MFR Accounts Receivable Trade Receivables Receivables arising from ordinary course or normal operation of the business Classified as Current Asset if collectible within one year or normal operating cycle whichever is LONGER. Non-trade Receivables Receivables NOT arising from ordinary course or normal operation of the business Classified as Current Asset only if collectible within one year from the balance sheet date Classified as NON-CURRENT Asset if collectible beyond one year from the balance sheet date Transactions affecting Accounts Receivable Transactions that could increase Credit Sales Accounts Receivable xx Sales xx Recovery of Accounts Previously Written Off o Reversal of accounts written off Accounts Receivable xx Allowance for Bad Debts xx Dishonored Note o Customer’s note not paid on maturity date Accounts receivable xx Notes receivable xx Interest receivable xx Other income (e.g. Protest fee) xx MFR Transactions that could decrease Accounts Receivable Collection from Credit Customers Cash xx Accounts Receivable xx Sales discount o Gross Method Cash xx Sales Discount xx Accounts receivable o xx Net Method Cash xx Accounts Receivable xx Sales Discount Lost (if any) xx Sales Returns and Allowances Sales returns and allowances xx Accounts Receivable xx Accounts Written Off Allowance for bad debts xx Accounts Receivable xx Recovery of Accounts Previously Written Off o Collection from customer (If not yet included in the total collections) Cash xx Accounts Receivable xx MFR Notes received in settlement of accounts o Conversion from Accounts Receivable to Notes Receivable Notes Receivable xx Accounts Receivable xx Take note! Notes GIVEN in settlement of accounts – Conversion from Accounts Payable to Notes Payable Accounts Receivable Beginning Balance Credit Sales Recovery Dishonored Note Collections* Write-off Recovery** SRA Based on Credit sales Conversion Ending Balance *Take Note! Cash received + Sales discount (Gross method) Cash received – Sales discount lost (Net method) **Take Note ulit! If NOT yet included in the total collections Aging of Receivables Allowance for Bad Debts Contra-Asset Account (Deducted from AR) Transactions decreases Allowance for Bad Debts Accounts written off Allowance for bad debts Accounts Receivable xx xx MFR Recovery of accounts previously written off o Reversal of accounts written off Accounts Receivable xx Allowance for bad debts xx Year-end adjustment Bad Debts expense xx Allowance for bad debts xx Methods of RECORDING bad debts Direct write off method Bad debts expense xx Accounts Receivable xx Allowance method Bad debts expense Allowance for bad debts xx xx Allowance for Bad Debts Write-off Beginning balance Recovery Balance before adjustment Bad debts expense (year-end adjustment) Ending balance Methods of ESTIMATING Bad Debts Income Statement Approach o % of uncollectible x Sales = Bad Debts Expense o If the percentage of uncollectible is based on an income statement item (sales), the product is also an income statement Balance Sheet Approach o % of uncollectible x Receivables = Allowance for Bad Debts MFR Accounts receivable, end must be classified to: Not yet due/ Current Account Past due account Aging of Receivables Age Not yet due 1-30 days past due 31-60 60-90 Over 90 days TOTAL Amount xx xx xx xx xx AR, end Accounts Receivable Allowance for Bad debts Allowance for Sales Returns Allowance for Sales Discounts Amortized cost of AR/ Carrying value/ AR to be presented in the SFP x Estimated % Uncollectible = xx% xx% xx% xx% xx% xx (xx) (xx) (xx) xx Allowance/ Provision xx xx xx xx xx Allowance for Bad Debts, end May be called PROVISIONS Sample Problem The following transactions affecting the Accounts Receivable of China Company took place during the year 2019: Cash sales Credit sales Cash received from credit customers Accounts receivable written off as worthless Cash discounts given to customers Credit memorandum issued to credit customers for sales returns Cash refunds given to cash customers for sales returns and allowances Recoveries on accounts receivable written off as uncollectible in prior periods (not included in the cash collections above) 1 500 000 1 200 000 800 000 100 000 60 000 40 000 20 000 10 000 An aging analysis of Accounts Receivable on Dec. 31, 2019 disclosed the following information: Age Not yet due 1-30 days past due 31-60 days past due Over 60 days Amount of Receivable 400 000 150 000 90 000 ? % Uncollectible 1 5 10 20 MFR The following balances were taken from December 31, 2018 Balance Sheet: Accounts Receivable: 500 000; Allowance for Bad Debts 120 000. China Company is using the gross method to account for any cash discounts given to customers. Requirements: 1. How much is the Bad Debts Expense in the year 2019? 2 500 2. How much is the Allowance for Bad Dets as of December 31, 2019? 32 500 3. How much is the Accounts Receivable Ledger Balances as of December 31, 2019? 700 000 4. How much is the amortized cost of Accounts Receivable as of December 31, 2019? 667 500 Solution: Accounts Receivable 500 000 1 200 000 10 000 800 000 60 000 100 000 40 000 10 000 700 000 Allowance for Bad Debts 100 000 120 000 10 000 30 000 2 500* 32 500 Aging of Receivables Age Not yet due 1-30 days past due 31-60 Over 60 days TOTAL *Workback Amount 400 000 150 000 90 000 60 000* 700 000 Accounts Receivable Allowance for Bad debts Amortized cost of AR x Estimated % Uncollectible = 1% 5% 10% 20% 700 000 (32 500) 667 500 Allowance/ Provision 4 000 7 500 9 000 12 000 32 500 MFR Accounting for Cash Discounts Gross Method Net Method Allowance Method Ex: Invoice Price = 50 Cash Discount = 5 Gross Method Date of Sale AR AR 45 5*** Cash A.SD AR 50 45 Sales Allowance Method 45 50 Sales Net Method Collection WITHIN the discount period Cash 45 SD 5* AR 50 Cash 45 AR 45 AR 50 Sales A.SD 45 5 50 Collection BEYOND the discount period Cash 50 AR 50 Cash 50 AR 45 SD Lost 5** Cash 50 A.SD 5 SD Lost 5 AR 50 *Contra-sales account **Treated as Other Income or Added to Sales account ***Contra-asset account (Deducted to AR) Sample Problem 1: COVID Company sold merchandise with a list price of 100 000 to SARS Company who was given a trade discount of 20% on April 10. Credit terms were 3/15, n/45 Requirements: Prepare Journal entries using the Gross, Net, and Allowance Method Assuming SARS Company made a full payment on April 25, answer the following using all methods: 1. How much is the cash received? 77 600 2. How much is the total Sales Discount? 2 400 (n/a for Net and Allowance Method) 3. How much is the total Sales Discount Lost? 0 (n/a for Gross Method) Assuming SARS Company made a full payment on April 30, answer the following using all methods: 1. How much is the cash received? 80 000 2. How much is the total Sales Discount? 0 (n/a for Net and Allowance method) 3. How much is the total Sales Discount Lost? 2 400 (n/a for Gross Method) MFR Solution: Invoice Price = 80 000 (100 000 x 80%) Cash Discount = 2 400 (80 000 x 3%) Journal Entries Date of Sale Gross Method AR Net Method AR Allowance Method Sales 77 600 Collection WITHIN the discount period Cash 77 600 SD 2 400 AR 80 000 Cash 77 600 AR 77 600 Sales A.SD 80 000 77 600 2 400 Cash 77 600 A.SD 2 400 AR 80 000 80 000 Sales 80 0000 77 600 AR Collection BEYOND the discount period Cash 80 000 AR 80 000 Cash 80 000 AR 77 600 SD Lost 2 400 Cash 80 000 A.SD 2 400 SD Lost 2 400 AR 80 000 Accounting for Cash Discounts Part Two Freight Transportation cost/ Delivery Cost POV of BUYER – Freight In POV of SELLER – Freight Out Regardless, their normal balance is debit Determination of the ownership of goods in transit and payment of freight FOB Destination o Seller is still the owner of goods in transit and responsible for the payment of freight FOB Shipping Point o Buyer is the owner of goods in transit and responsible for the payment of freight MFR Determination of who actually paid for the freight Freight Collect o Buyer pays for the freight Freight Prepaid o seller pays for the freight Combinations FOB Destination, Freight Collect o Decrease in AR (seller) o Decrease in AP (buyer) FOB Shipping Point, Freight Prepaid o No effect on AP and AR FOB Destination, Freight Collect o No effect on AP and AR FOB Shipping Point, Freight Prepaid o Increase in AR (seller) o Increase in AP (buyer) Sample Problem 2: BILKO Company sold merchandise with a list price of 500 000 to SAM Company who was given a trade discount of 20%, 10% on December 10, 2019. Credit terms were 5/10, 3/15, n/45. The goods were shipped FOB Shipping point, freight prepaid. BILKO Company paid 5 000 of delivery cost. On December 15, 2019, SAM Company returned damaged goods originally billed at 20 000. Solution: Invoice Price = 360 000 (500 000 x 80% x 90%) Cash Discount if paid within 10 days = 17 000 [(360 000 – 20 000) x 5%] Cash Discount if paid within 15 days = 10 200 [(360 000 – 20 000) x 3%] MFR Collected on or before BS Date Gross Method Dec. 10 Accounts Receivable 360 000 Sales Accounts Receivable 360 000 5 000 Cash 5 000 December 15 Sales Return and Allowances 20 000 Accounts Receivable 20 000 Collection within the 10-day discount period Cash 328 000 Sales discount Accounts Receivable 17 000 345 000 List Price Sales Return and Allowances Total X Discount Rate% Sales Discount 360 000 (20 000) 340 000 5% 17 000 List Price Sales Return and Allowances Sales Discount Freight Paid Cash Receipt 360 000 (20 000) (17 000) 5 000 328 000 MFR Collection within the 15-day discount period Cash 334 800 Sales discount 10 200 Accounts Receivable 345 000 Collection beyond the discount period Cash 345 000 Accounts Receivable 345 000 Net Method Dec. 10 Accounts Receivable 342 000 Sales Accounts Receivable 342 000 5 000 Cash 5 000 December 15 Sales Return and Allowances 19 000 Accounts Receivable 19 000 Collection within the 10-day discount period Cash 328 000 Accounts Receivable 328 000 MFR Collection within the 15-day discount period Cash 334 800 Sales discount lost* 6 800 Accounts Receivable 328 000 *[340 000 x (5%-3%)] Collection beyond the discount period Cash 345 000 Accounts Receivable 328 000 Sales Discount lost 17 000 Sample Problem 3: Tzan Co. sold merchandise with an invoice price of 20 000 to Jero Co. on December 20, 2019. Credit terms were 2/10, n/30. The goods were shipped FOB shipping point, Freight Collect. Jero Company paid 1 000 of delivery cost. Solution: Cash Discount = 400 (20 000 x 2%) Take Note! As of December 31, 2019, the discount period already lapsed Gross Method December 20, 2019 Accounts Receivable Sales December 31, 2019 No entry 20 000 20 000 MFR Possible Questions (Gross Method): 1. How much is the net adjustment to AR? Zero 2. How much is the total AR as of December 31, 2019? 20 000 Net Method December 20, 2019 Accounts Receivable 19 600 Sales 19 600 December 31, 2019 Accounts Receivable 400 Sales Discount Lost 400 Possible Questions (Net Method): 1. How much is the net adjustment to AR? 400 2. How much is the total AR as of December 31, 2019? 20 000 Sample Problem 4: Argana Co. sold merchandise with an invoice price of 20 000 to Morales Co. on Dec. 24, 2019. Credit terms were 2/10, n/30. The goods were shipped FOB Shipping point, Freight Collect. Morales Co. paid 1,000 of delivery cost. Solution: Cash Discount = 400 (20 000 x 2%) Take Note! As of December 31, 2019, the discount period is not yet expired MFR Gross Method December 20, 2019 Accounts Receivable 20 000 Sales 20 000 December 31, 2019 Sales Discount 400 Allowance for Sales Discount 400 Take note! If this is not adjusted upon year-end, the income and AR would be overstated Possible Questions (Gross Method): 1. How much is the net sales reported in the 2019 Income statement? 19 600 2. How much is the total AR to be reported in the SFP as of December 31, 2019? 19 600 Net Method December 20, 2019 Accounts Receivable Sales 19 600 19 600 December 31, 2019 No Entry Possible Questions (Gross Method): 1. How much is the net sales reported in the 2019 Income statement? 19 600 2. How much is the total AR to be reported in the SFP as of December 31, 2019? 19 600 MFR Receivable Financing (PDAF) Pledging Considered a loan For payable: Cash Notes Payable xx xx For receivable: Disclosure in the notes All accounts receivable is used as collateral Assignment Considered a loan Specific receivables are used as collateral Accounts Receivable - Assigned Accounts Receivable xx xx Factoring Considered a loan if with recourse Considered a sale if without recourse If problem is silent, assume that it is without recourse Factor = buyer AR Factored Face Value Factoring Fee Sales price of AR/ Purchase Price Factor’s holdback* PROCEEDS *Receivable xx (xx) xx (xx) xx *Not included in computing the loss of factoring Carrying value of AR Sales price of AR FACTORING LOSS xx (xx) xx MFR Discounting Applicable for Notes Receivable Considered as loan if with recourse Considered as sale if without recourse If problem is silent, assume it is with recourse 1. Maturity Value Principal Interest* MATURITY/ CARRYING VALUE** xx xx xx *Pertains to the agreed rate/ stated rate **Don’t compute anymore if non-interest bearing notes receivable 2. Discount Maturity Value X Discount Rate DISCOUNT Stated rate X Discount Period* DISCOUNT RATE *Remaining period before maturity of the note xx xx xx xx xx xx 3. Proceeds Maturity Value Discount PROCEEDS xx (xx) xx Principal Interest Earned* CARRYING VALUE OF NR xx xx xx Principal X Interest Rate X Holding Period* INTEREST EARNED *Period that you hold the note before discounting xx xx xx xx MFR Proceeds/ Selling Price Carrying Value of NR GAIN OR LOSS ON DISCOUNT (w/o recourse) xx (xx) xx
