LECTURE NOTES: RECEIVABLEs
RECEIVABLES $%nancial assets that represent a contractual right to receive cash or another %nancial asset from another entity.
Classifcation
As to Source &rade receivable $ claims arising from sale of goods or services 1. &rade in the normal course of business 2. 'on$trade receivables $ receivable other than trade receivables * Because of the application of t he normal operating cycle, trade receia!les are "enerall# classifed as current assets. Nor$al o%eratin" c#cle of c#cle of an entity is the time beteen the the acquisition acquisition of assets assets for processing processing and their realization realization in cash or cash equivalents. Meaning, it is the period required for cash cash to be converted converted into into inventories inventories through through purchase and production, inventories into receivable through sale, and receivable back into cash or cash equivalents through collections. * here the nor$al o%eratin" c#cle o& t'e !usiness e(tends !e#ond t)ele $ont's because $ont's because of long term credit, as in the case case of of certain certain installment receivable receivable (e.g., (e.g., installment installment sale for household appliances), in hich such accounts are an integral part of orking capital, it is proper to classify the receivable receivable as current current assets! hoever, the amount amount or estimate disclosed. thereof not realizable ithin telve months should be disclosed. current if they are reasonably *non$trade receivables are classied as current if e"pected to be realized realized in cash cash ithin telve telve months from from the date of balance balance sheet, regardless regardless of or notithstanding the length of operating cycle. cycle. #f not realized ithin ithin telve months, these are classi%ed as non*current assets.
* "ample of non$trade receivables loans to ocers and employees, advances to aliates, accrued interest and dividends, deposits to guarantee performance or payment subscription for the entity+s securities, etc. + Clarifcation , -urt'er iscussion /0 Custo$ers credit !alances is classi%ed as current lia!ilities. and included as part of trade and other payables. eferring to the illustration in your book, there is an entry (i.e., debit - and credit customers+ credit balance) making the - to increase because &he - account reports a balance of hp/00,000. 1hen e check the subsidiary ledger, e%nd that the said balance is incorrect. 2o3 4imply because the remainig balance of - is hp//0,000 (500,0006 7/0,000) representing the accounts of - and B. 1hy the - account reports only hp/00,000, it+s because the credit balance orth hp/0,000 coming from the account of 8 as being o9set. -s a result, the - balance is understated by hp/0,000, hence, e need to increase the - to re:ect the correct balance, then increase the liability to re:ect that e have a payable from customer 8. ;n the other hand, if the problem shos balances for di9erent types of receivable (i.e., notes receivable, accounts receivable, etc.) and you+ll be asked for the correct balance of trade and other receivable, you need not to include the customers+ credit balance, since, again it is classi%ed as current liability.
* "ample of non$trade receivables loans to ocers and employees, advances to aliates, accrued interest and dividends, deposits to guarantee performance or payment subscription for the entity+s securities, etc. + Clarifcation , -urt'er iscussion /0 Custo$ers credit !alances is classi%ed as current lia!ilities. and included as part of trade and other payables. eferring to the illustration in your book, there is an entry (i.e., debit - and credit customers+ credit balance) making the - to increase because &he - account reports a balance of hp/00,000. 1hen e check the subsidiary ledger, e%nd that the said balance is incorrect. 2o3 4imply because the remainig balance of - is hp//0,000 (500,0006 7/0,000) representing the accounts of - and B. 1hy the - account reports only hp/00,000, it+s because the credit balance orth hp/0,000 coming from the account of 8 as being o9set. -s a result, the - balance is understated by hp/0,000, hence, e need to increase the - to re:ect the correct balance, then increase the liability to re:ect that e have a payable from customer 8. ;n the other hand, if the problem shos balances for di9erent types of receivable (i.e., notes receivable, accounts receivable, etc.) and you+ll be asked for the correct balance of trade and other receivable, you need not to include the customers+ credit balance, since, again it is classi%ed as current liability.
As to Ti$in" o& Collection 7. 8urrent receivable <. 'on$current receivable
As to Ti$in" o& Collection 7. 8urrent receivable <. 'on$current receivable
LECTURE NOTES: ACCOUNTS RECEIVABLE Initial Reco"nition: Measured initially at face value or original invoice amount. Su!seuent $easure$ent: Measured at net realizable value eductions to consider in esti$atin" t'e net relia3a!le alue 7 -lloance for freight charge =;B destination > the seller shall be responsible for the freight charges up =;B shipping point > buyer ill pay for the transportation charge from the po point of destination =reight collect > freight charge is paid by the buyer =reight prepaid > freight charge on the shipped is already paid by the sell < -lloance for sales returns ? -lloance for sales discounts Trade iscounts > also knon as volume or quantity discounts, are means to the price actually charged to the buyer. > are alays deducted from the list price prior to recordin from a credit sales transaction. > "ample -- Manufacturing sells merchandise on acco on @uly 7A, <07<. -- alloed trade dis f 70, 70
LECTURE NOTES: ACCOUNTS RECEIVABLE Initial Reco"nition: Measured initially at face value or original invoice amount. Su!seuent $easure$ent: Measured at net realizable value eductions to consider in esti$atin" t'e net relia3a!le alue 7 -lloance for freight charge =;B destination > the seller shall be responsible for the freight charges up =;B shipping point > buyer ill pay for the transportation charge from the po point of destination =reight collect > freight charge is paid by the buyer =reight prepaid > freight charge on the shipped is already paid by the sell < -lloance for sales returns ? -lloance for sales discounts Trade iscounts > also knon as volume or quantity discounts, are means to the price actually charged to the buyer. > are alays deducted from the list price prior to recordin from a credit sales transaction. > "ample -- Manufacturing sells merchandise on acco on @uly 7A, <07<. -- alloed trade discounts of 70, 70 =;B shipping point. =reight paid to the shipper by -- M &he invoice price of the merchandise is computed as foll 700,000".D0".D0".D/ E FA,D/0 -ccounts eceivable 4ales
FA,D/0.00
Anot'er $et'od in recordin" credit sales 4aside &ro$ "ross and net $et'od0 c. -lloance method Gsing the illustration above, belo are the entries using the alloance method -ccounts eceivable FH,D/0.00 -lloance for sales discount 4ales 8ash
*
7,/?D.00 F/,577.00 <,000.00
**
*- plus <,000 freight paid by the shipper but should be paid by the buyer si **< of credit sales, FA,D/0
ntries if collection is ithin the discount period 8ash -lloance for sales discount -ccounts eceivable
ntries if collection is beyond the discount period
FF,577.00 7,/?D.00 FH,D/0.00
ntries if collection is beyond the discount period 8ash FH,D/0.00 -lloance for sales discounts 7,/?D.00 4ales discount forfeited -ccounts eceivable
* *
7,/?D.00 FH,D/0.00
Ot'er clarifcations accounts ritten o9 included in the balance per aging should be deducted since it is ritte per aging, Imore than one yearI age correspond to 700 estimated uncollectible even suc
to the point of destination int of shipment to the
er.
of converting a catalog list price g the accounts receivable arising
nt ith a list price of hp700,000 and /. &erms ere
FA,D/0.00
collection beyond
nce =;B shipping point
n o9, thereby no need to provide alloance h is not indicated in the problem
LECTURE NOTES: NOTES RECEIVABLE
LECTURE NOTES: NOTES RECEIVABLE Initial Reco"nition: 4hort term Jong term
$ at face value hich is equal to its present value $ interest bearing note $ at face value hich is non$interest note $ at present value
Su!seuent $easure$ent: Measured at amortized cost > for interest beaing note, subsequent to the date of the note, the prese face value plus accrued interest
Additional Note: > 1hen a non$interest bearing note is e"changed solely for cash and no other rights and the present value of the note on the date it is received, hich is its amortized cost, is proceeds e"changed. > #f a non$interest bearing note is e"changed for property, goods or services, the prese on the date it is received is the fair market value of the property, goods or services or value of the note, hichever is more clearly determinable.
Sa$%le %ro!le$ related to i$%air$ent loss @on, one of 4onic 8ompany+s credit customers, is e"periencing %nancial diculties and in its %nancial performance. &he %rm is unable to service its debt and as result has mi of this note and accured interest ith 4onic 8ompany. &he principal amount of the not is already due) ith annual interest of 70 payable annually. -ccrued interest balance is /0,000. @on management has negotiated a modi%cation of its debt terms ith 4oni 4onic 8ompany agreed to the folloing ne terms > =orgive the accrued interest at Kecember ?7, <075 > "tend the payment of the principal for to years > educe the interest rate (payable annually) to H 2o much impairment loss should be recognized by 4onic 8ompany on Kecember ?7, -nser 4olution
AF,?H0.00 L of the note L of principal L of interest
57?,<00.00 * AD,5<0.00 **
carrying value impairment loss
5H<,A<0.00 //0,000.00 456789.0
*time factor uses 70,
its present value
t value is equal to the
privileges are e"changed, qual to the cash
t value of the note the fair market
a donard trend sed the payment is /00,000 (hich at Kecember ?7, <075 8ompany.
<0753
