CHAPTER 1

Generally Accepted Accounting Principles Exclusions/Deductions

- It represents a set of accounting standards,
principles, and procedures that are widely 1. Postdated Checks – the cash balance is
accepted and used for financial reporting and restored and liability is recognized (add back)
preparation of financial statements in a specific 2. Stale Checks – the checks became stale if not
jurisdiction. enchased within 6 months. The cash is restored
- GAAP provides a common language for if the amount is material
financial reporting, ensuring that companies’
3. Customer’s Check mark NSF/AUD/DAIF
financial statements are consistent, comparable
and understandable.

Compute for cash as of December 31, 2020

Undeposited Cash collections 1 000 000 
CASH AND
Customer Check dated 10/31/20 5 000 
CASH EQUIVALENTS
Customer check dated 1/1/2021 1 000
Customer dated 1/1/19 3 000
 Cash – includes cash, money and any other NSF check reviewed from 10 000
negotiables instruments that is payable in money customer dated October 1, 2020
and acceptable by the bank for deposit and Total Cash 1 005 000
immediate credit, checks, bank drafts and money
orders because these are acceptable by the bank
for deposit or immediate encashment

 Cash Equivalents – are short-term, highly liquid 1. Cash in Bank

investments that are easily convertible to known a. Savings Deposit
amounts of cash and have original maturities of b. Demand Deposit
three months or less. c. Time Deposit

Exclusions/Deductions

 CASH 1. Earmarked Deposits (longterm purpose)

2. Escrow deposits
- To be reported as cash, an item must be
3. Compensating balance (legally restricted)
unrestricted in use
- The cash must be readily available and - It is cash if not legally restricted
not subject to any restrictions, 4. Cash in closed banks
contractual or otherwise. 5. Cash in foreign bank subject to restrictions

2. Cash on Hand Additions:

a. Undeposited collections
b. Bank Drafts 1. Company’s undelivered check
c. Cashiers’ or managers checks or 2. Company’s postdated checks
treasurers’ checks 3. Company’s long outstanding checks
d. Customer’s Checks 4. Bank overdraft which was deducted from
e. Traveler’s Check other banks
f. Postal Money order
 Compute for cash in bank as of December 31, 2020  CASH EQUIVALENTS
- Should be purchased three months
CIB – PCIM checking 1 1 000  before maturity
CIB – PCIM checking 2 (100) deduct
a. Treasury Bills (T Bills)
PNB Account (100) Ignore
b. Commercial paper
Check drawn from PCIM 40
checking account payable to Add c. Money Market Funds
supplier, recorded on back d. Banker’s Acceptance
December 31, 2020, e. Certificate of Deposits (CDs)
delivered on Jan 1, 2021 f. Treasury warrant
Check drawn from PCIB 50
checking account payable to Add g. Treasury Notes
supplier, recorded and Back h. Treasury Bonds/ Government Bonds
delivered on December 31, i. Redeemable Preference Share
2020, dated Jan 1, 2021
Total Cash in Bank 990 Cannot be cash equivalents:
a. Treasure Shares
b. Equity Shares
3. Cash Fund Compute for cash in as of December 31, 2020
a. Petty Cash Fund Money Market (acquired
b. Change Fund Nov 1, 2020 due on March 120
c. Interest Fund 1, 2021) 000
d. Tax fund Treasury Bills (acquired
e. Dividend Fund Dec 31, 2020, due on
March 31, 2021)
30 000

f. Payroll Fund
Redeemable preference
shares (acquired Dec 31, 40 000
Fund for noncurrent operations 2020, due on March 31,
2021)

a. Plant expansion **
Equity securities (expected
b. Sinking Fund
to be sold in Han 31, 2021 80 000
c. Postretirement benefits of employees Total Cash in Bank 750
d. Contingent Fund 000
e. Insurance Fund
f. Preferred Fund Compute for CCE in as of December 31, 2020
g. Preferred Shares Redemption Cash in Bank – PCIB 800
checking account 1 (200 1 000 only
Compute for cash in as of December 31, 2020 legally restricted as
compensating balance)
Payroll Fund 150  Cash in Bank – PCIB
Plant expansion fund
(disbursed 2022)
800 checking account 2 (200
informally restricted as
1 000

Plant expansion fund 1 000 compensating balance)
(disbursed 2021) Cash in closed Banks 30
Bond sinking Fund (Bond 400 Cash in foreign banks -
to be paid August 2022) restricted 20
Bond sinking Fund (Bond 500  ABC bank savings deposit – 120 LTI
to be paid March, 2021) contingent Fund
Total Cash in Bank 650 ABC bank savings deposit – 200 LTI
preference share
Total Cash in Bank 1 800
 CASH
Earmarked deposits (long term purpose)
Escrow Deposits
Not included Not legally restricted Included
as Cash Compensating Legally restricted deduct
balance
(Exclusions) Cash in foreign Not legally restricted add
CASH IN BANK bank Legally restricted Ignore
Cash in closed banks
Included and Company’s undelivered Checks

should be add Company’s Postdated Checks

Company’s long outstanding checks
back
Same bank Offset (deduct)
Bank overdraft Different bank Ignore
Petty Cash Fund
Silent/ In Change Fund
Dividend Fund
General Interest Fund
Unless, stated that its Tax fund
more than 12 months Payroll Fund
CASH FUND
Will Never Plant Expansion Fund
Sinking Fund
Depends on their Postretirement benefits of employees
usage/purpose. Cash Contingent Fund
if it is for current Insurance Fund
operations Preferred Share redeemable Funds
CASH EQUIVALENTS
Treasury Bill
Silent/ In Commercial paper
Money Market Funds
General Banker’s Acceptance
Unless, stated that its Certificates of Deposit (CDs)
more than 3 months
Treasury warrant
Pampagulo sa CCE
Items Correct Classification
Cash in Closed banks Noncurrent Assets
Bank overdraft different banks Current Liability
Compensating Balance – short term legal restriction Current receivable
Compensating Balance – long term legal restriction Noncurrent receivable
IOU (I owe You) Receivable
Equity Securities Short or Long term Investments
Callable Preference Shares Can’t be CCE ( Short/long term investments
Redeemable Preferences May be CCE (otherwise, Short/term liability)
NSF Checks receivables
Unused credit lines Disclosure Only
Escrow Deposits Other current/noncurrent assets with liability
Postage Stamps Supplies
PROBLEM 1-10
Tranvia Company related the following information on December 31, 2022:
Cash in checking account 350 000
Cash in money market account 750 000
Treasury bill, purchased Nov 1,2022,
maturing Jan 31, 2023 3 500 000
Time deposit purchased Dec 1, 2023,
maturing March 31, 2023 4 000 000
What amount should be reported as cash and cash equivalents on Dec 31, 2022?
a. 1 100 000 Cash in checking account 350 000
b. 3 850 000 Cash in money market account 750 000
c. 4 600 000 Time deposit 3 5000
d. 8 600 000
Total CCE P 4 600 000

PROBLEM 1-11
At year-end, Myra Company reported cash and cash equivalents which comprised the following:
Cash on hand 500 000
Demand Deposit 4 000 000
Certificate of Deposit 2 000 000
Postdated customer checks 300 000
Petty cash fund 50 000
Traveler Check 200 000
Manager Check 100 000
Money order 150 000

What amount should be reported as cash Cash on Hand 500 000

on Dec 31, 2022? Demand Deposit 4 000 000
a. 7 000 000 Petty Cash Fund 50 000
b. 4 800 000 Traveler Check 200 000
c. 6 800 000 Manager Check 100 000
d. 5 000 000 Money order 150 000
Total Cash P 5 000 000

PROBLEM 1-12
Starex Company provided the following information at year-end:
Checking account at metrobank 3 000 000
Employee postdated check 120 000
Foreign bank account unrestricted and in equivalent pesos 2 500 000
IOU from company president 500 000
NSF Customer Check 100 000
Petty cash fund, expense receipts P40 000 50 000
Postage Stamps 10 000
Treasury Bills 1 200 000
Treasury Bonds 500 000
Value added tax accounts 1 500 000
What amount should be reported as cash and cash equivalents?
a. 8 710 000 Checking account 3 000 000
b. 7 000 000 Foreign bank account 2 500 000
a. 8 210 000 Petty Cash (50 000 – 40 000) 10 000
b. 8 250 000 Treasury Bills 1 200 000
Value Added Tax 1 500 000
Total CCE P 8 210 000
PROBLEM 1-13
Thor Company provided the following data on Dec 31, 2022:
Checkbook balance 4 000 000
Bank statement balance 5 000 000
Check drawn on Thor’s account, payable to supplier,
dated and recorded on Dec 31, 2022
but not mailed until Jan 41,2023 500 000
Cash in sinking Fund 2 000 000
On Dec 31, 2022, what amount should be reported as cash under current assets?
a. 4 500 000
Checkbook balance 4 000 000
b. 5 500 000
Undelivered Checks 500 000
c. 3 500 000
Total cash P 4 500 000
d. 6 500 000

PROBLEM 1-14
On Dec 31, 2022, west Company had the following cash balance:
Cash in bank – current account 1 800 000
Petty cash fund – all funds were reimbursed at year-end 50 000
Time Deposit – due Feb 1, 2023 250 000
Savings deposit in bank closed by BSP 1 000 000

Cash in bank included P600 000 of compensating balance against short term borrowing arrangement
The compensating balance is legally restricted as to withdrawal
What total amount should be reported as cash and cash equivalents?
a. 1 500 000
b. 2 500 000 Cash in Bank – current account 1 800 000
c. 1 250 000 Less: compensating balance (600 000)
Petty cash fund 50 000
d. 2 100 000
Time Deposit 250 000
Total CCE P 1 500 000

PROBLEM 1-15
Baloney Company had the following account balances on December 31, 2022:

Cash in Bank 2 250 000

Cash on Hand 125 000
Cash restricted for addition to
plant in Jan 2023 1 600 000

Cash in bank included P600 00 of compensating balance against short-term borrowing arrangement.
The compensating balance is not legally restricted as to withdrawal
What total amount should be reported as cash under current assets
a. 1 775 000
b. 2 375 000 Cash in Bank 2 250 000
c. 3 375 000 Cash on hand 125 000
d. 3 975 000 Total cash P 2 375 000
PROBLEM 1-16
Yasmin Company provided the following on December 31, 2022:
Petty Cash fund 50 000
Current account – First Bank 4 000 000
Current account - Second Bank (overdraft) (150 000)
Money market placement – third bank 1 000 000
Time deposit – fourth Bank 2 000 000
A check for P 100 000 was drawn against First Bank current account dated and recorded Dec 29, 2022 but
delivered to payee on Jan 15, 2023
The fourth bank time deposit is set aside for land acquisition in early January 2023
What total amount should be reported as cash and cash equivalents on Dec 31, 2022?
a. 1 775 000 Petty Cash fund 50 000
b. 2 375 000 Current account – first bank 4 000 000
c. 3 375 000 Money market placement 1 000 000
d. 3 975 000 Undelivered checks 100 000
Total CCE P 5 150 000

PROBLEM 1-17
On December 31, 2022, Roma Company reported cash balance of P9 950 000
Undeposited collections 600 000
Cash in bank – BDO checking account 4 000 000
Undeposited NSF check received from customer
dated Dec 1, 2022 150 000
Undeposited check from a customer dated Jan 15, 2023 250 000
Cash in bank – BDO fund for payroll 1 000 000
Cash in Bank – BDO time deposit, 90 days 2 000 000
Cash in foreign bank restricted 1 500 000
Cash in Bank – BDO value added tax account 450 000
Total 9 950 000
On December 31, 2022, what total amount should be reported as cash and cash equivalents?
a. 7 600 000 Undeposited collections 600 000
b. 8 200 000 Cash in Bank – BDO checking account 4 000 000
c. 6 050 000 Cash in bank - BDO payroll fund 1 000 000
d. 8 050 000 Cash in bank – BDO time deposit, 90 days 2 000 000
Cash in bank – BDO VAT account 450 000
Total CCE P 8 050 000

PROBLEM 1-18
Ral Company reported the checkbook balance on dec 31, 2022 at P5 000 000 and held the following
items on same date:
Check payable to Ral, dated January 2, 2023 in
payment of a sale made in December 2022
not included in Dec 31 checkbook balance 2 000 000
Check payable to Ral, deposited Dec 15 and included
in Dec 31 checkbook balance, but returned by bank
on Dec 30 stamped “NSF”. The check was redeposited
on Jan 2, 2023 and cleared on Jan 9, 2023 500 000
Check drawn on Ral’s account, payable to vendor,
dated and recorded in Ral’s books on Dec 31, 2022
but not mailed until January 10, 2023 300 000
Certificate of Time deposit 1 000 000
What amount should be reported as cash on December 31, 2022?
a. 4 800 000 Checkbook Balance 5 000 000
b. 5 300 000 Customer’s NSF checks (500 000)
c. 6 500 000 Undelivered checks 300 000
Total Cash P 4 800 000
d. 5 800 000
PROBLEM 1-19
Everlast Company reported the following information at year-end:
 Share investments of P1 000 000 that are very actively traded
 Government treasury bills of P2 000 000 with a 10-year term but purchased on Dec 31 with
two months to go until maturity
 Cash of P3 400 000 in the form of coin, currency, saving account and checking account
 Commercial papers of P1 500 000 with the term of nine months but purchased on Dec 31
with three months to go until maturity.
What amount should be reported as cash and cash equivalents?
a. 4 800 000 Treasury Bills 2 000 000
b. 5 300 000 Cash 3 400 000
c. 6 500 000 Commercial papers 1 500 000
d. 5 800 000 Total Cash P 6 900 000

PROBLEM 1-20
Campbell company had the following account balances on Dec 31, 2022:
Petty cash fund 50 000
Cash on hand 500 000
Cash in bank – current account 4 000 000
Cash in bank – payroll account 1 200 000
Time deposit 1 000 000
Cash in bank – restricted for plant addition 500 000
Sinking fund set aside for bonds payable due June 30, 2023 2 000 000
The petty cash fund included unreplenished Dec 2022 petty cash expense vouchers of P 5 000 and employee
IOU of P5 000.
The cash on hand included a P100 000 check payable to Campbell dated Jan 31, 2023
In exchange for a guaranteed line of credit, the entity had agreed to maintain balance of P200 00 in the
unrestricted current bank account
What amount should be reported as cash and cash equivalents on Dec 31, 2022?
a. 8 640 000 Petty cash fund 50 000
b. 7 640 000 Less: expense vouchers & IOU (10 000)
c. 5 640 000 Cash on hand 500 000
d. 7 440 000 Postdated checks 100 000
Cash in bank – current account 4 000 000
Cash in bank – payroll account 1 200 000
Sinking Fund 2 000 000
Time deposit 1 000 000
Total Cash P 8 640 000
PROBLEM 1-21
Isabel Company provided following information on Dec 31, 2022:
Cash on Hand 200 000
Security Bank current account 5 000 000 Cash on Hand 200 000
Manila bank current account No.1 4 000 000 Security Bank current account 5 000 000
Manila bank current account Undelivered Checks 100 000
No.2 (bank overdraft) (500 000)
Manila bank current account No.1 4 000 000
BDO account for bond payable
due Dec 31, 2024 3 000 000 Bank overdraft (500 000)
United bank saving account for United bank Time deposit 2 000 000
equipment acquisition 250 000 Treasury Bills 1 000 000
United bank time deposit, 90 days 2 000 000 Total Cash P 11 800 000
Treasury bills 1 000 000
Check drawn against Security Bank current account for P100 000 dated and recorded Dec 31, 2022
was delivered to the payee Jan 15, 2023
What amount should be reported as cash and cash equivalents on Dec 31, 2022?
 CHAPTER 4

What is receivable? Gross Method

- Is a financial asset that represents a 1. Sale of merchandise for P 100 000, terms 5/10, n/30.
contractual right to receive cash or another Accounts Receivable 100 000
financial asset from another entity. Sales 100 000
2. Assuming collections within discount period
CLASSIFICATIONS
Cash 95 000
1. Trade Receivables Sales Discount 5 000
- Refer to claims arising from sale of
Accounts Receivable 100 000
merchandise or services in the ordinary
course of business. 3. collections beyond discount period
- Expected to realized in cash within the Cash 100 000
normal operating cycle or one year Accounts Receivable 100 000
- Includes: Accounts Receivable and : Net Method
Notes Receivable 1. Sale of merchandise for P 100 000, terms 5/10, n/30.
a. Accounts Receivable Accounts Receivable 95 000
- Open accounts arising from sale of Sales 95 000
goods and services in the ordinary
2. Assuming collections within discount period
course of business and not supported by
promissory note Cash 95 000
- Other names: customer’s accounts, trade Accounts Receivable 95 000
debtors, trade accounts receivable 3. collections beyond discount period
Cash 100 000
Face Value xx
Accounts Receivable 95 000
Less: Allowance for Doubtful Accounts (xx)
Sales Discount forfeited 5 000
Allowance for freight charge (xx)
Allowance for sales discount (xx) Sales Discount forfeited are classified as
Allowance for sales return (xx) other income.
Net Realizable Value xx

Net Realizable Value is the amount of cash

expected to be collected or estimated recoverable
amount.

Method of recording credit sales

1. Gross Method
- Accounts receivable and sales are
recorded at gross amount of invoice
2. Net Method
- Accounts receivable and sales
recorded at net amount of the
invoice or at the invoice price minus
cash discount whether take or not
 Measurement Presentation
Trade
Trade Accounts Receivable Net Realizable Value Current Asset
Trade Notes Receivable Face Current Asset
Non Trade
Loans/ receivables from shareholders, directors, Short term – face Current Assent (silent)
officers or employees value Unless more than 12 months
Advances to affiliates (parent/subsidiary) Long term (noncurrent)
Long term – Present investments
Advances to supplier for acquisition of merchandise Value Current assets
Deposits to guarantee performance or payment or to Current asset
cover possible damages or loss a. Interest
Deposits with creditors, claims for losses and Bearing –
damages PV is face

Claim receivable from common carriers b. Noninterets Current asset

Claim for tax refunds or rebates bearing – Current asset
discounted
Special deposits on contracts bids/deposits on long Generally noncurrent asset unless
using PV
term leases collectible currently
Factor
Debit balance of creditors account
Subscription Receivable Noncurrent except if explicitly
currently collectible
Dividend receivable, Accrued rent receivable, Current assets
accrued royalties receivable accrued interest
receivable

PROBLEM 4-2

Affectionate company sold merchandise on account for P500 000. The terms are 3/10, n/30. The related freight
charge amounted to P10 000. The account was collected within the discount period.
Prepare journal entries to record transactions under the following freight terms:
a. FOB destination and freight collect
b. FOB destination and freight prepaid
c. FOB shipping point and freight collect
d. FOB shipping point and freight prepaid
PROBLEM 4-3
On June 15, 2024, Romela Company sold 100 air conditioning units. The sale price for each unit is P45 000.
All sales are subject to terms 2/10, n/30. The entity use the gross method of accounting for accounts receivable.
1. Prepare journal entry to record the sale
2. Prepare journal entry to record receipt of the payment assuming the correct amount was received on
June 25, 2024
3. Prepare journal entry to record receipt of the payment assuming the correct amount was received on
July 10, 2024
PROBLEM 4-7
Valiant company reported the following analysis of current receivables at year-end;
Trade accounts receivable 2 000 000
Allowance for doubtful accounts (100 000)
Claim against shipper for goods lost
in transit in November 300 000
Selling price of unsold goods sent by Valiant
on consignment at 150% of cost and
not included in ending inventory 600 000
Security deposit on lease of warehouse 200 000

What total amount should be reported as current trade and other receivable?
Trade accounts receivable 2 000 000
Allowance for doubtful accounts (100 000)
Claim receivable 300 000
Total P 2 200 000

PROBLEM 4-8
Jay Company provided the following information for the current year in relation to accounts receivable
Accounts receivable, Jan 1 650 000
Credit Sales 3 000 000
Sales return (75 000)
Accounts written off (40 000)
Collections from customers (2 150 000)
Estimated future sales return on dec 31 50 000
Estimated uncollectible accounts per aging at year-end 110 000
Accounts receivable P 650 000
Net credit sales (3 000 000 – 75 000) 2 925 000
Accounts written off (40 000)
Collections from customers ( 2 150 000)
Estimated future sales return (50 000)
Estimated uncollectible accounts (110 000)
Net Realizable Value P 1 225 000

PROBLEM 4-9
Roxy Company had the following information for the current year relating to accounts receivable:
Accounts receivable, Jan 1 1 300 000
Credit Sales 5 400 000
Collections from customers, excluding recovery 4 750 000
Accounts written off (125 000)
Collections of accounts written off in prior year
customer credit was not reestablished 25 000
Estimated uncollectible receivables per aging 165 000
at Dec 31

What amount should be reported as accounts receivable before allowance for doubtful accounts in Dec 31?
Accounts receivable P 1 300 000
Credit Sales 5 400 000
Collection, excluding recovery 4 750 000
Total (before ADA, end) P 1 950 000
PROBLEM 4-10
At year-end, Harem Company reported accounts receivable of P 8 200 000 with the following analysis:
TR NTR
Accounts known to be worthless 100 000 Not a Receivable
Advance payments on purchase orders 400 000 
Advances to subsidiary 1 000 000  Noncurrent
Customers account reporting credit
balance arising from sales return (600 000) liabilities
Interest receivable on note receivable 400 000 
Trade accounts Receivable 3 500 000 
Subscription installment receivable due in30 days 2 200 000 
Trade installments receivable due in 1-18 months  Less P50 000
including unearned finance charge of P50 000 850 000
Trade accounts receivable from officers, due currently 150 000 
Trade accounts on which postdated checks are held
and no entries were made on receipt of checks 200 000 

What amount should be reported as trade accounts receivable? P 4 650 000

PROBLEM 4-11
Faith Company provided the following information relating to current operations:

Accounts receivable, Jan 1 4 000 000 Inventory, Jan 1 P 4 800 000

Accounts receivable collected 8 400 000 Purchases 8 000 000
Less: Inventory, Dec 31 (4 400 000)
Cash sales 2 000 000
Cost of Sale 8 400 000
Inventory, Jan 1 4 800 000 Gross margin on sale 4 200 000
Inventory, Dec 31 4 400 000 Total Sales 12 600 000
Purchases 8 000 000 Less: Cash Sales (2 000 000)
Gross margin on sales 4 200 000 Credit Sales 10 600 000
Accounts receivable, Jan 1 4 000 000
What amount should be reported as accounts Collections (8 400 000)
Total P 6 200 000
receivable on Dec 31?

PROBLEM 4-12
Steven Company provided provided the following information during the first year of operations:
Total merchandise purchase for the current year 7 000 000
Merchandise inventory, Dec 31 1 400 000
Collections from customers 4 000 000

All merchandise was mark to sell at 40% above cost. All sales are on credit basis and

What amount should be reported as accounts receivable on Dec 31?

Purchases 7 000 000
Less: Inventory, Dec 31 (1 400 000)
Cost of Sales 5 600 000
Mark up on cost ( 5 600 000  40%) 2 240 000
Sales 7 840 000
Collections from customers (4 000 000)
Accounts Receivable, Dec 31 P 3 840 000
 CHAPTER 5

Two Methods:
1. Direct Writeoff method 2. Allowance method
- An immediate recognition of a particular - Requires recognition of bad debt loss If the
uncollectible account removed directly from accounts are doubtful collection
accounts receivable only when the accounts - Generally accepted accounting principles because
proved to be worthless or uncollectible it conforms with the matching principle
- It violates the matching principle because Illustration:
the bad debt loss is often recognized in later
accounting period in which the sales revenue 1. Accounts of P30 000 are considered doubtful
was recognized of collections
Doubtful accounts 30 000
- Not permitted under IFRS
Allowance for Doubtful Accounts 30 000
Illustration:
2. The accounts proved to be worthless
1. Accounts of P30 000 are considered doubtful
Allowance for doubtful accounts 30 000
of collections
Accounts Receivable 30 000
No entry
3. The same accounts that are previously written off
2. The accounts proved to be worthless as worthless are recovered or collected
Bad Debts 30 000 Accounts Receivable 30 000
Accounts Receivable 30 000 Allowance for doubtful accounts 30 000
3. The same accounts that are previously written
Cash 30 000
off as worthless are recovered or collected Accounts Receivable 30 000
Accounts Receivable 30 000
Bad Debts 30 000

Cash 30 000
Accounts Receivable 30 000

Three methods of estimating doubtful accounts

3. Aging of accounts receivables
- Involves an analysis where the accounts
are classified into not due or past due
- The amount computed by aging of
account receivable represents the
required allowance for doubtful
accounts at the end of the period

2. Percents of accounts Receivable

- A certain rate is multiplied by the open
accounts at the end of the entity in order
to get the required allowance balance.

1. Percents of accounts Receivable

- The amount of sales for the year is
multiplied by a certain rate to get the
doubtful accounts expense.
- an income statement approach because
it favors the income statement
PROBLEM 5-3
Orr company prepared an aging of accounts receivable on December 31 and determined the net
realizable value of the accounts receivable at P 2 500 000
Accounts receivable 2 700 000
Allowance for doubtful accounts on Jan 1 280 000
Accounts written off an uncollectible 230 000
Recovery of accounts written off 50 000

What amount should be recognized as doubtful accounts expense for the current year?
Allowance for doubtful accounts, Jan 1 P 280 000
Doubtful accounts 100 000
Written off (230 000)
Recovery 50 000
Allowance for doubtful accounts, Dec 31 P 200 000

PROBLEM 5-4
Mill company’s allowance for doubtful accounts was P 1 000 000 at the end of 2025 and P 900 000
at the end of 2024. For the year ended December 31, 2025 the entity reported doubtful accounts expense of
P 250 000 in the income statement.

What amount was debited to the appropriate account to write off uncollectible accounts in 2025?

Allowance for doubtful accounts, Dec 31, 2024 P 900 000

Written off (?) (150 000)
Doubtful accounts 250 000
Allowance for doubtful accounts, Dec 31, 2025 P 1 000 000

PROBLEM 5-5
At the beginning of current year, Jasmin Company had a credit balance of P 260 000 in the allowance
for doubtful accounts. Based on past experience, 2% of credit sales would be uncollectible.
During the current year, the entity wrote off P 325 00 of uncollectible accounts. Credit Sales for the
year totaled P 9 000 000.
What amount should be as allowance for doubtful accounts at year-end?

Allowance for doubtful accounts, beg P 260 000

Doubtful accounts 180 000
Written off (325 000)
Allowance for doubtful accounts, end P 115 000

Doubtful accounts = Credit Sales (2%)

= ( 9 000 000 2%)
= P 180 000
PROBLEM 5-6
Tera Company provided the following information in relation to accounts receivable at year-end;
Days Outstanding Estimated amount % Uncollectible
0 – 60 1 200 000 5%
61 – 120 900 000 10%
Over 120 1 000 000 20%
3 100 000
During the current year, the entity wrote off P 100 000 in accounts receivable and recovered P 50 000
that had been written off in prior years. At the beginning of current year, the allowance for doubtful account
was P 150 000.
Allowance for doubtful accounts, beg P 150 000
Written off (100 000)
Recovery 50 000
Doubtful accounts 250 000
Allowance for doubtful accounts, end P 350 000

PROBLEM 5-7
Delta company sold goods to wholesalers on terms 2/15, net 30. The entity had no cash sales but 50% of the
customers took advantage of the discount.
The entity used the gross method of recording sales and accounts receivable at year-end revealed the following:
Age Amount % Collectible
0 – 15 days 2 000 000 100%
16 – 30 days 1 400 000 95%
31 – 60 days 400 000 90%
Over 60 days 200 000 50%
What amount should be reported as net realizable value accounts receivable at year-end?
Age Collectible amount
0 – 15 days [1 000 000 + ( 1000 000  98%)] 1 980 000
16 – 30 days (1 400 000  95%) 1 330 000
31 – 60 days (400 000  90%) 360 000
Over 60 days (200 000  50%) 100 000
Net Realizable Value P 3 770 000

PROBLEM 5-8
Manchester Company reported the following unadjusted balances at year-end:
Debit Credit
Accounts Receivable 5 000 000
Allowance for doubtful accounts 40 000
Net credit Sales 20 000 000

Manchester the entity estimated that 3% of the gross accounts receivable would become uncollectible
What amount should be reported as doubtful accounts expense for the current year?

Allowances for doubtful accounts, beg P (40 000)

Doubtful accounts 190 000
Allowances for doubtful accounts, end P 150 000
( 5 000 000  3%)
Remember: the method used is percents of accounts receivable thus, the results is the required allowance (end)
PROBLEM 5-9
Marian company used the allowance method of accounting for doubtful accounts
Number of days
% Collectible
Outstanding Amount

0 – 15 days 5 000 000 98%

16 – 30 days 2 000 000 90%
31 – 60 days 1 000 000 80%
Over 60 days
The entity provided the following additional information for the current year:
Net credit sales for the year 40 000 000
Allowance for doubtful accounts:
Balance, January 1 450 000
Balance before adjustment, December 31 (20 000)
The entity based the estimate of doubtful accounts on the aging of accounts receivable

What amount should be recognized as doubtful accounts expense for the current year?

Allowance for doubtful accounts, Jan 1 450 000

Doubtful accounts
Allowance for doubtful accounts (20 000)
Uncollectible
0 – 30 days 100 000
31 – 60 days 200 000
Over 60 days 200 000
Allowance for doubtful, end P 500 000

PROBLEM 5-10
Ladd Company provided the following information for the current year:
Allowance for doubtful accounts, Jan 1 200 000
Sales – all on credit 9 500 000
Sales Discount 1 000 000
Sales Return & allowance 500 000
Accounts written off as uncollectible 100 000
Recovery of accounts written off 50 000
The entity recorded doubtful accounts expense at the rate of 5% of net credit sales.
What amount should be reported as allowance for doubtful accounts on December 31?

Sales P 9 500 000

Sales Discount ( 1 000 000)
Sales Return and Allowances (500 000)
Net credit sales 8 000 000
Rate 5%
Doubtful accounts P 400 000

Allowance for doubtful accounts, Jan 1 P 200 000

Doubtful accounts 400 000
Written off (100 000)
Recovery 50 000
Allowance for doubtful accounts, Dec 31 P 550 000
 CHAPTER 6

NOTES RECEIVABLE
- Are claims supported by formal promises to pay Initial Subsequent
usually in the form of notes
- A negotiable promissory note is an unconditional Interest Face amount Face amount
Bearing
promise in writing made by one person to
Non-interest Present Value Amortized Cost
another, signed by the maker, engaging to pay
bearing (using effective
on demand or at a fixed determinable future
rate)
time a sum certain in money to order or to bearer.

 Interest-bearing notes receivable

Measurement of notes receivable
 Noninterest-bearing notes receivable
Accounts Net Realizable Value
Receivable 1. Lump Sum =
Notes Receivable
Short term Face amount

Long term Present Value 2. Annuity =

Illustration – Interest bearing

On January 1, 2024, entity owned a tract of land costing P 800 00 and sold land for P 1 000 000.
The entity received a 3-year note for P 1 000 000 plus interest of 12% compounded annually.

When interest is compounded annually, the accrued interest also earns interest.

2024
Notes Receivable 1 000 000
Land 800 000
Gain on sale of land 200 000
Accrued interest receivable 120 000
Interest income 120 000

2025
Accrued interest receivable 134 400
Interest income 134 400

2026
Accrued interest receivable 134 400
Interest income 134 400

Cash 1 404 928

Notes Receivable 1 000 000
Accrued interest receivable 254 400
Interest income 150 528
PROBLEM 6-1
Feasible Company sold to another entity a tract of land costing P 5 000 000 for P 7 000 000 on January 1, 2022.

The buyer paid P 1 000 000 down and signed a two-year promissory note for the remainder of the purchase price plus
12% interest compounded annually. The note matures on January 1, 2024.
Prepare journal entries for 2022, 2023, and 2024.

2022
Notes Receivable 6 000 000
Cash 1 000 000 (Principal + interest of 2022 and 2023)  rate
Land 5 000 000 (P 6 000 000 + 720 000 + 806 400)  12% = 806 400
Gain on sale of land 2 000 000
12/31
Principal  rate = interest income
Accrued interest receivable 720 000
Interest income 720 000 P 6 000 000  12% = 720 000

2023 – Dec (Principal + interest of 2022)  rate

31 Accrued interest receivable 806 400 (P 6 000 000 + 720 000)  12% = 806 400
Interest income 806 400
2024 – Jan 1 Cash received = Principal + interest of 2022 & 2023
Cash 7 526 400 For Accrued interest receivable
Notes Receivable 6 000 000
Accrued Interest Receivable 1 526 400 - Cancel out the balance by crediting

PROBLEM 6-2
Byron Company manufactures and sells computers. On January 1, 2022, the entity sold a computer costing
P 400 00 for P 600 000
The buyer signed a non-interest bearing note for P 600 00) payable in three equal installment every December 31.
The cash selling price of the computer is P 540 000
Prepare journal entries for the current year

01/01/22 Notes Receivable 600 000

Sales 540 000 Notes Receivable – cash price = unearned interest
Unearned Interest income 60 000

12/31/22 Cash 200 000

Annual payment = Notes receivable/3 installments
Notes Receivable 200 000

Unearned Interest income 30 000

Interest income 30 000

Year Notes Fraction Interest

receivable income
2022 600 000 6/12 30 000
2023 400 000 4/12 20 000
2024 200 000 2/12 10 000
1 200 000 60 000
Subsequently:

12/31/23 12/31/23
Cash 200 000 Cash 200 000
Notes Receivable 200 000 Notes Receivable 200 000
Unearned Interest income 20 000 Unearned Interest income 10 000
Interest income 20 000 Interest income 10 000
PROBLEM 6-3
Innova company manufactures and sells electrical generators. On January 1, 2022, the entity sold an
electrical generator costing P700 000 for P 1000 000
The buyer paid P100 000 down and signed a P900 000 noninterest bearing note payable in three equal installments.
The prevailing interest rate for a note of this type is 12%. The present value of an ordinary annuity of 1 for three
period is 2.4018
Prepare journal entries for the current year.

01/01/22
Note receivable 900 000 PV of Annuity = 2.4018 x P 300 000 = P 720 540
Cash 100 000 Sales + DP = 820 540
Sales 820 540 Unearned interest = 900 000 – 720 540 = P 179 460
Unearned interest income 179 460
12/31/22
Unearned interest income 86 465
Income interest 86 465

Year Collections Interest Income Principal PV

01/2022 720 540
2022 300 000 86 465 213 535 507 005
2023 300 000 60 841 239 159 267 846
2024 300 000 32 154 267 846 -

PROBLEM 6-4
Gullible company is a dealer in equipment. On December 31, 2022, the entity sold an equipment in
exchange for a non interest bearing note requiring five annual payments of P500 00. The first payment was
made on December 31, 2023
The market interest for similar note was 8%.

3. Prepare journal entries for 2022 and 2023

Year Collections Interest Income Principal PV
2022 1 995 000
2023 500 000 159 600 340 400 1 654 600
2024 500 000 132 368 367 632 1 286 968
2025 500 000 102 957 397 043 889 925
2026 500 000 71 194 428 806 461 119
2027 500 000 38 881 461 119 -

12/31/22 12/31/23
Note receivable 2 500 000 Cash 500 000
Sales 1 995 000 Note Receivable 500 000
Unearned interest income 505 000
Unearned interest income 159 600
PV of Annuity = 3.99 x P 500 000 = 1 995 000 Income interest 159 600

2. Carrying amount of the note receivable on Dec 31, 2023

Note receivable (2 500 000 – 500 000) 2 000 000 The deductions are the
Unearned interest (505 000 – 159 600) (345 4000)
collections for 2023
Carrying amount 2023 1 654 600

1. Interest income for 2024

Interest income 2024 (8% x 1 654 600) 132 368
PROBLEM 6-5
On January 1, 2022, Enigma Company sold an equipment costing P500 000 which had a carrying amount
of P350 000, receiving a P125 000 down payment and, as consideration, a P400 000 noninterest-bearing
note
The prevailing rate of interest for a note of this type at January 1, 2022 was 12%. The present value of 1 at
12% for three periods is 0.7118

( )

01/01/22

PROBLEM 6-7
On January 1, 2022, Ott company sold goods to Fox Company. Fox Company signed noninterest-bearing
note requiring payment of P600 000 annually for seven years. The first payment was made on January 1,
2022. The prevailing rate of interest for this type of note at date of issuance was 10%.
PV of an ordinary annuity of 1 at 10% for 6 periods 4.36
PV of an ordinary annuity of 1 at 10% for 7 periods 4.87
1. Prepare all journal entries for 2022
2. Determine the carrying amount of note receivable on Dec 31, 2022.

01/01/22 First payment 600 000

Cash 600 000 Present Value, 6 periods 2 616 000
Note Receivable 3 000 000
Sales Revenue 3 216 000 Correct Sales 3 616 000
Unearned interest 984 000
Note receivable 3 600 000
12/31/22
Present Value, 6 period 2 616 000
Unearned interest income 261 600
Interest income 261 600 unearned interest income 984 000

Note Receivable, Dec 31 3 600 000

Unearned interest (984 000 - 261 600) 722 400
Carrying Amount – Dec 31, 2022 2 877 600
PROBLEM 6-8
Persia Company is a dealer in equipment. On January 1, 2022, the entity sold an equipment in exchange
for a noninterest bearing note requiring five annual payments of P500 000. The first payment was made on
Dec 31, 2022. The market interest rate for similar note was 8%
PV of 1 at 8% for 5 periods 0.68
PV of an ordinary annuity of 1 at 8% for 5 periods 3.99
1. Prepare all journal entries for 2022
2. Determine the carrying amount of notes receivable on December 31, 2022.

01/01/22 PV of Annuity= 3.99 x 500 000 = 1 995 000

Note Receivable 2 500 000
Sales Revenue 1 995 000 Note Receivable 2 500 000
Unearned Interest Income 505 000 Present Value (1995 000)
Unearned Interest 505 000
12/31/22
Unearned interest income 159 600 PV 1 995 000
Interest income 159 600 Rate 8%
Interest income, Dec 31 2022 159 600

Note Receivable 2 000 000

Beware of dates of selling and first payment
Unearned Interest (505 000 – 159 600) (345 400)
Carrying amount, Dec 31, 2022 1 654 600 The first payment was Dec 31, 2022

PROBLEM 6-9
On January 1, 2022, Emma Company sold equipment with a carrying amount of P4 800 000 in exchange for a
P6 000 000 noninterest bearing note due January 1, 2025. There was no established exchange price for the
equipment
The prevailing rate of interest for a similar noted was 10% and the present value of 1 at 15% for three periods is
0.75
1. Prepare all journal entries for 2022
2. Determine the carrying amount of note receivable on December 31, 2022.

01/01/22
Note Receivable 6 000 000 PV of 1= 0.75 x 6 000 000 = 4 500 000
Loss on Sale of equipment 300 000
Equipment 4 800 000 Note Receivable 6 000 000
Unearned Interest Income 1 500 000 Present Value (4 500 000)
Unearned Interest 1 500 000
Note Receivable 6 000 000
Unearned Interest (1 500 000 – 450 000) (1 050 000) PV 500 000
Rate 10%
Carrying amount, Dec 31, 2022 4 950 000 Interest income, Dec 31 2022 450 000
Year Interest Unearned PV
Income Interest Present Value 4 500 000
01/01/22 1 500 000 4 500 000 Carrying Amount 4 800 000
12/31/22 450 000 1 050 000 4 950 000 Loss on sale (300 000)
12/31/23 495 000 555 000 5 505 000
12/31/24 555 000 - 6 060 000

***Present Value is the Sales Price unless there’s a down payment you add it. The Sales Price is the amount
you record for the asset sold or sales revenue
PROBLEM 6-11
Frame Company has an 8% note receivable dated June 30, 2022, in the original amount of P1 500 000. Payments
of P500 000 in principal plus accrued interest are due annually on July 1, 2023, 2024, and 2025.
2. What is the balance of Note Receivable on July 1, 2023?
a. 1 500 000
b. 1 000 000
c. 500 000
d. 0

July 1, 2023 – first payment Note Receivable – June 30, 2022 1 500 000
Cash 540 000 1st Payment - 500 000
Note Receivable 500 000 Balance of NR – July 1, 2023 1 000 000
Interest Income 40 000

1. On June 30, 2024, what amount should be reported as accrued interest receivable on the noted receivable?
a. 120 000
b. 40 000
Accrued Interest (1 500 000 x 8%) 120 000
c. 80 000
Interest Income – (120 000/3 periods) 40 000
d. 0
June 30, 2022 – July 1, 2023
Accrued Interest – June 30, 2024 80 000

Since the next payment is on July 1, 2024, the accrued interest balance on June 30, 2024 is still for two years
CHAPTER 7
 PROBLEM 8-3
Elegant Company assigned the following transaction: Accounts Receivable – assigned 800 000
Accounts Receivable 800 000
May 1 Elegant Company assigned P800 000 of accounts
receivable to a bank in consideration for a loan. Cash [(800 000 x 80%) – 20 000] 620 000
A cash advance of 80% less service charge of P20 Service Charge 20 000
000 was made by the latter. Notes Payable - bank 640 000
It was agreed that interest of 2% per month is to Sales Return 30 000
be made and that the assignor continues to make Accounts receivable -assigned 30 000
the collections. The entity signed a promissory Cash 490 000
note for the loan. Sales Discount 10 000
5 The entity issued a credit memo to a customer for Accounts receivable – assigned 500 000
returned merchandise, P30 000. The account is
one of the assigned accounts Notes Payable – bank 490 000
Interest expense (640k x 2%) 12 800
10 Collections of P500 000 of the assigned accounts
Cash 502 800
were made, less 2% discount.
Allowance for doubtful 10 000
June 1 Remitted the collections to the bank plus 2%
Accounts receivable – assigned 10 000
interest for one month
7 Assigned accounts of P10 000 proved to be Cash 200 000
worthless Accounts receivable – assigned 200 000
20 Collections of P200 000 for the accounts Notes Payable 150 000
assigned were made Interest expense 3 000
July 1 Final settlement was made with the bank. Cash 153 000
Elegant Company accordingly remitted the total Accounts Receivable 60 000
amount due to the bank to pay off the loan plus Accounts receivable – assigned 60 000
interest charge Accounts receivable - assigned 800 000
Less: Collections 690 000
Sales return 30 000
PROBLEM 8-4 Sales discount 10 000
Docile Company assigned certain accounts Worthless 10 000
receivable to a bank for a loan on the following basis: Balance P 60 000
75% cash advance, 4% service charge on gross
accounts assigned, 2% interest per month is to be
charged, and the bank makes the collections. The Accounts receivable – assigned 1 500 000
entity signed a promissory note for the loan Accounts receivable 1 500 000

July 1 Received remittance upon the specific Cash 1 065 000

assignment of P1 500 000 in accounts to the bank Service Charge 60 000
Note Payable – bank 1 125 000
Aug 1 Received notice from the bank that P800 000 of
the assigned accounts were collected. A check Notes payable 800 000
was sent to the bank for one month interest Interest Expense 22 500
charge Accounts receivable – assigned 800 000
Sept 1 Received notice from bank that assigned Cash 22 500
accounts of P500 000 were collected in full and Cash 168 500
the remaining accounts of P200 000 were being Notes payable (remaining) 325 000
returned. Accordingly, a check was received Interest expense 6 500
from the bank in settlement of the assignment Accounts receivable – assigned 500 000
contract. In making the settlement, the bank
deducted the interest charge for the Accounts Receivable 200 000
corresponding period Accounts receivable – assigned 200 000
PROBLEM 8-5
Grateful Company provided the following
transactions:
Accounts Receivable – assigned 500 000
July 1 The entity assigned P500 000 of accounts Accounts receivable 500 000
receivable to bank on nonnotification basis in
consideration for a loan. On this date, the bank Cash 390 000
advanced P400 000 less a service charge of 2% Service Charge 10 000
of the total accounts assigned, and the entity Notes Payable – bank 400 000
signed a promissory note bearing interest of 1% Cash 330 000
per month on the unpaid loan balance at the Accounts receivable – assigned 330 000
beginning of the month.
Notes Payable – bank 326 000
Aug 1 Collected P330 000 on assigned accounts. The Interest Expense (400 000 x 1%) 4 000
entity remitted this amount to the bank in Cash 330 000
payment first for the interest and the balance to
the principal. Cash 170 000
Sept 1 Collected the remaining balance of assigned Accounts Receivable – assigned 170 000
accounts. The entity paid off the remaining loan Notes Payable – bank 74 000
balance Interest Expense (74 000 x 1%) 740
Cash 74 740

PROBLEM 8-7
Vanity Company financed some of its operations by
Accounts Receivable – assigned 800 000
assigning accounts receivable to a bank in
Accounts receivable 800 000
consideration for a loan
On July 1, the entity assigned accounts of P800 000
under a notification basis. The bank advanced 80% Cash 616 000
less a 3% service charge of the total accounts Service Charge 24 000
assigned. The entity signed a promissory note Notes Payable - bank 640 000
bearing interest of 1% per month on the unpaid loan
balance.
Notes Payable – bank 413 600
On Aug 1, the entity received a statement that the Interest Expense 6 400
bank had collected P420 000 of the assigned
Accounts receivable – assigned 420 000
accounts.
On Sept 1, the entity received a second statement Cash 91 336
from the bank, together with a check for the amount Notes Payable – bank 226 400
due. The statement indicated that the bank had Interest expense 2 264
collected P320 00 of the assigned accounts. Accounts receivable – assigned 320 000

Accounts Receivable 60 000

Accounts receivable – assigned 60 000

Bank loan 640 000

Aug 1 payment (413 600)
NP – balance 226 400

The recorded CASH are the remaining/exceeds from the

collected AR – assigned less the NP balance , the interest
expense are charged to the cash.
3. FACTORING
- Is sale of accounts receivable usually b. Factoring as a continuing agreement
on without recourse, notification basis - All receivables (existing and future)
(derecognition). In factoring
arrangement, an entity sells accounts Illustration
receivable to a bank or finance entity An entity factored accounts receivable of
called a factor P500 000 with credit terms of 2/10, n/30
A gain or loss is recognized for the immediately after shipment of the goods to the
difference between the proceeds received and customer
the net carrying amount of the accounts The actor charged a 5% commission based
receivable factored on the gross amount of the receivables factored
a. Casual Factoring
In addition, the factor withheld 20% of the
- One time transaction in case of need
amount of the receivables factored to cover
sales returns and allowance
Loss on factoring

- If there’s a returns in merchandise the Cash 365 000

customer will not pay the bank and this Sales Discount 10 000
transaction is not part of the agreement. Commission 25 000
Thus, there should be an allowance Receivable from factor 100 000
- This is where the factor’s holdback Accounts receivable 500 000
exist

If theres a return & allowances If the customer is subsequently allowed a

credit of P50 000 for damaged machine:
Sales of return and allowances
Receivable from factor Sales Return & Allowances 50 000
Sales discount 1 000
If there’s no problem or excess from Receivable from factor 49 000
holdback, factor will return it
No further return and allowances
Cash
Receivable from factor Cash 51 000
Receivable from factor 51 000

Casual Continuing agreement

Cash Cash
Allowance for doubtful accounts Allowance for doubtful accounts
Loss on factoring Commission
Receivable from factor Interest expense
Accounts receivable Factoring fee
Receivable from factor
Accounts receivable
On June 1, 2022, factee sold P5 000 000 of its PROBLEM 8-8
receivable for P4 000 000. Allowances doubtful
Dainty company sold accounts receivable
accounts amounted to P100 000
without recourse with a face amount of P6 000 000.
Cash 4 000 000 The factor charged 15% commission on all accounts
receivable factored and withheld 10% of the accounts
Allowance for doubtful 100 000
factored as protection against customer returns and
Loss on factoring 900 000
other adjustments
Accounts receivable 5 000 000
v The entity had previously established an allowance
for doubtful accounts of P200 000 for these accounts
PROBLEM 8-9 By year end, the entity had collected the factor’s
Generous Company provided the following holdback there being no customer returns and other
information with respect to factoring of accounts adjustment
receivable
Cash 4 300 000
Factored P800 000 of accounts receivable Allowance for doubtful 200 000
without recourse with a bank on notification basis Commission 900 000
Receivable from factor 600 000
The bank charged a factoring fee of 5% of the Accounts receivable 6 000 000
amount of accounts receivable factored and
withheld 10% of accounts receivable factored to Cash 200 000
cover sales return and allowances. Receivable from factor 200 000

Received notice from the bank that factored

accounts are fully collected less sales return and PROBLEM 8-10
allowances of P20 000
Commonplace company provided the following
Received a check from the bank as a final transactions for the current year
settlement of the factoring contract
Sold merchandise to a customer for P500 000 terms
2/10, n/30.
Cash 680 000
Factored the account to a bank. The bank charged 5%
Factoring fee 40 000
commission and 25% holdback
Receivable from factor 80 000
Accounts receivable 800 000 Granted the customer a credit allowance of P50 000
for damage in the shipment
Sales and return & allowances 20 000
Receivable from factor 20 000 The customer paid in full its accounts to bank

Final settlement was made with the bank

Cash 60 000
Receivable from factor 60 000 Cash 340 000
Sales Discount 10 000
Commission 25 000
Receivable from factor 125 000
Accounts receivable 500 000

Sales return and allowance 50 000

Receivable from factor 50 000

Cash 75 000
Receivable from factor 75 000
 4. DISCOUNTING
PROBLEM 8-11
Maker (customer) – is the one liable
A factor has agreed to purchase selected accounts Payee (company) – is the one entitled to
receivable from epic company. The factor charged 5% payment on the date of maturity
commission and 20% holdback. the following
When a note is negotiable, the payee may obtain
accounts are sold on July 26.
cash before maturity date by discounting the note at
Invoice date Customer Amount a bank or other financing company
July 32 A 300 000
July25 B 500 000 Endorsement
July 24 C - Is the transfer of right to a negotiable
200 000
instrument by simply signing at the back of
On July 28, customer B was granted a credit of P50 the instrument.
000 for returned merchandise. Final settlement is made
Endorser – the company
with the factor on August 31.
Endorsee – the bank
Cash 750 000
Commission 50 000 Two Kinds:
Receivable from factor 200 000 1. With recourse – which means that the
Accounts receivable 1 000 000 endorser shall pay the endorsee if the
maker dishonors the note
Sales return and allowance 50 000 2. Without recourse - that the endorser
avoids future liability even if the maker
Receivable from factor 50 000
refuses to pay the endorsee on the date of
maturity.
Cash 150 000
Receivable from factor 150 000 Endorsement is assumed to be with recourse

1. Net Proceeds – to the discounted value of note

PROBLEM 8-17 received by the endorser from endorsee
Daisy company sold accounts receivable Net Proceeds = Maturity Value minus Discount
without recourse with face amount of P6 000 000. The
factor charged 15% commission on all accounts 2. Maturity Value – the amount due on the note
receivable factored and withheld 10% of the accounts at the date if maturity
factored as protection against customer returns and Maturity Value = Principal plus interest
other adjustments
The entity had previously established an 3. Maturity Date – is the date on which the note
allowances for doubtful accounts of P200 000 for these should be paid.
accounts 5. Principal – is the amount appearing on the face
By year-end the entity had collected the of the note. Also referred to as Face Value
factor’s holdback there being no customer returns and
4. Interest – is the amount of interest for the full
other adjustments term of note.
Cash 4 300 000 6. Interest rate – the rate appearing on the face of
Commission 900 000 the note
Receivable from factor 600 000 7. Time – is the period within which interest shall
Allowances for doubtful 200 000 accrue
Accounts receivable 6 000 000 9. Discount – the amount of interest deducted by
the bank in advance
Cash 600 000
Discount = Maturity Value x disc. rate x disc. period
Receivable from factor 600 000
8. Discount Period – period of time from date of
discounting to maturity date. In simpler words,
it is the unexpired term of the note.
Illustration – Discounting w/o recourse Illustration – Discounting with recourse
A P1 000 000, 180-day, 12% note dated July 1, A P2 400 000, 6-month, 12% note dated
2024 was received from a customer and discounted February 1, 2024 is received from a customer and
without recourse on August 30, 2024 at 15% discounted with recourse by first bank on March 1,
discount rate. 2024 at 15%

Principal 1 000 000 Principal 2 400 000

Interest (12% x 1M x 180/360) 60 000 Interest (2 400 000 x 12% x 6/12) 144 000
Maturity Value 2 544 000
Maturity Value 1 060 000
Maturity Value 2 544 000
Discount (1.060M x 15% x 60/360) 53 000 Discount rate 15%
Term of Note 180 days Discount period 5/12
Expired days (July 1-Aug 30) 60 days Discount 1 59 000

Discount period 120 days Maturity value 2 544 000

Less: Discount 159 000
Maturity value 1 060 000
Net proceeds 2 385 000
Less: Discount 53 000
Net proceeds 1 007 000 Principal 2 400 000
Accrued interest 24 000
Principal 1 000 000
Accrued interest receivable 20 000 Carrying amount 2 424 000
1Mx 12% x 60/260 – earned
Carrying amount of NR 1 020 000 Net proceeds 2 385 000
Carrying amount 2 424 000
Net proceeds 1 007 000
Loss on note discounting (39 000)
Carrying amount 1 020 000
Loss on note discounting (13 000)
Cash 2 385 000
Cash 1 007 000 Loss on NRD 39 000
Loss on NRD 13 000 Notes receivable discounted 2 400 000
Notes receivable 1 000 000 Interest income 24 000
Interest income 20 000

PROBLEM 9-12
Apex company accepted from a customer
P1 000 000 face amount, 6-month, 8% note dated
Aprill 1, 2022. On the same date, the entity
discounted the notes without recourse at a 10%
discount rate.

Principal 1 000 000

Interest 40 000
Maturity value 1 040 000

Maturity value 1 040 000

Discount 52 000
Net proceeds 988 000
Principal 1 000 000
Accrued interest -
Carrying amount 1 000 000
PROBLEM 9-8
PROBLEM 9-9
Roth company received from a customer a one-
On July 1, 2022, lee company sold goods in
year, P500 000 note bearing annual interest of 8%.
exchange for P2 000 000, 8 month, noninterest
After holding a note for 6 months, the entity bearing notes receivable.
discounted the note at the bank at an effective
At the time of the sale, the note’s market rate
interest rate of 10%
interest was 12%. The note was discount at 10%
Principal 500 000 on September 1, 2022.
Interest 40 000 Principal 2 000 000
Maturity value 540 000 Maturity value 2 000 000
Maturity value 540 000
Discount 27 000 Maturity value 2 000 000
Net proceeds 513 000 Discount 100 000
Net proceeds 1 900 000
Principal 500 000
Accrued interest 20 000 Principal 2 000 000
Carrying amount 520 000 Carrying amount 2 000 000
Net proceeds 1 900 000
Net proceeds 513 000
Carrying amount 2 000 000
Carrying amount 520 000
Loss on NR discounted (100 000)
Loss on NR discounted (7 000)
Cash 1 900 000
Cash 513 000 Loss on NRD 100 000
Loss on NRD 7 000 Notes receivable 2 000 000
Notes receivable 500 000
Interest Income 20 000 PROBLEM 9-11
PROBLEM 9-10 On June 30, 2022, Ray company discounted at
Rand company accepted from a customer a P4 000 the bank a customer P6 000 000, 6-month, 10%
000, 90 day, 12% dated August 31, 2022. note receivable dated April 30, 2022. The bank
discounted the note at 12%.
On September 30, 2022, the entity discounted
without recourse the note at 15%. However the
proceeds were not received until Oct 1, 2022.
Principal 6 000 000
Interest 300 000
Principal 4 000 000
Maturity value 6 300 000
Interest 120 000
Maturity value 4 120 000 Maturity value 6 300 000
Discount 252 000
Maturity value 4 120 000 Net proceeds 6 048 000
Discount 103 000
Net proceeds 4 017 000 Principal 6 000 000
Accrued interest 100 000
Principal 4 000 000
Carrying amount 6 100 000
Accrued interest 40 000
Carrying amount 4 040 000 Net proceeds 6 048 000
Carrying amount 6 100 000
Net proceeds 4 017 000
Loss on NR discounted (52 000)
Carrying amount 4 002 000
Loss on NR discounted (23 000)
Cash 6 048 000
Cash 4 017 000 Loss on NRD 52 000
Loss on NRD 23 000 Notes receivable 6 000 000
Notes receivable 4 000 000 Interest Income 100 000
Interest Income 40 000
PROBLEM 9-13 PROBLEM 9-14
On July 1, 2022, Kay company sold equipment to On April 1, 2022, Shalimar company discounted
mando company for P1 000 000. Kay company with recourse a 9-month, 10% nite dated January
accepted a 10% note receivable for the entire sale 1, 2022 with face amount of P6 000 000. The bank
price. discount rate is 12%
The note receivable is due in two equal The discounting transaction is accounted for as a
installments of P500 000 plus accrued interest on conditional sale with recognition of contingent
Dec 31, 2022 and December 31, 2023. liability.
On July 1, 2023, the entity discounted the note at On October 1, 2022, the maker dishonored the
a bank at an interest rate of 12% note receivable. Then entity paid the bank
maturity value of the note plus protest fee of P50
December 31, 2022: 000

1st Installment 500 000 On December 31, 2022, the entity collected the
Interest (1 000 000 x 10% x 6/12) 50 000 dishonored note receivable in full plus 12%
First Payment 550 000 annual interest on the total amount due.

December 31, 2023: Principal 6 000 000

nd
2 Installment 500 000 Interest 450 000
interest (500 000 x 10% x 1) 50 000 Maturity value 6450 000
First Payment 550 000
Maturity value 6 450 000
Discount 387 000
Maturity value 550 000 Net proceeds 6 063 000
Discount (12% x 6/12) 33 000
Net proceeds 517 000 Principal 6 000 000
Accrued interest 150 000
Net proceeds 517 000 Carrying amount 6 150 000
Carrying amount 525 000
Loss on NR discounted (8 000) Net proceeds 6 063 000
Carrying amount 6 150 000
Loss on NR discounted 87 000

Cash 517 000 Cash 6 063 000

Loss on NRD 8 000 Loss on NRD 87 000
Notes receivable 500 000 Notes receivable 6 000 000
Interest Income 20 000 Interest income 150 000
Accounts receivable 6 500 000
Cash 6 500 000

Notes receivable discounted 6 000 000

Note Receivable 6 000 000

Cash 6 695 000

Notes receivable 6 450 000
Protest fee 50 000
Interest income 195 000

Maturity Value + Protest Fee = 6 500 000

Interest rate 12%
Time (October – Dec 31) 3/12
Interest income 195 000
 CHAPTER 9

A loan receivable is a financial asset arising Principal xxx

from a loan granted by a bank or other financial Less: origination fees received xxx
institution to a borrower or client. Add: direct origination costs xxx
The term of the loan may be short-term but in Present Value (Net Cash Outflow) xxx
most cases, the repayment periods cover several years.
Journal entry:

Loan Receivable xxx

Measurement of Loan Receivable Cash xxx
 At initial recognition, an entity shall measure a Cash xxx
loan receivable at fair value plus transaction Unearned interest income xxx
costs that are directly attributable to the
Unearned interest income xxx
acquisition of the financial asset.
Cash xxx
 The Fair value of loan receivable at initial
recognition is normally the transaction price
which is actually the amount of loan granted. Cash xxx
 Transaction costs that are direct attributable to Direct origination cost xxx
the loan receivable include direct origination Direct origination cost xxx
costs. Cash xxx
 Direct origination costs should be included in ORIGINATION FEES
the initial measurement of the loan receivable - the fees charged by the bank against the
 However, indirect origination costs should be borrower for the creation of the loan.
treated as outright expense.
Origination fees for:
 A loan receivable is measure subsequently at a. Evaluating the borrower’s financial condition
amortized cost using the effective interest b. Evaluating the guarantees, collateral and other
method. security
c. Negotiating the terms of the loan
The amortized cost is the amount at which the loan d. Preparing and processing the documents
receivable is measured initially: related to the loan
a. Minus principal payment e. Closing and approving the loan transaction
b. Plus or minus cumulative amortization of
any difference between the initial carrying Accounting for origination fees
amount and the principal maturity amount The origination fees received from borrower are
c. Minus reduction for impairment or recognized as unearned interest income and amortized
uncollectibility over the term of the loan
If the origination fees are not chargeable
In other words, if the initial amount against the borrower, the fees are known as direct
recognized is lower than the principal amount, the origination costs.
amortization of the difference is added to the The direct origination costs are deferred and
carrying amount. amortized over the term of loan
If the initial amount recognized is higher Preferably, the direct origination costs are offset
that the principal amount, the amortization of the directly against any origination fees
difference is deducted from the carrying amount. If the origination fees received exceed the direct
origination costs, the difference is unearned interest
income and the amortization will increase interest
income
If the direct origination costs exceed the
origination fees received, the difference is charged to
direct origination costs and the amortization will
decrease the interest income.
 Illustration - 1 Illustration - 2
On Jan 1, 2024, Global Bank granted P5 000 On January 1, 2024, Empress Bank granted P5 000 000
000 loan to a borrower with 12% interest payable loan to a borrower. The interest on the loan is 10%
annually starting December 31, 2024. The loan matures payable annually on December 31, 2024, December
in three years in December 31, 2026. 31, 2025 and December 31, 2026. The loan matures in
three years on December 31, 2026.
Principal 5 000 000
Origination fees received (331 800) Principal 5 000 000
Direct origination costs 100 000 Origination fees received (200 000)
Initial carrying amount of loan 4 768 200 Direct origination costs 457 500
Initial carrying amount of loan 5 257 500

Journal Entries: Journal Entries:

01/01/24 01/01/24
Loan Receivable 5 000 000 Loan Receivable 5 000 000
Cash 5 000 000 Cash 5 000 000
Cash 231 800 Direct Origination Cost 257 500
Unearned Interest Income 231 800 Cash 257 500

Origination fees received 331 800 The excess is expensed in direct origination,
Direct origination costs incurred (100 000) meaning you paid more than what you have
Net origination fees received 231 800 received from the borrower.

Date Interest Interest Discount Carrying Origination fees received 457 500
received Income amortization amount Direct origination costs incurred (200 000)
01/01/2024 4 768 200 Direct Origination costs(expensed) 231 800
12/31/2024 600 000 667 548 67 548 4 385 748
12/31/2025 600 000 677 005 77 005 4 912 753
Date Interest Interest Premium Carrying
12/31/2026 600 000 687 247 87 247 5 000 000 received Income amortization amount
01/01/2024 5 257 500
Interest Received = Principal x Nominal Rate 12/31/2024 500 000 420 600 79 400 5 178 100
Interest Income = carrying amount x effective rate 12/31/2025 500 000 414 248 85 752 5 092 348
12/31/2026 500 000 407 652 92 348 5 000 000

Journal Entries: Journal Entries:

12/31/24 12/31/24
Cash 600 000 Cash 500 000
Interest Income 600 000 Interest Income 500 000

Unearned Interest Income 67 548 Interest Income 79 400

Interest Income 67 548 Direct origination Cost 79 400

12/31/25 12/31/25
Cash 500 000
Cash 600 000
Interest Income 500 000
Interest Income 600 000
Interest Income 85 752
Unearned Interest Income 77 005
Direct origination Cost 85 752
Interest Income 77 005
12/31/26
Cash 500 000
Interest Income 500 000
Interest Income 92 348
Direct origination Cost 92 348
Impairment of Loan JOURNAL ENTRY
PFRS 9 provides an entity shall recognize a loss
allowance (impairment) for expected credit losses on 12/31/24
financial asset measured at amortized cost Loan Impairment Loss 890 000
Accrued Interest receivable 300 000
Credit losses are the present value or discounted value Allowance for loan impairment 590 000
of all cash shortfalls
Date Amount Loan Interest Allow. Carrying
projected -ending Income Amount
Credit Losses = increase in credit risk – expected 3 000 000 590 000 2 410 000
cash flows decreased – carrying amount decreased 12/25 500 000 2 500 000 241 000 349 000 2 151 000
12/26 1 000 000 1 500 000 215 100 133 900 1 366 100
Carrying amount of loan (PV of original CF) xxx
PV of new cash flows (xxx) 12/27 1 500 000 - 136 610
Impairment of loss (PV of shorfalls) xxx
12/31/25
Measurement Allowance for Impairment loss 241 000
- Is the difference between the carrying amount Interest Income 241 000
and the present value of estimated future cash
flows discounted at the original effective rate.

Illustration PROBLEM 7-1

International Bank loaned P5 000 000 to Bankard National Bank granted a loan to a borrower on January 1,
company on Jan 1, 2022. 2022. The interest on the loan is 10% payable annually
The terms of the loan require principal payment of P1 starting Dec 31, 2022. The loan matures in three years on
000 000 each year for 5 years plus interest at 10% Dec 31, 2024.
However, during 2024, Bankard Company began to Principal Amount 4 000 000
experience financial difficulties and was unable to Direct origination cost incurred 150 000
make the required principal and interest payment on Origination fee received from borrower (342 100)
Dec 31, 2024 PV of Cash flows 3 807 900

On Dec 31, 2024, International Bank assessed the Origination fees received 343 100
collectability of the loan and has determined that the Direct origination costs incurred (150 000)
remaining principal payments will be collected but the Net origination fees received 193 100
collection of the interest is unlikely.
To determine the effective rate:
The loan receivable has carrying amount of P3 300 000 Amount PVF PV
including the accrued interest of P300 000 on Principal 4 000 000 0.7118 2 847 200
December 31, 2024. International Bank projected the Interest 400 000 2.4018 960 720
cash flows from the loan on December 31, 2024 3 897 920

Date of cash flows Amount Projected

Dec 31, 2025 500 000 Date Interest Interest Discount Carrying
received Income amortization amount
Dec 31, 2026 1 000 000
01/01/2022 3 807 900
Dec 31, 2027 1 500 000
12/31/2022 400 000 456 948 56 948 3 864 848
12/31/25 (500 000 x .91) 455 000 12/31/2023 400 000 463 782 63 782 3 928 630
12/31/26 (1 000 000 x .83) 830 000 12/31/2024 400 000 471 370 71 370 4 000 000
12/31/27 (1 500 000 x .75) 1 125 000
Total Present Value of Cash Flows 2 410 000

Carrying Amount of loan 3 300 000

PV of cash flows 2 410 000
Impairment Loss (890 000)
PROBLEM 7-3 PROBLEM 7-2
Philippine Bank granted a loan to a borrower on January Apparri Bank granted a loan to a borrower on January 1,
1, 2022. The interest on the loan is 8% payable annually 2022. The interest rate on loan is 10% payable annually
starting December 31, 2022. The loan matures in three starting December 31, 2022. The loan matures in five
years on December 31, 2024.
years on December 31, 2026.
Principal Amount 3 000 000
Principal Amount 4 000 000
Direct origination cost incurred 260 300 Direct origination cost incurred 61 500
Origination fee received from borrower (100 000) Origination fee received from borrower (350 000)
PV of Cash flows 3 160 300
PV of Cash flows 3 711 500
After considering the origination fee charged to the
The effective rate on the after considering the direct
borrower and the direct origination cost incurred, the
origination cost and origination fee received is 12%
effective rate on the loan is 6%.

Origination fees received 100 000 Origination fees received 350 000
Direct origination costs incurred (260 300) Direct origination costs incurred (61 500)
Net origination fees received (160 300) Net origination fees received 288 500

01/01/22 Date Interest Interest Premium Carrying

Loan Receivable 3 000 000 received Income amortization amount
Cash 3 000 000 01/01/22 3 711 500
01/01/22 12/31/22 400 000 445 380 45 380 3 756 880
Direct origination Cost 160 300 12/31/23 400 000 450 826 50 826 3 807 706
Cash 160 300 12/31/24 400 000 456 925 56 925 3 864 631
12/31/25 400 000 463 757 63 757 3 928 387
Date Interest Interest Premium Carrying
received Income amortization amount 12/31/26 400 000 471 613 71 613 4 000 000
01/01/2022 3 160 300
12/31/2022 240 000 189 618 50 382 3 109 918
12/31/2023 240 000 186 595 53 405 3 059 536
12/31/2024 240 000 180 464 59 536 3 000 000

12/31/22
Cash 240 000
Interest Income 240 000
Interest Income 50 382
Direct origination costs 50 382

12/31/23
Direct origination Cost 240 000
Cash 240 000
Interest Income 53 405
Direct origination costs 53 405

12/31/24
Direct origination Cost 240 000
Cash 240 000
Interest Income 59 536
Direct origination costs 59 536

Cash 3 000 000

Loan Receivable 3 000 000
PROBLEM 7-5 PROBLEM 7-6
Solvent Bank loaned P10 000 000 to a borrower on Cozy Bank loaned a borrower P7 500 000 on January 1,
Jan 1., 2022. The terms of the loan requires principal 2022. The terms of the loan were payment in full on
payments of P2 000 000 each year for 5 years plus December 31, 2026, plus annual interest payment at 12%
interest at 8% beginning December 31, 2022.
The first principal and interest payment is due on dec
31, 2022. The borrower made the required payments The interest payment was made as scheduled on
on Dec 31, 2022 and Dec 31, 2023. December 31, 2022. However, due to financial setbacks,
the borrower was unable to make the December 31, 2023
interest payment.
However, during 2024 the borrower began to
experience financial difficulties, requiring the bank to The bank considered the loan impaired and projected the
reasses the collectivity of the loan. cash flows from the loan on December 31, 2023. The bank
accrued the interest on December 31, 2023.

On dec 31, 2024, the bank has determined that the

On dec 31, 2024, the bank has determined that the
remaining principal payments will be collected but the
remaining principal payments will be collected but the
collection of the interest is unlikely. The bank has accrued
collection of the interest is unlikely. The bank has
the interest for 2024
accrued the interest for 2024

12/31/25 (1 000 000 x .93) 930 000 12/31/24 (500 000 x .89) 445 000
12/31/26 (2 000 000 x .86) 1 720 000 12/31/25 (1 000 000 x .80) 800 000
12/31/27 (3 000 000 x .79) 2 370 000 12/31/26 (2 000 000 x .71) 1 420 000
Present value of cash flows 5 020 000 12/31/27 (4 000 000 x .64) 2 560 000
Present value of cash flows 5 225 000
Loan receivable – 12/31/24 6 000 000
Accrued interest (6 000 000 x 8%) 480 000
Total Carrying amount 6 480 000 Loan receivable – 12/31/23 7 500 000
Present Value of loan 5 020 000 Accrued interest (6 000 000 x 8%) 900 000
Impairment Loss 1 460 000 Total Carrying amount 8 400 000
Present Value of loan 5 225 000
Date Amount Loan Interest Allow. Carrying Impairment Loss 3 375 000
projected -ending Income Amount
6 000 000 980 000 5 020 000
12/25 1 000 000 5 000 000 401 600 578 400 4 421 600 2023
12/26 2 000 000 3 000 000 353 728 224 672 2 775 328 Impairment Loss 3 375 000
12/27 3 000 000 - 222 026 Accrued Interest receivable 900 000
Allowance for loan impairment 2 275 000
2024 2024
Impairment Loss 1 460 000 Cash 500 000
Accrued Interest receivable 480 000 Loan Receivable 500 000
Allowance for loan impairment 980 000
Allowance for impairment 627 000
2024 Interest income 627 000
Cash 1 000 000
Loan Receivable 1 000 000 Date Amount Loan Interest Allow. Carrying
projected -ending Income Amount
Allowance for impairment 401 600 12/23 7 500 000 2 275 000 5 225 000
Interest income 401 600 12/24 500 000 7 000 000 627 000 1 648 000 5 352 000
12/25 1 000 000 6 000 000 642 240 1 005 760 4 994 240
12/26 2 000 000 4 000 000 599 309 406 451 3 593 549
12/27 4 000 000 - 431 226 - -
- 406 451
PROBLEM 7-7 PROBLEM 7-8
On December 31, 2022, Solid Bank has a loan Kalibo Bank loaned P5 000 000 on Catidan Company
receivable of P 4 000 000 from a borrower that it is on Januray 1, 2022. The terms of the loan require
carrying at face amount and is due on December 31, principal payments of P1 000 000 each year for 5 years
2027. Interest on the loan is payable at 9% each plus interest at 8%.
December 31.
The first principal and interest payments is due on Jan
The borrower paid the interest due on December 31, 1, 2023. Caticlan Comapnay made the required
2022 but informed the bank that it would probably miss payments during 2023 and 2024.
the next two years’ interest payments because of
financial difficulty. However, during 2024 Caticlan Company began to
experience financial difficulties, requiring Kalibo Bank
After that, the borrower is expected to resume the to reassess the collectivility of the loan.
annual interest payment but it would make the principal
payment one year late, with the interest paid for that On Decmber 31, 2024, Kalibo Bank has determined that
additional year at the time of principal payment. the remaining principal payments will be collected but
the collection of the interest is unlikely. Kalibo Bank did
The PV of 1 is .77 for three periods, .71 for four periods, not accrue the interest on Dec 31, 2024.
.65 for five periods and .60 for six periods
The PV of 1 at 8% is .93 for one period, .86 for two
12/31/25 (360 000 x .77) 277 200 periods and .79 for three periods
12/31/26 (360 000 x .71) 255 600
01/01/25 (1 000 000 x 1.00) 1 000 000
12/31/27 (360 000 x .65) 198 000
01/01/26 (1 000 000 x .93) 930 000
12/31/28 (4 360 000 x .60) 2 616 000
01/01/27 (1 000 000 .86) 860 000
Total Present Value of Loan 3 382 800
Total Present Value of Loan 2 790 000

Received Income PV Received Income PV

12/31/22 3 382 800 12/31/24 2 790 000
12/31/23 No received 304 452 3 687 252 01/01/25 1 000 000 1 790 000
12/31/24 No received 312 748 4 000 000 12/31/25 143 2000 1 933 200
12/31/25 360 000 360 000 4 000 000 01/01/26 1 000 000 933 200
12/31/26 360 000 360 000 4 000 000 12/31/26 66 800 1 000 000
12/31/27 360 000 360 000 4 000 000 01/01/27 1 000 000 -
12/31/28 4 360 000 360 000 -
Since for two years the borrower wasn’t able to pay the Face Value of Loan 3 000 000
annual interest, allowance for impairment is recognized for Present Value of loan 2 790 000
two years only Impairment Loss 210 000

Face Value of Loan 4 000 000 JOURNAL ENTRIES:

Present Value of loan 3 382 800
Impairment Loss 617 200 01/01/2022
Loan Receivable 5 000 000
JOURNAL ENTRIES: Cash 5 000 000
12/31/2022
2022 Cash 360 000
2022 Cash 360 000
Accrued Interest receivable 400 000 360 000
Interest income
Interest income 360 000
Interest Income 400 000
5
Impairment loss 617 200 000 000
Allow. for loss 617 200
01/01/2023
Cash 1 400 000 5
2023 Allow. for loss 304 452 Accrued
Interest Income 304 452 000 000 Interest receivable 400 000
Loan Receivable 1 000 000

2024 Allow. for loss 312 748 12/31/2023

Interest Income 312 748 Accrued Interest receivable 320 000
Interest Income 320 000
 CHAPTER 10

Consigned goods
Inventories are assets held for sale in the ordinary A consignment is a method of marketing goods in
course of business, in the process of production for which the owner called the consignor transfer physical
such sale or in the production process or in the possession of certain goods to an agent called the
rendering of services consignee who sells them on the owner’s half
Inventories encompass goods purchased and held for Consigned goods shall be included in the consignor’s
resale, for example: inventory and excluded from the consignee’s
a. Merchandise purchased by a retailer and held inventory
COMPANY’s POV
for resale Consigned Goods held out Included
b. Land and other property held for resale by a
Consigned goods held on Excluded part of consignee
subdivision entity and real estate developer
Inventories are broadly classified into tow, namely
Freight and other handling charges on goods out on
inventories of a trading concern and inventories of
consignment are part of the cost of goods consigned.
manufacturing concern.
2. Trading concern
- Is one that buys and sells goods in the COST OF INVENTORIES
same form purchased. The term
 Purchase Price
merchandise inventory is generally
 Import duties and other nonrecoverable taxes
applied to goods held by trading concern
- Custom duties, percentage tax, Input Vat on
1. Manufacturing concern non-VAT registered taxpayer
- Is one that buys good which are altered or  Directly attributable costs
converted into another form before they - Transport, handling, insurance, etc.
are made available for use  Conversion costs (not to include abnormal
wastage)
The inventories of a manufacturing concern are
finished goods, goods in process, raw materials and Other costs
factory or manufacturing supplies.  Borrowing costs or interest during production of
Finished goods – are completed products which inventories which take substantial time to
are ready for sale produce.
Goods in process – or work in process are partially  Storage costs – when products require a
completed products which require further process or maturation process (related to goods in process)
work before they can be sold  Cost of designs for custom products
Raw materials are goods that are to be used in the
production process. No work or process has been done
WHO OWNS THE INVENTORY?
on them as yet.
Factory or manufacturing supplies are similar to raw FOB FOB Seller Ownership is transferred
Destination only upon receipt of the
materials but their relationship to the end product is
goods by the buyer
indirect. The goods in transit are still the property of the seller.
Factory or manufacturing supplies may be referred to Thus, the seller must be responsible for freight charges
as indirect supplies and other expenses up to the point of destination
FOB FOB Buyer Ownership is transferred
Shipping Point only upon shipment of
Goods includible in the inventory the goods by the buyer
- The general rule is that all goods to which the The goods in transit are still the property of the buyer.
entity has title shall be included in the Thus, the buyer must be responsible for freight charges
inventory, regardless of location and other expenses from the point of shipment to the point
of the destination
- The phrase “passing the title” is a legal
language which means the point of time of
which ownership changes
MARITIME SHIPPING TERMS PROBLEM 10-1
1. FAS or Free alongside Amiable Company provided the following data at year-
- A seller who ships FAS must bear all end:
expenses and risk involved in delivering
Items counted in the bodega 4 000 000 
the goods to the dock
Items included in the count 100 000 -
- Buyer bears the cost of loading and specifically segregated per sales
shipment contract
2. CIF or Cost, Insurance, and Freight Items in receiving department, 50 000 
- Buyer agrees to pay in a lump sum the returned by customer, in good
cost of the goods, insurance cost and condition
freight charge Items ordered in the receiving 400 000 
department, invoice not received
- Seller must pay for the cost of loading,
means that ownership is pass to the buyer
Items ordered, invoice received but 300 000 
goods not received. Freight is on
upon delivery, account of seller
3. Ex-ship Items shipped today, invoice mailed, 250 000 
- A seller who delivers the goods ex-ship FOB shipping point
bears all expenses and risk of loss until the Items shipped today, invoice mailed, 150 000 
goods are unloaded FOB destination
Items currently used for window 200 000 
- Buyer when goods are unloaded on vessel
display
Items in counter for sale 800 000 
EXCLUDED FROM INVENTORIES Items in receiving department, 180 000 
refused because of damage
 Abnormal amounts of wasted materials, labor or Items included in count, damaged 50 000 -
other production and unusable
Items in the shipping department 250 000 
 Storage costs (unless essential to the production
Total P 5 700 000
process)
 Administrative overheads unrelated to production
 Selling costs PROBLEM 10-9
At year-end Kerr Company purchased goods costing
 Foreign exchange differences arising directly on
P500 000 FOB Destination. These goods were received
the recent acquisition of inventories invoiced in a
at year-end. The cost incurred in connection with the sale
foreign currency
and delivery of the goods were.
 Interest cost when inventories are purchased with
deferred settlement terms Packaging for shipment 10 000 
Shipping 15 000 
PROBLEM 10-2
Lemon Company provided the following data at year-end:
Special handling charges 25 000 
TOTAL P 500 000
Finished goods in storeroom, 2 000 000  When goods are purchased FOB destination, the
at cost
seller is responsible for costs incurred in transporting the
Finished goods in transit, 250 000  goods to the buyer
FOB shipping point
Finished goods held by 200 000 
salesmen, at selling price, PROBLEM 10-11
cost, P100 000 Inventory shipped on consignment to 600 000 
Goods in process, at cost 900 000  a consignee
Freight paid by Stone Company 50 000 
Materials 1 000 000 
Inventory received on consignment 800 000 
Materials in transit, FOB 50 000 
from a consignor
destination
Defective materials returned 100 000 
Freight paid consignor 50 000 
to suppliers for replacement TOTAL P 650 000
Shipping supplies 150 000  1. Inventory shipped on consignment by Stone remains
Gasoline and oil for testing 100 000  part of Stone’s inventory, since it has not been sold
finished goods
Machine lubricants 300 000  NOTE: if the consignment goods are sold, ownerships
TOTAL P 4 500 000 transfers to the customer, and Stone company removes it
from inventory
1. A company issued a check, but it has not yet been 3. In computing for the ending deposit in transit, the
cleared by the bank. How is this treated in a bank following procedures are generally correct, except
reconciliation? a. Beginning deposit in transit is added to the
a. Added to the bank balance amounts of deposits made to the bank during the
b. Deducted from the bank balance current period.
c. Added to the cash book balance b. The total amount of deposits made to the bank
d. Deducted from the cash book balance is equal to the amount of book receipts.
c. The amount of total deposits acknowledged by the
Outstanding checks reduce the balance the bank should
bank is deducted from the sum of the beginning
actually reflect but hasn’t yet because the checks
deposit in transit and deposits made to the bank
haven't cleared.
during the current period.
2. Which of the following should be added to the cash d. The total amount of deposits acknowledged by the
balance per books in a bank reconciliation? bank is not necessarily equal to the amount of bank
a. Outstanding checks receipts.
Book and bank receipts often differ
b. Deposits in transit
c. Bank service charges
d. NSF (non-sufficient funds) checks 7. Outstanding checks at the beginning of the current
month should be reflected in the current month's
All book reconciling items listed are deductions, not
proof of cash as
additions.
a. Deduction from the bank balance.
b. Addition to the book disbursements.
11. The Financial Reporting Standards Council is
c. Deduction from the bank disbursements.
renamed
a. Financial and Sustainability Reporting d. Addition to the bank disbursements. receipts.
Standards Council (FSRSC) Otstanding cheks reduce the bank side during
b. International Sustainability Standards Board reconciliation
(ISSB)
c. International Reporting Standards Council 6. The following are removed from the amount of bank
d. Philippine Reporting Standards Council receipts in determining the amount of deposits
acknowledged by the bank, except
10. Which of the following is not considered cash or a
a. Proceeds from a bank loan granted to the entity
cash equivalent?
during the current period
a. Treasury bills
b. Proceeds from a collection of the entity's note
b. Accounts receivable
receivable during the current period
c. Money market funds
c. Errors involving the overstatement of deposits
d. Bank demand deposits
committed during the current period.
9. Which of the following funds is generally classified d. Errors involving the overstatement of checks
as cash? committed during the current period
a. Sinking fund for bonds payable in 6 months
b. Insurance fund These do not affect bank receipts, but rather
c. Postretirement fund disbursements
d. Fund for Plant expansion starting in 3 months
5. Cash equivalents are typically:
All items depend on their purpose to be included in a. Highly liquid investments with original
CCE. Since, sinking fund is for 6-month purpose, it is maturities of three months or less
part of CCE b. Stocks and bonds traded in the stock market
c. Any asset that can be converted to cash within one
8. Which of the following are bank reconciling items? year
a. Credit memo d. Long-term financial instruments
b. Debit memo
c. Notes collected by bank. Option C is Cash fund
d. NSF checks not recorded by bank.
All options are BOOK reconciling items
12. Which of the following best describes cash 16. Tranvia Company revealed the following information on
equivalents? Dec 31, 2022
a. Illiquid assets with high volatility Cash in checking account 350 000 
b. Short-term, highly liquid investments readily Cash in money market account 750 000 
convertible to known amounts of cash Time deposited purchased Dec 1, 3 500 000 
2022 maturing Jan 31, 2023
c. Investments with maturities longer than one year
Treasury Bill, purchased Oct 1, 4 000 000 
d. Only physical cash and coins
2022 maturing Jan 5, 2023
TOTAL CCE P 4 600 000
13. Where are cash and cash equivalents reported in the
17. On December 31, 2022, west company had the following
financial statements?
cash balances:
a. Under liabilities in the balance sheet
b. Under the cash flow statement only Cash in bank – current account 1 800 000 
Compensating balance restricted (60 000)
c. As a part of current assets in the balance sheet
Petty cash fund – with 50 000 
d. Under revenue in the income statement unreplenished petty cash
vouchers of P 8 000
Unreplensihed petty cash (8 000)
14. Why are restricted cash balances not included in Time deposit – due February 1, 250 000 
cash and cash equivalents? 2023
a. They are not liquid assets Third Bank dollar account 1 000 000 
b. They are not expected to be used in the normal (converted to peso)
course of operations TOTAL CCE P 3 032 000
c. They must be held for longer than a year
d. They have an unknown fair market value Cash in bank included P60 000 of compensating balance
against short-term borrowing arrangement. The
Restrictions prevent immediate availability for general compensating balance is legally restricted as to withdrawal
use

18. In preparing the bank reconciliation for the month of

15. Which of the following is NOT a reason for December, Case Company provided:
differences between the cash book and bank
statement? Balance per bank statement 3 800 000
a. Outstanding checks Deposit in transit 420 000
Amount erroneously debited by 40 000
b. Deposits in transit
bank to Case’s account
c. Errors in the bank's accounting records Bank service charge 5 000
d. Depreciation expense NSF Checks 50 000
Outstanding checks 675 000

16. Which of the following items requires an adjustment

in the company’s cash book during a bank
reconciliation?
a. Outstanding checks Balance per bank statement 3 800 000
Deposit in transit 420 000
b. Deposits in transit
Amount erroneously debited by 40 000
c. Bank service charges bank to Case’s account
d. Checks issued but not yet presented for payment Oustanding checks (675 000)
Adjusted balance P 3 585 000
Bank service charges are only recorded in the bank
records, so it must be adjusted in the books.