more than 12
months-not NCA, but part of equity and deducted from equity)
II. Measurement (As stated by IFRS 9: Financial Instruments)
General Application:
A. Initial – fair value plus transaction cost

If it does not represent Fair Value (Fair Value ≠ Face Amount)

Level 1 – identical in active market
Level 2 – similar in active market or identical in inactive market
Level 3 – unobservable data (the company will project the fair value of product or receivable)

Active market – number of buyers and sellers are sufficient; prices of products are fairly represented
Inactive market - number of buyers and sellers are insufficient; prices of products are not fairly represented

B. Subsequent – amortized cost

Face amount – the amount of value borrowed; In notes, how much is the amount stated payable by the customer
Amortized Cost – net realizable value; how much will be received at the maturity date of receivable

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Actual Application:

TYPE OF RECEIVABLE INITAIL MEASUREMENT SUBSEQUENT MEASUREMEMENT

Short-term Face Amount Net Realizable Value
Long-term: Interest-bearing Face Amount Face Amount less Impairment
Effective Rate = Contract Rate Loss
Long-term: Interest-bearing Present Value using effective rate Amortized Cost
Effective Rate ≠ Contract Rate
Long-term: Noninterest-bearing Present Value using effective rate Amortized Cost

SALES DISCOUNT:
GROSS & NET METHOD

I. What Is Sales Discount?

- A Cash Discount (Seller-Sales Discount; Buyer-Purchase Discount
- To induce timely payment by the buyer
- Sales Discount - contra-revenue account; deducted on Sales in the Income Statement
- Sales Discount Forfeited – adjunct account; added to Sales to determine Net Sales

*Trade Discount – induces the buyer to complete the sales transaction; may also be due to large number of items
bought.
II. Gross Method
- Sales and Accounts Receivable are recorded, gross of discounts (discounts not yet deducted)
- Practically adopted by most entities
III. Net Method
- Sales and Accounts Receivable are recorded, net of discounts (discounts already deducted)
- Entity assumes that customer will avail the sales discount
- Theoretically preferred in financial reporting (discounts are already estimated)

Illustration: Romelita Co. sold goods costing P50,000 for P100,000, 2/10. n/30
(2 – discount rate, 10 – discount period, 30 – credit period)
TRANSACTION GROSS METHOD NET METHOD
Sale Dr. Accounts Receivable 100,000 Dr. Accounts Receivable 98, 000
Cr. Sales 100,000 Cr. Sales 98, 000

Dr. Cost of Goods Sold 50,000 Dr. Cost of Goods Sold 50,000
Cr. Merchandise Inventory 50,000 Cr. Merchandise Inventory 50,000
Collection within Dr. Cash 98,000 Dr. Cash 98,000
discount period Dr. Sales Discount 2,000 Cr. Accounts Receivable 98,000
Cr. Accounts Receivable 100,000
Collection beyond Dr. Cash 100,000 Dr. Cash 100,000
discount period Cr. Accounts Receivable 100,000 Cr. Accounts Receivable 98,000
Cr. Sales Discount Forfeited 2,000

Net Realizable Value

Accounts Receivable
(Allowance for Doubtful Accounts)
(Allowance for Sales Returns & Sales Discounts)
= Net Realizable Value / Amortized Cost or
Carrying Amount of Accounts Receivable
Bad Debt Expense
- Uncollectible accounts receivable
I. Direct Write-off Method
- not acceptable under IFRS but is required for tax purposes.
- bad debt expense are recorded only when certainly uncollectible.
II. Allowance Method (acceptable)
- required under IFRS but is not allowed for tax purposes
- bad debt expense are estimated every reporting period.

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Illustration: Bad Debt Expense

Romelita Co. had the following transactions.
• Dec. 1 Estimated uncollectible accounts receivable amounted to P20,000
• Dec. 31 P5,000 accounts receivable becomes certainly uncollectible.
• Jan. 5 Previous write-off of P3,000 is recovered and collected.
The company also reported P70,000 Accounts Receivable in the Balance Sheet.

Journal Entries:
Date Direct Write-off Method Allowance Method
Dec. 1 No journal entry is required. Dr. Bad Debt Expense 20,000
Cr. Allowance for Doubtful Accounts 20,000
31 Dr. Bad Debt Expense 5,000 Dr. Allowance for Doubtful Accounts 5,000
Cr. Accounts Receivable 5,000 Cr. Accounts Receivable 5,000
Jan. 5 Dr. Accounts Receivable 3,000 Dr. Accounts Receivable 3,000
Cr. Gain from Recoveries 3,000 Cr. Allowance for Doubtful Accounts 3,000

Dr. Cash 3,000 Dr. Cash 3,000

Cr. Accounts Receivable 3,000 Cr. Accounts Receivable 3,000
OR OR
Dr. Cash 3,000 Dr. Cash 3,000
Cr. Gain from Recoveries 3,000 Cr. Allowance for Doubtful Accounts 3,000

Analysis: Effect on Net Realizable Value

Date Direct Write-off Method Allowance Method
Dec. 1 AR balance 70,000 AR balance 70,000
ADA balance 20,000
NRV 50,000
31 AR balance 70,000 Write-off do not AR balance 65,000
affect the NRV ADA balance 15,000
NRV 50,000
Jan. 5 Recovery AR balance 70,000 Recovery decreases AR balance 65,000
does not the NRV ADA balance 18,000
affect NRV NRV 47,000

Estimation of Doubtful Accounts

I. Income Statement Method
• Percentage of Sales – estimated uncollectible is based on net credit sales; represents Bad Debt Expense.
II. Balance Sheet Method
• Percentage of Accounts Receivable – estimated uncollectible is based on balance of accounts receivable;
represents the ending balance of Allowance for Doubtful Accounts.
• Aging of Accounts Receivable - estimated uncollectible is based on aged accounts receivable; represents
the ending balance of Allowance for Doubtful Accounts.

Illustration: Allowance for Doubtful Accounts Estimation

Romelita Co. had the following account balances.
Accounts Receivable P150,000
Allowance for Doubtful Accounts (unadjusted) P5,000
Net Credit Sales P300,000
The company estimates that the percentage of uncollectible is 15%.

Computation of Bad Debt Expense

Percentage of Sales Percentage of Accounts Receivable
Net Credit Sales 300,000 Accounts Receivable 150,000
Uncollectible x15% Uncollectible x 15%
Bad Debt Expense 45,000 Ending ADA 22,500
Beginning ADA + 45,000 Beginning ADA (5,000)
Ending ADA 50,000 Bad Debt Expense 17,500
Dr. Bad Debt Expense 45,000 Dr. Bad Debt Expense 17,500
Cr. Allowance for Doubtful Accounts 45,000 Cr. Allowance for Doubtful Accounts 17,500

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What if there are write-off and recoveries at year end?

Illustration: Allowance for Doubtful Accounts Estimation

Romelita Co. had the following account balances.
Accounts Receivable P150,000
Allowance for Doubtful Accounts (unadjusted) P5,000
Net Credit Sales P300,000
The company estimates that the percentage of uncollectible is 15%.
• Certainly uncollectible P10,000
• Recovery of past write-off P3,000

Computation of Bad Debt Expense

Percentage of Sales Percentage of Accounts Receivable
Net Credit Sales 300,000 Accounts Receivable 150,000
Uncollectible x15% Uncollectible x 15%
Bad Debt Expense 45,000 Ending ADA 22,500
Beginning ADA + 45,000 Beginning ADA (5,000)
Write-off (10,000) Write-off + 10,000
Recovery + 3,000 Recovery (3,000)
Ending ADA 43,000 Bad Debt Expense 24,500
Dr. Allowance for Doubtful Accounts 10,000 Dr. Allowance for Doubtful Accounts 10,000
Cr. Accounts Receivable 10,000 Cr. Accounts Receivable 10,000

Dr. Cash 3,000 Dr. Cash 3,000

Cr. Allowance for Doubtful Accounts 3,000 Cr. Allowance for Doubtful Accounts 3,000

Dr. Bad Debt Expense 45,000 Dr. Bad Debt Expense 24,500
Cr. Allowance for Doubtful Accounts 45,000 Cr. Allowance for Doubtful Accounts 24,500

Illustration: Aging of Accounts Receivable

Romelita Co. had the following account balances.
Accounts Receivable P150,000
Allowance for Doubtful Accounts (unadjusted) P5,000
The company estimates the percentage of uncollectible as follows:
30 days past due 5%
60 days past due 15%
90 days past due 40%

Computation of Bad Debt Expense

Amount Age % of uncollectible Uncollectible
80,000 30 days past due 5% 4,000
50,000 60 days past due 15% 7,500
20,000 90 days past due 40% 8,000
Ending ADA 19,500
Beginning ADA (5,000)
Bad Debt Expense 14,500
Dr. Bad Debt Expense 14,500
Cr. Allowance for Doubtful Accounts 14,500

Can ADA have a debit balance due to high amount of write-off?

Yes, if management’s estimate is significantly incorrect.

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NOTES AND LOANS RECEIVABLE

Definition of Note Receivable
I. Legal Definition
A negotiable promissory note is an unconditional promise in writing made by one person to another, signed by
the maker, engaging to pay on demand, or at fixed or determinable future time, a sum certain in money to
order or to bearer.

Measurement and Presentation of Note Receivable

I. Presentation
- Current Asset, except when subject to unusual credit arrangement exceeding 12 months or operating cycle,
whichever is longer.
- Operating cycle – the time between the acquisition of assets for processing and their realization in cash or cash
equivalents.
Example:
Romelita Co. sells heavy equipment and usually provide 16 months credit period to its customers.
*use operating cycle of 16 months instead of 12 months
The entity’s Notes Receivable are as follows:
6 months Notes Receivable --> Current Asset
15 months Notes Receivable --> Current Asset
24 months Notes Receivable (special arrangement: related-party transaction) --> Noncurrent Asset

II. Measurement (As stated by IFRS 9: Financial Instruments)

General Application:
A. Initial – fair value plus transaction cost

If it does not represent Fair Value *rare cases (Fair Value ≠ Face Amount)
Level 1 – identical in active market
Level 2 – similar in active market or identical in inactive market
Level 3 – unobservable data (the company will project the fair value of product or receivable)

Active market – number of buyers and sellers are sufficient; prices of products are fairly represented
Inactive market - number of buyers and sellers are insufficient; prices of products are not fairly represented

B. Subsequent – amortized cost (Carrying Amount +/- Interest Amortization – Impairment Loss)

Face amount – the amount of value borrowed; In notes, how much is the amount stated payable by the customer
Amortized Cost – net realizable value; how much will be received at the maturity date of receivable

Actual Application:

TYPE OF RECEIVABLE INITAIL MEASUREMENT SUBSEQUENT MEASUREMEMENT

Short-term Face Amount Net Realizable Value
Long-term: Interest-bearing Face Amount Face Amount less Impairment
Effective Rate = Contract Rate Loss
Long-term: Interest-bearing Present Value using effective rate Amortized Cost
Effective Rate ≠ Contract Rate
Long-term: Noninterest-bearing Present Value using effective rate Amortized Cost

HOW TO COMPUTE PRESENT VALUE?

- Time concept of money (the value of money in the past is not the same as in the present, same happens to future)

PV – Present value
CF – Cash flow (how much should be paid in the future)
r – rate (interest rate in market)
-n – number of years/payment before it is paid in the future

I. Present Value of 1 – used for one-time payment formula: PV = CF X (1+r) -n

Example: How much money is needed today to accumulate P100,000 in the 10 years, assuming the effective interest rate is
12% compounded annually.
PV = P100,000 X (1+.12)-10 = P32,197.32

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II. Present Value of Ordinary Annuity - used for series of equal payments starting at the end of the period.
𝟏−(𝟏+𝒓)−𝒏
formula: PV = CF X
𝒓
Example: How much is the value today (January 1) of a P20,000 3-year semi-annual payment every June 30 and December
31, assuming the effective interest rate is 10%.
𝟏−(𝟏+.𝟎𝟓)−𝟔
PV = 20,000 X = P101,513.84
.𝟎𝟓

III. Present Value of Annuity Due – used for series of equal payments starting at the beginning of the period
(advance payment)
𝟏−(𝟏+𝒓)−𝒏
formula: PV = CF X [ x (1+r)]
𝒓
Example: How much is the value today (June 30) of a P20,000 3-year semi-annual payment every June 30 and December
31, assuming the effective interest rate is 10%.
𝟏−(𝟏+.𝟎𝟓)−𝟔
PV = 20,000 X [ x (1+.05)] = P106,589.53
.𝟎𝟓

1. INTEREST-BEARING NOTE
I. Components
a. Principal
b. Interest Rate
• Contract Rate – Stated Rate; the actual interest received; written on the Note.
• Effective Rate – Market Rate; interest earned; actual interest rate in the market; rate used in
present value computation
c. Maturity Date
II. Effective Rate = Contract Rate
A. One-time Payment
Illustration: On January 1, Romelita Co. provide services to a client and received 2-year P400,000 10%
note. Interest will be received every December 31.

Computation:
PV of Principal = P400,000 x 1.1-2 = 330,578.51
1−(1+1)−2
PV of Interest = P40,000 x = 69,421.49
.1
PV of the Note Receivable = 330,578.51 + 69,421.49 = 400,000 PRESENT VALUE = FACE VALUE

Journal Entries: Assumption: There is no market rate, so it is assumed that it is equal to the contract rate.
Face Amount P400,000 Carrying Amount P400,000
Contract Rate 10% Market Rate 10%
Year 1 Jan1 Dr. Notes Receivable 400,000
Cr. Service Revenue 400,000
Dec 31 Dr. Cash 40,000
Cr. Interest Revenue 40,000
Year 2 Dec 31 Dr. Cash 440,000
Cr. Interest Revenue 40,000
Cr. Notes Receivable 400,000

B. Installment
Illustration: On January 1, Romelita Co. provide services to a client and received 2-year P400,000 10%
note. P200,000 plus interest will be received every end of the year.

Computation:
1−(1+1)−2
PV of Principal = P400,000 x = 347,107.44
.1
PV of Interest on Year 1 = P40,000 x 1.1-1 = 36,363.64
PV of Interest on Year 2 = P20,000 x 1.1-2 = 16,528.92
PV of the Note Receivable = 347,107.44 + 36,363.64 + 16,528.92 = 400,000 PRESENT VALUE = FACE VALUE

Journal Entries: Assumption: There is no market rate, so it is assumed that it is equal to the contract rate.
Face Amount P400,000 Carrying Amount P400,000
Contract Rate 10% Market Rate 10%

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Year 1 Jan1 Dr. Notes Receivable 400,000

Cr. Service Revenue 400,000
Dec 31 Dr. Cash 240,000
Cr. Interest Revenue 40,000
Cr. Notes Receivable 200,000
Year 2 Dec 31 Dr. Cash 220,000
Cr. Interest Revenue 20,000
Cr. Notes Receivable 200,000

III. Effective Rate ≠ Contract Rate

A. One-time Payment
Illustration: On January 1, Romelita Co. provide services to a client and received 2-year P400,000 10%
note. Interest is compounded semi-annually. The market rate for interest is 8%.

Computation:
PV of Principal = P400,000 x 1.04-4 = 341,921.68
1−(1+.04)−4
PV of Interest = P20,000 x = 72,597.90
.04
PV of the Note Receivable = 341,921.68 + 72,597.90 = 414,591.58 PRESENT VALUE > FACE VALUE
PREMIUM
AMORTIZATION SCHEDULE (Effective Interest Method)
Date Interest Received Interest Revenue Amortization Carrying Amount
FA x CR CA x ER Int. Inc – Int. Rec
Y1 Jan 1 P414,520
Jun 30 20,000 16,581 3,419 411,101
Dec 31 20,000 16,444 3,556 407,545
Y2 Jun 30 20,000 16,302 3,698 403,847
Dec 31 20,000 16,153 3,847 400,000
Total 80,000 65,480 14,520

Journal Entries:
Face Amount P400,000 Carrying Amount P414,520
Contract Rate 10% Market Rate 8%
Year 1 Jan1 Dr. Notes Receivable 400,000
Dr. Premium on NR 14,520
Cr. Service Revenue 414,520
Jun 30 Dr. Cash 20,000
Cr. Interest Revenue 16,581
Cr. Premium on NR 3,419
Dec 31 Dr. Cash 20,000
Cr. Interest Revenue 16,444
Cr. Premium on NR 3,556
Year 2 Jun 30 Dr. Cash 20,000
Cr. Interest Revenue 16,302
Cr. Premium on NR 3,698
Dec 31 Dr. Cash 420,000
Cr. Interest Revenue 16,153
Cr. Premium on NR 3,847
Cr. Notes Receivable 400,000
B. Installment
Illustration: On January 1, Romelita Co. provide services to a client and received 2-year P400,000 10%
note. P200,000 plus interest will be received every end of the year. The market rate for interest is 12%.

Computation:
1−(1+.12)−2
PV of Principal = P400,000 x = 338,010.20
.12
PV of Interest on Year 1 = P40,000 x 1.12-1 = 35,714.29
PV of Interest on Year 2 = P20,000 x 1.12-2 = 15,943.88
PV of the Note Receivable = 338,010.20 + 35,714.29 + 15,943.88 = 389,668.37 PRESENT VALUE < FACE VALUE
DISCOUNT

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AMORTIZATION SCHEDULE (Effective Interest Method)

Date Interest Received Interest Revenue Amortization Principal Carrying
FA x CR CA x ER Int. Inc – Int. Rec Collection Amount
Y1 Jan 1 P389,668.37
Dec31 40,000 46,760 6,760 200,000 196,428
Y2 Dec 31 20,000 23,572 3,572 200,000 0
Total 60,000 70,332 10,332

2. NONINTEREST-BEARING NOTE – no Contract/Stated Rate; does not mean it has no interest (interest and principal is
included on the face amount); always Discount.
I. Components
a. Principal
b. Interest Rate
• Effective Rate – Market Rate (interest earned)
c. Maturity Date
II. Contract Rate ≠ Effective Rate – contract rate is automatically zero
A. One time payment
Illustration: On January 1, Romelita Co. provide services to a client and received 2-year P400,000 0%
note. The market rate for interest is 12%.

Computation:
PV of Principal = P400,000 x 1.12-2 = 318,877.55 PRESENT VALUE < FACE VALUE
PV of Notes Receivable = 318,877.55 DISCOUNT

AMORTIZATION SCHEDULE (Effective Interest Method)

Date Interest Revenue Amortization Carrying
CA x ER Amount
Y1 Jan 1 P318,878
Dec31 38,265 38,265 357,143
Y2 Dec 31 42,857 42,857 400,000
Total 81,122 81,122

Journal Entries:
Face Amount P400,000 Carrying Amount P318,878 Market Rate 12%
Year 1 Jan1 Dr. Notes Receivable 400,000
Cr. Discount on NR 81,122
Cr. Service Revenue 318,878
Dec 31 Dr. Discount on NR 38,625
Cr. Interest Revenue 38,625
Year 2 Dec 31 Dr. Discount on NR 42,857
Cr. Interest Revenue 42,857
Dr. Cash 400,000
Cr. Notes Receivable 400,000

B. Installment
Illustration: On January 1, Romelita Co. provide services to a client and received 2-year P400,000 0% note.
P200,000 will be received every beginning of the year, starting at the transaction date. The market rate for
interest is 8%.

Computation:
1−(1+.08)−2
PV of Principal = 200,000 X [ x (1+.08)] = 385,185.19 PRESENT VALUE < FACE VALUE
.08
PV of Notes Receivable = 385,185.19 – 200,000 = 185,185.19 DISCOUNT

AMORTIZATION SCHEDULE (Effective Interest Method)

Date Interest Revenue Amortization Principal Carrying
CA x ER Int. Inc – Int. Rec Collection Amount
Y1 Jan 1 200,000 P185,185
Dec31 14,815 14,815 200,000
Y2 Jan 1 200,000 0

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Journal Entries:
Face Amount P400,000 Carrying Amount P185,185 Market Rate 8%
Year 1 Jan 1 Dr. Cash 200,000
Dr. Notes Receivable 200,000
Cr. Discount on NR 14,185
Cr. Service Revenue 385,185
Dec 31 Dr. Notes Receivable 14,815
Cr. Interest Revenue 14,815
Year 2 Jan 1 Dr. Cash 200,000
Cr. Notes Receivable 200,000

ANALYSIS: ANALYSIS ON ONE-TIME PAYMENT NOTES RECEIVABLE:

Effective Rate = Contract Rate Par / Face ITEM PREMIUM DISCOUNT
Amount Interest Received Consistent Consistent
Effective Rate > Contract Rate Discount Interest Revenue Decreases over time Increases over time
Effective Rate < Contract Rate Premium Amortization Increases over time Increases over time
Noninterest-bearing Note Always issued Carrying Amount Approaching Face Approaching Face
at Discount Amount Amount

DISHONORED NOTES
I. Definition – notes that are unpaid at maturity
II. Accounting – transferred to Accounts Receivable
Journal Entry:
Dr. Accounts Receivable xxx
Cr. Notes Receivable xxx
Cr. Interest Receivable xxx

LOANS RECEIVABLE
I. Definition – loan granted by a financial institution (banks, lending companies, insurance companies, etc.) to a
borrower.
Loan – trade receivable of financial institutions.
II. Presentation – financial institutions do not classify assets and liabilities as current or noncurrent but in the order of
liquidity,
III. Measurement (As stated by IFRS 9: Financial Instruments)
General Application:
A. Initial – fair value plus TRANSACTION COST (Direct Origination Cost (all processing fees required) – Origination
Fees Received (already collected)) – fees to process the loan; processing fees.

If it does not represent Fair Value *rare cases (Fair Value ≠ Face Amount)
Level 1 – identical in active market
Level 2 – similar in active market or identical in inactive market
Level 3 – unobservable data (the company will project the fair value of product or receivable)

Active market – number of buyers and sellers are sufficient; prices of products are fairly represented
Inactive market - number of buyers and sellers are insufficient; prices of products are not fairly represented

B. Subsequent – amortized cost (Carrying Amount +/- Interest Amortization – Impairment Loss)

Face amount – the amount of value borrowed; In notes, how much is the amount stated payable by the customer
Amortized Cost – net realizable value; how much will be received at the maturity date of receivable

TYPE OF RECEIVABLE INITAIL MEASUREMENT SUBSEQUENT MEASUREMEMENT

Short-term Face Amount Net Realizable Value
Long-term: Interest-bearing Face Amount Face Amount less Impairment
Effective Rate = Contract Rate Loss
Long-term: Interest-bearing Present Value using effective rate Amortized Cost
Effective Rate ≠ Contract Rate
Long-term: Noninterest-bearing Present Value using effective rate Amortized Cost

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Illustration: On January 1, Romelita Co. granted a 2-year P500,000 10% loan to a borrower. Interest is received every
December 31. Additional processing are as follows:
Direct Origination Cost P741
Origination Fees Received P13,500

Initial Carrying Amount

Face Amount 500,000
Direct Origination Cost + 741
Origination Fees Received (13,500)
Present Value P487,241
EFFECTIVE RATE MUST BE COMPUTED
Methods:
1. Interpolation
2. Yield to Maturity
3. Trial and Error (exams)

PV of Loans Receivable 487,241

Contract Rate 10%
Interpolation (more accurate) Yield to Maturity
𝑃𝑉𝑟1− 𝑃𝑉 𝐹𝐴−𝑃𝑉
Formula: ER = r1 + 𝐶+
𝑃𝑉𝑟1− 𝑃𝑉𝑟2 Formula: YTM = (𝐹𝐴 𝑛
𝑋 .4)+(𝑃𝑉 𝑋 .6)
PV using 11% 491,437.38 50,000 +
500,000−487,241

YTM = (500,000 2
PV using 12% 483,099.49 𝑋 .4)+(487,241 𝑋 .6)
YTM = 11.45%
𝟒𝟗𝟏,𝟒𝟑𝟕.𝟑𝟖− 𝟒𝟖𝟕,𝟐𝟒𝟏
ER = 11 +
𝟒𝟗𝟏,𝟒𝟑𝟕.𝟑𝟖− 𝟒𝟖𝟑,𝟎𝟗𝟗.𝟒𝟗
ER = 11.50%

AMORTIZATION SCHEDULE (Effective Interest Method)

Date Interest Received Interest Revenue Amortization Carrying
FA x CR CA x ER Int. Inc – Int. Rec Amount
Y1 Jan 1 P487,241
Dec31 50,000 56,033 6,033 493,274
Y2 Dec 31 50,000 56,726 6,726 500,000
Total 100,000 112,759 12,759

Journal Entries:
Face Amount P500,000 Carrying Amount P487,241
Contract Rate 10% Market Rate 11.5%
Year 1 Jan 1 Dr. Loans Receivable 500,000
Cr. Discount on LR 12,759
Cr. Cash 487,241
Dec 31 Dr. Cash 50,000
Dr. Discount on LR 6,033
Cr. Interest Revenue 56,033
Year 2 Jan 1 Dr. Cash 550,000
Dr. Discount on LR 6,726
Cr. Interest Revenue 56,726
Cr. Loans Receivable 500,000

IMPAIRMENT OF LOAN RECEIVABLE

I. Credit Risk – probability of loss due to borrower’s default on contractual obligations.
A. Not significant increase in Credit-Risk or Low Credit-Risk
→ 12-month expected credit loss and Effective interest rate
B. Significant increase in Credit-Risk
→ Lifetime expected credit loss and Effective interest rate
C. Credit-Impaired
→ Lifetime expected credit loss and Credit-adjusted effective interest rate (change in the terms)

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 lOMoARcPSD|16421679

Illustration: On January 1, Romelita Co. granted a 2-year P500,000 10% loan to a borrower. Interest is received every
December 31. Additional processing are as follows: Initial Carrying Amount
Direct Origination Cost P781 Face Amount 500,000
Origination Fees Received P13,000 Direct Origination Cost + 781
The effective rate is 11% Origination Fees Received (13,000)
Present Value P487,781
At the end of the first year, the credit risk of the loan is:
Not Significant Increase Significant Increase Credit-Impaired
5% chance of default for the next 40% chance of default for the next 50% of the principal will be
12 months and 80% of principal 24 months and 70% of principal will uncollected and interests are
will be collected. be collected. also 50% of the original.

Journal Entries:
Year 1 Dr. Loans Receivable 500,000
Jan 1 Cr. Discount on LR 12,219
Cr. Cash 487,781
Dec Dr. Cash 50,000
31 Dr. Discount on LR 3,656
Cr. Interest Revenue 53,656 Carrying Amount = P491,437
Not Significant Increase Significant Increase Credit-Impaired
Principal 500,000 Principal 500,000 250,000 x 1.11-2 = 202,905.61
Collectible x .80 Collectible x .70 25,000 x
1−(1+.11)−2
= 42,813.08
Expected Collection 400,000 Expected Collection 350,000 .11
202,905.61 + 42,813.08 = 245,719
PV x 1.11-2 PV x 1.11-2
PV of Expected Collection 324,649 PV of Expected Collection 284,068
PV of Recoverable Amount 245,719
Carrying Amount (491,437) Carrying Amount (491,437)
Carrying Amount (491,437)
Expected Credit Loss 166,788 Expected Credit Loss 207,369
Impairment Loss 245,718
Probability x .05 Probability x .40
Impairment Loss 8,339 Impairment Loss 82,948

Date Not Significant Increase Significant Increase Credit-Impaired

Y1 Dr. Impairment Loss 8,339 Dr. Impairment Loss 82,948 Dr. Impairment Loss 245,718
Dec Cr. Allowance 8,339 Cr. Allowance 82,948 Cr. Allowance 245,718
31
Dr. Allowance 245,718
Dr. Discount on LR 4,282
Cr. Loans Receivable 250,000

Gross Carrying Amount 250,000

Gross Carrying Amount 491,437 Gross Carrying Amount 491,437 Allowance for Impairment (0)
Allowance for Impairment (8,339) Allowance for Impairment 82,948 Discount on LR (4,281)
Net Carrying Amount 483,098 Net Carrying Amount 408,489 Net Carrying Amount 245,719
Y2 Dr. Cash 50,000 Dr. Cash 50,000 Dr. Cash 25,000
Dec Dr. Discount on LR 4,058 Dr. Discount on LR 4,058 Dr. Discount on LR 2,029
31 Cr. Interest Revenue 54,058 Cr. Interest Revenue 54,058 Cr. Interest Revenue 27,029
*New Effective Rate may be necessary

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