Chapter 3 Receivables

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Chapter 3 Receivables

RECEIVABLES

- Any legitimate claim from others for money, goods or services- Claims that are expected to be settled by the receipt of cash

a) Amounts collectible from customersb) Accrued revenuec) Other items such as loans and advances to offices etc.d) Legitimate claims against suppliers and insurance companiese) Claims against arising from nonrecurring transactionsCLASSSIFICATION

As to source:

Trade Receivables -from sale of goods/services in the normal course of business

Non-trade Receivablesfrom sources other than from sale of goods/services in the normal course of

business

Examples:

a) Loans to officers and employeesb) Advances to affiliatec) Accrued interest and dividendsd) Deposits to guarantee performance/payment or to cover possible damages/lossese) Subscriptions for the entitys securitiesf) Deposit with creditors, claims for losses and damagesg) Claims for tax refunds/rebatesh) Claims against common carriers for damaged/lost goodsi) Claims against creditors for returned, damaged or lost goodsAs to classification:

Current Receivables expected to be collected within a year or during the current operating cycle*

Non-current Receivables non-trade receivables that are not reasonably expected to be realized in

cash within 12 mos from eop

*Normal Operating Cycle

- time between the acquisition of assets for processing and their realization in cash or cash equivalents- -

- period required for cash to be converted onto inventories through purchase and production,

inventories into receivables trough sale and receivables back into cash/cash equivalents throughcollection

RECOGNITION

Trade discounts

- Volume/quantity discounts- Means of converting a catalog list price to the prices actually charged to the buyer


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- Always deducted from the list price prior to recording the AR arising from a credit transactionCash discounts

- Sales discounts from the sellers point of view- Reductions from the sales price as an inducement for prompt payment of an account- Reduce gross sales revenue

a) Gross method - records discount when taken by customersRecord revenue at gross amount of sales

When customer takes the discount record cash discount

- Lacks conceptual validity- Simplest and most widely used method because the cash discount is usually immaterial and

record keeping is less complicated

b) Net methodRecord revenue at gross amount of sales less cash discount

When customer forfeits discount, record discounts taken

Report discounts forfeited as other revenue

- Theoretically preferred over the gross method- Initially recognizes AR at its amortized cost- Requires an adjusting entry at yearend for SD forfeited

c) Allowance MethodRecord revenue at gross amount and available CD record as allowance for SD (credit)

When customer takes discount allowance for SD is debited

If accounts collected beyond discount period Allowance for SD is debited and SD

forfeited account is credited

INITIAL MEASUREMENT

Short term receivables

Fair Value = Face value / Original invoice amount

Interest bearing Long term receivables

Fair Value = Face value

Non-interest bearing Long term receivables

Fair Value = Present Value of all Future Cash Flows Discounted using the Prevailing

Market Value of Interest for Similar transaction

SUBSEQUENT RECOGNITION

NRV = Gross AR Estimated ADA


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- Amount of cash expected to be collected/estimated recoverable amounta) Allowance for Freight Charge

1. FOB destination-Buyers ownership upon receipt-Seller responsible of freight charge

2. FOB shipping- Buyers ownership upon shipment- Buyer responsible of freight

3. Freight collect- Paid by buyer

4. Freight prepaid- Paid by seller

b) Allowance for Sales ReturnSales return XX

Allowance for sales return XX

c) Allowance for Sales DiscountSame as Cash Discount

d) Allowance for Doubtful AccountsAccount becomes uncollectible Bad debt loss

1. Allowance MethodRecognize bad debt loss if the accounts are doubtful of collection

DA XX

ADA XX

Worthless/ Uncollectibe

ADA XXAR XX

- Based on matching principle- Estimated bad debts are matched against revenue-Must be followed if amount are material

2. Direct Write-off methodRecognize bad debt loss only when proved to be worthless/uncollectible

Bad debts XX

AR XX

No entry if only doubtful of collection

- Used by small business- BIR recognize for income tax purposes- Violates the matching principle because bad debt loss often recognized in later accounting

period

Methods of Estimating DA

FOB destination, freight collect

Freight out XX

Allowance for freight charge XX


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1. Aging the AR/ SFP approach- analysis of the accounts where they are classified intonot due/past due

2. Percent of AR/ SFP approachcertain rate is multiplied by the open accounts at theend of the period

3. Percent of Salesamount of sales for the year is multiplied by a certain rate to get DAexpense

Documents

Chapter 3 Receivables