2 accounting for_receivables

7-1

7-2

C H A P T E R 2

ACCOUNTING FOR RECEIVABLES

Intermediate Accounting

IFRS Edition

Kieso, Weygandt, and Warfield

7-3

1. Define receivables and identify the different types of receivables.

2. Explain accounting issues related to recognition of accounts receivable.

3. Explain accounting issues related to valuation of accounts receivable.

4. Explain accounting issues related to recognition of notes receivable.

5. Explain accounting issues related to valuation of notes receivable.

6. Understand special topics related to receivables.

7. Describe how to report and analyze receivables.

Learning Objectives

7-4

Recognition

Valuation

Impairment

evaluation process

Accounts

ReceivableNotes Receivable Special Issues

Recognition

Valuation

Fair value option

Derecognition of

receivables

Presentation and

analysis

Accounting for Receivables

7-5

Accounts Receivable

LO 3 Define receivables and identify the different types of receivables.

Written promises to pay a

sum of money on a

specified future date.

Receivables are claims held against customers and

others for money, goods, or services.

Oral promises of the

purchaser to pay for goods

and services sold.

Accounts

Receivable

Notes

Receivable

7-6

Non-trade Receivables

1. Advances to officers and employees.

2. Advances to subsidiaries.

3. Deposits to cover potential damages or losses.

4. Deposits as a guarantee of performance or payment.

5. Dividends and interest receivable.

6. Claims against:

a) Insurance companies for casualties sustained.

b) Defendants under suit.

c) Governmental bodies for tax refunds.

d) Common carriers for damaged or lost goods.

e) Creditors for returned, damaged, or lost goods.

f) Customers for returnable items (crates, containers, etc.).

Accounts Receivable


7-7

Non-trade Receivables

Accounts Receivable


Illustration 7-4

Receivables Statement

of Financial Position

Presentations

7-8

Accounts Receivable

LO 4 Explain accounting issues related to recognition of accounts receivable.

Trade Discounts

Reductions from the list

price

Not recognized in the

accounting records

Customers are billed net of

discounts

10 %

Discount

for new

Retail

Store

Customers

Recognition of Accounts Receivable

7-9

Accounts Receivable


Cash Discounts(Sales Discounts)

Inducements for prompt payment

Gross Method vs. Net Method

Payment terms

are 2/10, n/30

Recognition of Accounts Receivable

7-10

Accounts Receivable


Cash Discounts (Sales Discounts) Illustration 7-5

Entries under Gross and

Net Methods of Recording

Cash (Sales) Discounts

7-11

E7-5: On June 3, Bolton Company sold to Arquette Company

merchandise having a sale price of £2,000 with terms of 2/10, n/60,

f.o.b. shipping point. On June 12, the company received a check for

the balance due from Arquette Company. Prepare the journal entries

on Bolton Company books to record the sale assuming Bolton records

sales using the gross method.

Sales 2,000

Accounts receivable 2,000June 3

Accounts Receivable


Cash 1,960

Sales discounts (£2,000 x 2%) 40

Accounts receivable 2,000

June 12

7-12

Sales 1,960


Accounts Receivable


Cash (£2,000 x 98%) 1,960


June 12



f.o.b. shipping point. On June 12, the company received a check for

the balance due from Arquette Company. Prepare the journal entries

on Bolton Company books to record the sale assuming Bolton records

sales using the net method.

7-13



f.o.b. shipping point. Prepare the journal entries on Bolton Company

books to record the sale assuming Bolton records sales using the net

method, and Arquette did not remit payment until July 29.

Sales 1,960


Accounts Receivable


Cash 2,000


Sales discounts forfeited 40

June 12

7-14

A company should measure receivables in terms of their

present value.

Non-Recognition of Interest Element


Accounts Receivable

In practice, companies ignore interest revenue related to

accounts receivable because, for current assets, the

amount of the discount is

not usually material in

relation to the net income

for the period.

7-15

How are these accounts presented on the Statement of

Financial Position?

Accounts ReceivableAllowance for

Doubtful Accounts

Beg. 500 25 Beg.

End. 500 25 End.

Accounts Receivable


7-16 LO 4 Explain accounting issues related to recognition of accounts receivable.

Current Assets:

Merchandise inventory 812$

Prepaid expense 40

Accounts receivable 500

Less: Allowance for doubtful accounts (25) 475

Cash 330

Total current assets 1,657

Statement of Financial Position (partial)

ABC Corporation

Accounts Receivable


Current Assets:


Prepaid expense 40

Accounts receivable, net of $25 allowance 475

Cash 330



ABC Corporation

Accounts Receivable

7-18

Journal entry for credit sale of $100?


Sales 100


Doubtful Accounts

Beg. 500 25 Beg.

End. 500 25 End.

Accounts Receivable


7-19


Doubtful Accounts

Beg. 500 25 Beg.

End. 600 25 End.

Sale 100

Accounts Receivable


Journal entry for credit sale of $100?


Sales 100

7-20

Collected of $333 on account?

Cash 333



Doubtful Accounts

Beg. 500 25 Beg.

End. 600 25 End.

Sale 100

Accounts Receivable


7-21

Collected of $333 on account?

Cash 333



Doubtful Accounts

Beg. 500 25 Beg.

End. 267 25 End.

Sale 100 333 Coll.

Accounts Receivable


7-22

Adjustment of $15 for estimated Bad-Debts?

Bad debt expense 15

Allowance for Doubtful Accounts 15


Doubtful Accounts

Beg. 500 25 Beg.

End. 267 25 End.

Sale 100 333 Coll.

Accounts Receivable


7-23

Adjustment of $15 for estimated Bad-Debts?

Bad debt expense 15

Allowance for Doubtful Accounts 15


Doubtful Accounts

Beg. 500 25 Beg.

End. 267 40 End.

Sale 100 333 Coll. 15 Est.

Accounts Receivable


7-24

Write-off of uncollectible accounts for $10?

Allowance for Doubtful accounts 10



Doubtful Accounts

Beg. 500 25 Beg.

End. 267 40 End.


Accounts Receivable


7-25

Write-off of uncollectible accounts for $10?

Allowance for Doubtful accounts 10



Doubtful Accounts

Beg. 500 25 Beg.

End. 257 30 End.


W/O 1010 W/O

Accounts Receivable



Current Assets:


Prepaid expense 40

Accounts receivable, net of $30 allowance 227

Cash 330



ABC Corporation

Accounts Receivable

7-27

Accounts Receivable

LO 5 Explain accounting issues related to valuation of accounts receivable.

Valuation of Accounts Receivables

Classification

Valuation (cash realizable value)

Uncollectible Accounts Receivable

Sales on account raise the possibility of accounts

not being collected.

7-28 LO 5 Explain accounting issues related to valuation of accounts receivable.

Valuation of Accounts Receivable

An uncollectible account receivable is a loss of revenue that

requires,

a decrease in the asset accounts receivable and

a related decrease in income and shareholders’ equity.


7-29 LO 5 Explain accounting issues related to valuation of accounts receivable.

Allowance Method

Losses are Estimated:

Percentage-of-sales

Percentage-of-receivables

IFRS requires when

material in amount

Methods of Accounting for Uncollectible Accounts

Direct Write-Off

Theoretically undesirable:

No matching

Receivable not stated at

cash realizable value

Not IFRS when material in

amount

Valuation of Accounts Receivable

7-30



Emphasis on

the Income

Statement

Emphasis on

the Statement

of Financial

Position

Illustration 7-7

7-31



Percentage-of-Sales Approach

Percentage based upon past experience and anticipate

credit policy.

Achieves proper matching of costs with revenues.

Existing balance in Allowance account not considered.

7-32


LO 5

Illustration: Gonzalez Company estimates from past experience

that about 1% of credit sales become uncollectible. If net credit

sales are $800,000 in 2011, it records bad debt expense as follows.

Bad Debt Expense 8,000

Allowance for Doubtful Accounts 8,000

Percentage-of-Sales Approach

Illustration 7-8

7-33



Percentage-of-Receivables Approach

Not matching.

Reports receivables at cash realizable value.

Companies may apply this method using

► one composite rate, or

► an aging schedule using different rates.

7-34





What entry

would Wilson

make assuming

that no balance

existed in the

allowance

account?

Illustration 7-9

Accounts Receivable

Aging Schedule

7-35



Bad Debt Expense ($37,650 – $800) 36,850


What entry

would Wilson

make assuming

the allowance

account had a

credit balance

of $800 before

adjustment?

Illustration 7-9

Accounts Receivable

Aging Schedule

7-36



E7-7 (Recording Bad Debts): Sandel Company reports the

following financial information before adjustments.

Instructions: Prepare the journal entry to record bad debt

expense assuming Sandel Company estimates bad debts at

(a) 1% of net sales and (b) 5% of accounts receivable.

7-37







(a) 1% of net sales.



(€800,000 – €50,000) x 1% = €7,500

7-38







(b) 5% of accounts receivable.



(€160,000 x 5%) – €2,000) = €6,000

7-39

Recovery of Uncollectible Accounts

LO 5

Illustration: Assume that the financial vice president of Brown

Furniture authorizes a write-off of the $1,000 balance owed by

Randall Co. on March 1, 2012. The entry to record the write-off is:


Accounts Receivable 1,000

Assume that on July 1, Randall Co. pays the $1,000 amount that

Brown had written off on March 1. These are the entries:



Cash 1,000


7-40 LO 8 Understand special topics related to receivables.

Company may transfer (e.g., sells) a receivables to another

company for cash.

Reasons:

Competition.

Sell receivables because money is tight.

Billing / collection are time-consuming and costly.

Transfer accomplished by:

1. Secured borrowing (Assignment)

2. Sale of receivables (Factoring)

Special Issues Related To Receivables

Derecognition of Receivables

7-41

Secured Borrowing (Assignment)

- Assigning/pledging accounts receivable means

using them as collateral for a loan or in a

borrowing transaction.

- Holder retains ownership.


7-42



Trade debt may be assigned or pledged with a

banker to obtain funds to meet company’s cash

needs.

Trade debts are used as collaterals to obtain the

financing.

Risk of bad debts are not passed on to the

banker because it has the full recourse on the

company in the event that the trade debtors are

unable to settle their debts.

7-43



Bill of exchange – trade debt financing

arrangements to acknowledge its liability.

The trade debts are remained in the accounting

records and the cash received and the

corresponding bill payable should be recognized

in the accounts.

7-44



o Transferor records for note payable and finance charge.No effect on accounting for accounts receivable.

o Transferor collects accounts receivable.

o Transferor records sales returns and sales discounts.

o Transferor absorbs bad debts expense.

o Transferor records interest expense on notes payable.

o Transferor pays on the note periodically from collections.

o Meanwhile, the banker will record for note receivables,finance revenue, interest revenue and cash paid andreceived.

7-45


Illustration: March 1, 2011, Howat Mills, Inc. provides (assigns)

$700,000 of its accounts receivable to Citizens Bank as collateral

for a $500,000 note. Howat Mills continues to collect the accounts

receivable; the account debtors are not notified of the arrangement.

Citizens Bank assesses a finance charge of 1 percent of the

accounts receivable and interest on the note of 12 percent. Howat

Mills makes monthly payments to the bank for all cash it collects on

the receivables.

LO 8 Understand special topics related to receivables.


Using receivables as collateral in a borrowing transaction.

7-46

Secured Borrowing - Illustration

LO 8 Illustration 7-18

7-47

E7-14: On April 1, 2010, Prince Company assigns $500,000 of its

accounts receivable to the Hibernia Bank as collateral for a $300,000 loan

due July 1, 2010. The assignment agreement calls for Prince Company to

continue to collect the receivables. Hibernia Bank assesses a finance

charge of 2% of the accounts receivable, and interest on the loan is 10% (a

realistic rate of interest for a note of this type).

Secured Borrowing - Exercise

Instructions:

a) Prepare the April 1, 2010, journal entry for Prince Company.

b) Prepare the journal entry for Prince’s collection of $350,000 of the

accounts receivable during the period from April 1, 2010, through

June 30, 2010.

c) On July 1, 2010, Prince paid Hibernia all that was due from the loan it

secured on April 1, 2010. Prepare the entry to record this payment.


7-48

E7-14 continued

Date Account Title Debit Credit

(a) Cash 290,000

Finance Charge 10,000

Notes Payable 300,000

($500,000 x 2% = $10,000)

(b) Cash 350,000


(c) Notes Payable 300,000

Interest Expense 7,500

Cash 307,500

(10% x $300,000 x 3/12 = $7,500)

Secured Borrowing - Exercise


7-49

Example 3

On January 2012, Provo Mercantile Co. assigns

specific receivables totaling RM300,000 to Salem

Bank as collateral on a RM200,000, 12% note.

Salem assesses a 1% finance charge on assigned

receivables in addition to the interest on the note.

Provo is to make monthly payments to Salem with

cash collected on assigned receivables. The entry

should be as follows:

7-50

1/1/2012

DR Cash RM197,000

DR Finance charge RM3,000

CR Notes payable RM200,000

(to record the loan with Salem Bank)

The trade debts of RM300,000 still remains in Provo’s accounts.

Dr. Accounts receivable assigned RM300,000

Cr. Accounts receivable RM300,000

( to reclassify the assigned account receivable)

7-51

In the banker’s book:

1/1/2012

DR Note Receivable 200,000

CR Finance revenue 3,000

CR Cash 197,000

(to record loan to Provo Co.)

7-52

31/1/2012

Collection of assigned accounts during January 2012 ofRM180,000 less cash discounts of RM1,000; Sales return inJanuary RM2,000

31/1/2012 RM RM

Cash 179,000Cash Discounts 1,000Sales return 2,000

Accounts Receivable Assigned 182,000(to record collection in January)

7-53

1/2/2012

February 2012, Payment to Salem Bank on amountowed plus interest on note payable

Journal entries-1/2/2012 RMRM

DR Notes payable 179,000DR Interest expense (200,000 x12%x1/12) 2,000

CR Cash 181,000(To record loan repayment)

7-54


1/2/2012

DR Cash 181,000CR Note receivable 179,000CR Interest revenue 2,000

(to record receipts from Provo Co. and recognize interestrevenue)

7-55

28/2/2012

Collection of the remaining 118,000 of receivables assigned

RMRM

DR Cash 118,000CR Accounts Receivable 118,000

Assigned(To record collection in February)

7-56

1/3/2012Remittance of balance due to Salem Bank

RM RMDR Notes payable(200,000-179,000) 21,000DR Interest expense (21,000 x 12% x 1/12) 210

CR Cash 21,210(to record loan repayment)

7-57

28/2/2012

Assuming Provo received RM21,000 from AR Assigned,

instead of RM118,000:

Dr. Cash 21,000

Cr. A/R assigned 21,000

(To record collection in February)

7-58

1/3/2012 Remitted the balance due to Salem Bank.

Dr. Notes Payable 21,000Dr. Interest expense 210Cr. Cash 21,210(To record loan repayment)

The balance in Accounts Receivable Assigned is to be reclassified asfollows:

Dr. Accounts Receivable 97,000Cr. Accounts Receivable 97,000

Assigned(To reclassify remaining balance of AR assigned)

7-59


1/3/2012

DR Cash 21,210CR Notes receivable 21,000CR Interest revenue 210

(to record receipts from Provo Co. and recognize interestrevenue)

7-60

Sales of Receivables (Factoring)

Factoring accounts receivable means selling them. It is another

way of obtaining cash advances on trade debts.

Factoring : transferring (selling) the AR to a factor (a company that

undertakes factoring)

Differs from assignment of trade debts where the factoring company

administers the credit management (includes sales accounting

services, credit administration and control services and collection

services) for the company.

Factoring can be with recourse (with guarantee) or without recourse(without guarantee).

Recourse (guarantee) refers to ultimate responsibility for payment.

7-61

Factors are finance companies or banks that buy receivables from

businesses for a fee.


Illustration 7-19


7-62

Sale without Guarantee (Recourse)

The legal title (the form) together with the risks and rewards

(the substance) of the trade debts pass to the factoring

company.

The difference between the net proceeds and the carrying

amount of the trade debts (if any) is recognized as a loss on

sale of trade debts in the income statement.



7-63 63

Factoring of receivables without

guarantee(recourse)

Ownership, risks and gain will be transferred to thefactoring company.

Control of receivables would be in the hand offactoring company.

Factoring company will charge the commissionbased on the risks associated

Factoring company normally pays 80% -90% of theface value after considering the potential salesreturn/allowance

7-64 64

Textiles Corporation factors RM500,000 ofaccounts receivable with Cotton Bank Berhad ona without recourse basis. The receivable recordsare transferred to Cotton Bank Berhad, which willreceive the collections.

The Cotton Bank Berhad assesses a financecharge of 3% of the amount of accountsreceivable & retain an amount equal to 5% of theaccounts receivable.

Example 1

7-65 65

Journal entries – Textiles Corp. (SELLER’S BOOK)

RM RM

DR Cash 460,000

DR Receivable from Bank-holdback 25,000

DR Finance charge 15,000

CR Accounts receivable 500,000

(To record the receivables sold without recourse)

Example 1

7-66 66

Journal entries – Cotton Bank Berhad (FACTOR’SBOOK)

RM RM

DR Accounts receivable 500,000

CR Payable to Textiles 25,000

CR Financing revenue 15,000

CR Cash 460,000

(To record the receivables purchased without recourse)

Example 1

7-67 67

Example 1- Receivables factoring

without recourse: Collection of AR

Assume RM20,000 was uncollectible and there were

RM7,000 sales return and allowances, sales discount of

RM5,000.

The remaining amount was collected by the bank.

7-68 68

Recording by Textiles (SELLER’S BOOK):

Bad debt expense 20,000

Sales discount 5,000

Sales Return and Allow. 7,000

Receivables from Bank 25,000

Cash 7,000

(to record sales adjustment and BD and pay for the shortage)

Liability on transferred Recv. 500,000


(to close liability a/c and a/receivables collected)

7-69 69

Collection: Recording by Bank (FACTOR’S

BOOK)

Cash 468,000


Payable to Textiles 12,000

A/R 500,000

(to record collection from debtors)


Cash 13,000

(to record settlement of A/R factored)

7-70 70

Factoring of receivables with

guarantee(recourse)

Debt factoring with recourse Immediate cash advances for certain % of the debt

factored provided by the factoring company.

The factor company – acts as a collection agent.

The seller has retained all the risk associated withthe trade receivable full recourse.

7-71 71

Factoring of receivables with

guarantee(recourse)(cont.)

Therefore, the trade receivables would be

retained on the BS as assets and the proceeds

received would be recognized as a liability.

As when the trade debtors settled and the cash

was passed over to the factor, the trade

receivables and liability would be reduced.

7-72 72

Example:

Jacko Sdn Bhd had RM4,000,000 accounts

receivable. The A/R were sold to a bank on a

recourse factoring arrangement. The amount of

cash advance obtained was RM3,600,000 less a

factoring fee of RM60,000. Also finance interest is

calculated at 15% p.a.

Show the journal entry to record the recourse

factoring arrangement.

Factoring of receivables with recourse

(Example 1)

7-73 73

Journal entry – SELLER’S BOOK

RM RM

DR Cash 3,540,000

DR Factoring fee deferred 60,000

CR Liability on transferred AR 3,600,000

(to record receivables factored with recourse)

Factoring fee will be amortized over the period

of the debt collection.

Interest will be recognized as an expense until

the debts are collected and advance paid.

Factoring of receivables with recourse

(Example 1)

7-74 74

Receivables factoring with

recourse (Example 2)

Textiles Corporation factors RM500,000 of

accounts receivable with Cotton Bank Berhad on

a recourse basis.

The Cotton Bank Berhad assesses a finance

charge of 3% of the amount of accounts

receivable and retain an amount equal to 5% of

the accounts receivable.

7-75 75

Journal entries – Textiles Corp. (SELLER’S BOOK)

RM RM

DR Cash 460,000

DR Receivable from Bank-holdback (5%) 25,000

DR Finance charge (deferred) (3%) 15,000

CR Liability on transferred AR 500,000

Receivables factoring with recourse

(Example 2)

7-76 76

Journal entries – Cotton Bank Berhad (FACTOR’SBOOK)

RM RM

DR Accounts receivable 500,000

CR Payable to Textiles 25,000

CR Financing revenue 15,000

CR Cash 460,000

Receivables factoring with recourse

(Example 2)

7-77 77

Example 2- Receivables factoring with

recourse: Collection of AR

Assume RM20,000 was uncollectible and there

were RM7,000 sales return and allowances,

sales discount of RM5,000.

The remaining amount was collected by the

bank.

7-78 78

Recording by Textiles Corp. (SELLER’S

BOOK):


Sales discount 5,000

Sales Return and Allow. 7,000

Receivables from Bank 25,000

Cash 7,000

(to record sales adjustment and BD and pay for theshortage)

Liability on transferred Recv. 500,000


(to close liability a/c and a/receivables collected)

7-79 79

Recording by Bank (FACTOR’S BOOK)

Cash 468,000


Acct Receivable 480,000

(to record collection from debtors)


Cash 7,000

Acct Receivable 20,000

(to record settlement of A/R factored)

7-80

Sale with Guarantee

Sales of Receivables

Seller guarantees payment to purchaser.

Transfer is considered a borrowing—sometimes referred to

as a failed sale.


Assume Crest Textiles sold the receivables on a with guarantee basis.

Illustration 7-21

7-81

Determining whether receivables that are transferred can be derecognized and

accounted for as a sale is based on an evaluation of whether the seller has

transferred substantially all the risks and rewards of ownership of the financial asset.

Summary of Transfers

LO 8

Illustration 7-22

7-82

General rule in classifying receivables are:

1. Segregate and report carrying amounts of different categories of

receivables.

2. Indicate receivables classified as current and non-current in the

statement of financial position.

3. Appropriately offset the valuation accounts for receivables that are

impaired, including a discussion of individual and collectively determined

impairments.

4. Disclose the fair value of receivables in such a way that permits it to be

compared with its carrying amount.

5. Disclose information to assess the credit risk inherent in the receivables

by providing information on:

6. Disclose any receivables pledged as collateral.

7. Disclose all significant concentrations of credit risk arising from

receivables.

Presentation and Analysis

LO 9 Describe how to report and analyze receivables.

7-83

Analysis of Receivables

Presentation and Analysis

This Ratio used to:

Assess the liquidity of the receivables.

Measure the number of times, on average, a company

collects receivables during the period.

Illustration 7-24

LO 9 Describe how to report and analyze receivables.

7-84

Supported by a formal promissory note.

Notes Receivable

LO 6 Explain accounting issues related to recognition of notes receivable.

A promissory note is a written promise to pay a sum of

money on a specified date in the future.

A negotiable instrument.

Maker signs in favor of a Payee.

Interest-bearing (has a stated rate of interest) OR

Zero-interest-bearing (interest included in face

amount).

7-85

Notes Receivable

LO 6 Explain accounting issues related to recognition of notes receivable.

Generally originate from:

Customers who need to extend payment period of an

outstanding receivable.

High-risk or new customers.

Loans to employees and subsidiaries.

Sales of property, plant, and equipment.

Lending transactions (the majority of notes).

7-86 86

Notes Receivable

The parties to a promissory note are:

1. The maker/borrower/customer - the party thatpromises to repay the amount borrowed

2. The payee - the party that will receive the payment

– E.g. RM1,000, 60-day note, 12% interest p.a.

RM50,000, 6-month note, 10% interest p.a.

7-87 87

Principal - the amount borrowed/ the face value/ thestated amount of the note

Maturity date - the date the note is to be repaid/due

Term - the time period/life of the note (in days ormonths)

Interest - the amount charged on the borrower forthe use of the money borrowed

Maturity value - the amount of cash to be repaidincluding principal and interest on the maturity date

Terms used in Note Receivable

7-88 88

Due date

The life of a note may be expressed in months or days.

When the life of a note is expressed in terms of months,the due date is found by counting the months from thedate of issue.

When the due date is stated in terms of days, it isnecessary to count the exact number of days todetermine the maturity date.

In counting the life of a note, the date the note is issuedis omitted but the due date is included.

7-89 89

Example

7-90 90

Computing interest

The formula for computing INTEREST is

PRT:

Principle (Face Value) x Rate (annual interest

rate) x Time (in Terms of one year)

7-91 91

Computing interest

365 = RM99

RM99

RM5099

RM5099

7-92 92

Entries to record notes receivables

At the time a note is received, it is

recorded at face value with no interest

added.

7-93 93


Notes receivable are reported at their cash (net)realizable value

A note is honored when it is paid in full at maturity

Interest revenue is recorded when the note is paid.However, if interim financial statements areprepared, interest on notes receivable is accruedand shown as interest revenue as it is earned.

7-94 94

Entries to record notesreceivables

7-95 95


If a note is not paid in full at maturity, it is

called a dishonored note. If it can reasonably

be assumed that the amount due will

ultimately be collected, it is usually

transferred to an Account Receivable.

7-96 96


7-97 97

Notes receivable are issued at face valuewhen the stated rate of interest is thesame as the effective (market) rate.

If the stated rate is less than the effectiverate then a discount results.

If the stated rate is greater than theeffective rate then a premium results.

The discount or premium is amortized tointerest revenue by the effective interestmethod.

Recognition of notes receivable

7-98 98

Financing with notes receivable (NR)

Obtain cash immediately from NR – through

discounting

Discounting: means selling the NR to bank

Discounting NR: selling the NR before

maturity date at a discounted price.

7-99 99

Formula

Maturity value (MV) = Face value (FV) + interest

Interest = FV x Interest rate x time

Discount = MV x discount rate x no. of discount days/365

Proceeds = MV – Discount

Book value = FV + accrued interest

Gain/loss = proceeds – book value of notesreceivable

7-100 100

Financing/ Discounting of Notes

Receivable

•Two methods:

i. with recourse ii. Without recourse

• Discounting with recourse – bank act ascollecting agent BUT seller will pay in case ofdefault (create liability and retain NR in BS)

• Discounting without recourse – the seller hasno responsibility with regard to the notes, andthe note is removed from the balance sheet.(all risks and rewards passed to the buyer)

7-101 101

Example

On 1/9/2012, ABC received a note receivable of RM5,000,10%, 90 days from a customer. After 10 days, ABCdiscounted the note to Bank DEF at the rate of 15%.

Calculation:

MV = 5,000 + (5,000 x 0.1 x 90/365) = 5,123

Discount = 5,123 x 0.15 x 80/365 = 168

Proceeds = 5,123 – 168 = 4,955

BV = 5,000 + (5,000 x 0.1 x 10/365) = 5,013.70

Gain/(loss) = 4,955 – 5,013.70 = (58.70)

7-102 102

Journal entry on 1/9/2012- Receipts of

NR

Sale (without recourse)

Dr. NR 5,000

Cr. AR/Cash 5,000

Sale (with recourse)

Dr. NR 5,000

Cr. AR/Cash 5,000

7-103 103

Journal entry (10/9/12- Discounting of

NR)


Dr. Cash 4,955.00

Dr. Loss on

discounting 58.70

Cr. NR 5,000.00

Cr. Interest rev 13.70


Dr. Cash 4,955.00

Dr. Loss on

discounting 58.70

Cr. NR Discounted 5,000

Cr. Interest rev 13.70

7-104 104

Journal entry

30/11/12 – Collection of NR


If customer paid the note

receivable in a given time

No entry


if customer paid the note

receivable in a given time

Dr. NR Discounted 5,000

Cr. NR 5,000

7-105 105

If customers failed to pay on due

date.. (Dishonored NR)

Sale

No entry


Dr. AR 5,148*

Cr. Cash 5,148

(* MV + Bank charge = 5123+25)

Dr. NR Discounted 5,000

Cr. NR 5,000

(assumption: there’s bank charge ofRM25)

7-106 106

Presentation in Balance Sheet

Credit balance in the provision account is

NOT a liability.

It is set off against the gross trade debtors

on presentation in the balance sheet.

Note on the provision for doubtful debts is

illustrated as:

7-107 107

Presentation in the Statement of

Financial Position- Notes to statement

TRADE DEBTORS

RM

Trade debtors 78,544,306

Less: Provision for doubtful

debts

(3,156,409)

75,387,897

7-108 108

Presentation in the Statement of

Financial Position

OTHER RECEIVABLES

Should be summarized in appropriately

titled accounts & reported separately in the

financial statements

7-109 109

Presentation in the Statement of FP

CURRENT ASSET

Trade receivables (at NRV) XXX

Other receivables (including S-term NR) XXX

NON-CURRENT ASSET

Note Receivables (Including L-Term NR) XXX

7-110 110

Ratio

The ratio used to assess the liquidity ofreceivables is the receivables turnover ratio.

Receivables turnover ratio measures thenumber of times, on average, receivables arecollected during the period.

7-111

► The accounting and reporting related to cash is essentially the

same under both IFRS and U.S. GAAP.

► The basic accounting and reporting issues related to recognition

and measurement of receivables are essentially the same between

IFRS and U.S. GAAP.

► Although IFRS implies that receivables with different characteristics

should be reported separately, there is no standard that mandates

this segregation. In addition, there is no specific standard related to

pledging, assignment, or factoring.

7-112

► Like the IASB, the FASB has worked to implement fair value

measurement for all financial instruments, but both Boards have

faced bitter opposition from various factions. As a consequence, the

Boards have adopted a piecemeal approach in which disclosure of

fair value information in the notes is the first step. The second step

is the fair value option, which permits companies to record fair

values in the financial statements. Both Boards have indicated that

they believe all financial instruments should be recorded and

reported at fair value.

7-113

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