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Trade and Other Receivables - Reviewer
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RECEIVABLES, defined
 Contractual rights to receive cash/other asset
from another entity.
Classification of Receivables
1. Trade Receivables
- Arising from sale of goods and/or
services in the ordinary course of
business.
- Classified under current assets when
collectible within the normal operating
cycle or 1 year, whichever is longer.
2. Non-Trade Receivables
- Arising from other sources
- Classified under current assets only
when collectible within 1 year.
Note:
 When we say non-trade receivables or other
receivables this is not arising from sale of
goods or services in the ordinary course of
business. It is arising from other sources.
Examples of Non-trade Receivables
1. Advances to Directors/Shareholders –
classified as non-current assets
2. Advances to Affiliates – classified as noncurrent assets.
3. Advances to Suppliers – classified as current
assets
4. Subscription Receivable – deduction from
share capital unless collectible within 1 year.
Classified as current assets.
Note:
It arises when you promise to buy the share of your
chosen company. Also, it occurs when you pay only
the partial amount and not fully paid. So, in the
future you need to pay it. The portion of the share
that you did not pay is what we called Subscription
Receivable of the corporation.
When the problem is silent, then the subscription
receivable is classified as a deduction to share
capital.
5. Debit balance or creditors (overpayment) –
classified as current assets (not offset against
payables)
6. Special deposits on contract bids – classified
as non – current assets
7. Accrued income – classified as a current
assets
Note:
Interest in bank deposits and dividend income
8. Claims receivable – classified as a current
assets
9. Receivables denominated in Foreign
Currency
- Initially, exchange rate at date of
transaction
- Subsequently, exchange rate at the end
of the reporting period
Financial Statement Presentation
Trade and non-trade receivables that are current
assets aggregated and presented in the statement of
financial position as “Trade and other receivables.”
Initial Measurement
 Trade receivables that do not have a
significant financing component are
measured at the transaction price in
accordance with PFRS 15 Revenue from
Contracts with Customers.
 Transaction price is “the amount of
consideration to which an entity expects to
be entitled in exchange for transferring
promised goods or services to a customer,
excluding amounts collected on behalf of
third parties (e.g. some sales taxes).” (PFRS
15)
Note:
Basically, when we say transaction price, it is
the amount that you will receive or expect to
receive.
 As a practical under PFRS 15, an entity may
not discount a trade receivable if it is due
within 1 year.
Recognition
 Trade receivable is recognized when the
entity has right to consideration that is
unconditional. This is normally the case
when the control over the promised goods or
services is transferred to the customer.
Bad Debts
1. Allowance Method
Initial Entry:
Accounts Receivable
xx
Sales
xx
Doubtful of collection: or Adjusting Entry
Bad Debts Expenses
xx
Allowance for Bad Debts
xx
Accounts become worthless:
Allowance for Bad Debts
xx
Accounts Receivable
xx
Recovery of Accounts:
Accounts Receivable
xx
Allowance for Bad Debts
xx
Cash
xx
Accounts Receivable
xx
2. Direct Write-Off Method
Initial entry:
Accounts Receivable
xx
Sales
Doubtful of collection:
No entry
Account became worthless:
Bad Debts Expense
xx
Accounts Receivable
Recovery of accounts:
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xx
xx
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Accounts Receivable
Bad Debts Expense
xx
Cash
xx
xx
Accounts Receivable
xx
Note:
 GAAP – Allowance Method because it has a
conservative approach than direct write-off
method.
 The Allowance for Bad Debts is a contraasset meaning it has a mother account
which is the Accounts Receivable. When we
say contra it is a deduction to the accounts
receivable.
 The establishment of your allowance is
based on your estimates. In real life, there is
a basis for this estimate, it can be a
historical information based on the
experience of the company or comparison
with the other members of the industry like
competitors.
 When the book is closed when you recover
your account receivable then, the entry is
debit accounts receivable credit retained
earnings if it is a corporation.
ACCOUNTS RECEIVABLE
Beginning balance
Collection
Sales on account
Account writeoff/
Worthless
Sales discount/returns
Ending balance
ALLOWANCE FOR BAD DEBTS
Account writeoff
/worthless
Beg. Balance
Doubtful of collection
Recovery of account
Sheet; do not adhere with the matching
concept.
Note: Required balance of Allowance for
Doubtful Accounts = Ending balance,
Allowance for Doubtful Accounts
Note:
Among the three methods, GAAP advice to use
is the Aging Method of A/R because it is wellrepresented. Using multiple percentage.
Sample Problem: Percentage of
Sales
Sales (including cash sales of
100,000)
Sales returns and discounts
Percentage of credit sales
Accounts receivable, Dec. 31
Net Credit
600,00
0
5,000
2%
80,000
Compute the Bad Debt Expense and Allowance
For Bad Debts using the Percentage of Credit
Sales Method.
Credit Sales (600,000-100,000) 500,000
Less: Sales returns and discounts (5,000)
Net Credit Sales
450,000
Multiply: Percentage
2%
Bad Debts Expense
9,900
Or Allowance for Bad Debts
Sample Problem: Percentage of A/R Method
Net Credit Sales
270,00
0
Collection
from
customers 140,00
(excluding recovery)
0
Allowance for bad debts, Jan. 1
10,000
Accounts receivable, Jan. 1
80,000
Write-off
5,000
Recovery
1,000
Percentage of receivables
5%
Compute the Bad Debt Expense and Allowance
for Bad Debts using the Percentage of A/R
method.
Ending balance
ACCOUNTS RECEIVABLE
Estimating doubtful accounts
1. Percentage of net credit sales method –
(Single-loss rate approach) – Bad debt is
computed; adheres to the matching concept;
favors the income statement.
2. Percentage of A/R Method – (Single-loss
rate approach) – required balance of
Allowance for Doubtful Accounts is
computed; favors the Balance Sheet; do not
adhere with the matching concept.
3. Aging of A/R Method – (Provision matrix) –
required balance of Allowance for Doubtful
Accounts is computed; favors the Balance
80,000
140,000
270,000
5,000
205,000
205,000 x 5% = 10, 250  Ending Allowance
for Doubtful Account/Required Allowance
ALLOWANCE FOR BAD DEBTS
5,000
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4,250 (workback)
1,000
10,250
10,250 – 1,000 – 10,000 + 5,000 = 4,250  Bad
Debts Expense
Sample Problem: Aging of A/R
No. of days
Amoun
Probability
outstanding
t
of Collection
0-30 days
500,000
0.98
31-60 days
200,000
0.90
Over 60 days 100,000
0.80
Ending ADA/Required Balance
The following additional information is available
for the current year.
 Accounts deemed worthless: 5,000
 Accounts recovered: 2,000
Compute the Bad Debt Expense and Allowance for
Bad Debts.
No. of days
outstanding
0-30 days
Amount
500,000
Probability
of Collection
0.98
31-60 days
200,000
0.90
Over 60 days
100,000
0.80
Ending ADA/Required Balance
500,000 x
2% =10,000
200,000 x
10%
=20,000
100,000 x
20%
=20,000
50,000
ALLOWANCE FOR BAD DEBTS
5,000
0
53,000 (workback)
2,000
50,000
50,000 + 2,000 + 0 – 5,000 = 53,000
Note:
As the number of days increases the probability of
collection decreases.
ILLUSTRATION 1
On December 31, 2015, the “Receivables” account
of Sunlight Company shows an amortized cost of
P1,950,000. Subsidiary details shows the following:
Trade accounts receivable, P775,000; Trade notes
receivable, P100,000; installments receivable,
normally due one year to two years, P300,000;
Customers’ accounts reporting credit balances
arising from sales returns, P30,000; Advance
payments for purchase of merchandise, P150,000;
Customers’ accounts reporting credit balances
arising from advance payments, P20,000; Cash
advances to subsidiary, P400,000, Claims from
insurance
company,
P15,000;
Subscription
receivable due in 60 days, P300,000; Accrued
interest receivable, P10,000. How much should be
presented as “trade and other receivables” under
current assets?
Trade Accounts Receivable
775,000
Trade Notes Receivable
100,000
Installments Receivable (1-2 yrs)
300,000
Advances payments (merchandise) 150,000
Claims from insurance company
15,000
Subscription Receivable (60 days) 300,000
Accrued Interest Receivable
10,000
Trade and Other Receivable
1,650,000
Note:
 Customer’s accounts reporting credit
balances arising from sales returns is not
included under trade and other receivables
because it is a liability.
 Customer’s accounts reporting credit
balances arising from advance payments is
not included under trade and other
receivables because it is a liability.
 Cash advances to subsidiary is not included
under trade and other receivables because it
is a subsidiary that classified under noncurrent assets.
 If Subscription Receivable has no days or
date then it is not included under trade and
other receivables because it is a deduction
in share capital.
ILLUSTRATION 2
TilIMetYou Company had the following
information relating to its accounts receivable for
the year
2016:
Accounts receivable – January 1
12,000,00
0
Credit Sales
20,000,00
0
Collection
from
customers, 17,000,00
excluding the recovery of accounts
0
written off
Accounts written off as worthless
300,000
Sales returns
1,000,000
Recovery of accounts written off
100,000
Estimated future sales returns on
400,000
December 31
Estimated uncollectible accounts on 1,000,000
December 31, per aging
TilIMetYou should report the December 31, 2016
accounts receivable, before allowance for sales
returns and uncollectible accounts, at
ALLOWANCE FOR BAD DEBTS
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5,000
10,000
4,250 (workback)
1,000


10,250


ACCOUNTS RECEIVABLE
12,000,000
20,000,000
17,000,000
300,000
1,000,000
13,700,000
Note:
 Recovery of accounts written off is not
included under accounts receivable because
it is under allowance for doubtful accounts.
 If the problem did not mention the phrase
“before allowance for sales returns and
uncollectible accounts” then the treatment
for the estimated future sales returns on
December 31 and Estimated uncollectible
accounts on December 31, per aging will be
deducted to the Accounts Receivable
because this are allowances.
Receivable Financing
 Act of including cash inflows from
receivables other than from their normal or
scheduled payments.
 Forms of receivable financing
1. Pledging
2. Assignment
3. Factoring
4. Discounting of notes
1. Pledging (Hypothecation)
 General form of receivable financing
 Receivables are used as collateral
security for loans.
 It does not transfer ownership of the
receivables; thus, does not affect the
balance of the receivables.
 No entry is made for the pledged
receivables. Only a note disclosure.
 Treated as a Secured Borrowing.
Note:
 It is a general form meaning it does not
need to be written.
 For example, you lend money to a person.
So, in able for the lender to lend his money
to you, you will have a collateral security
like an accounts receivable to Customer A,
B, and C in the future in able to secure your
loan.
2. Assignment

Specific form of receivable financing
Formal form of pledging wherein the
receivables assigned or used as
collateral security from borrowing
are specifically identified and stated
in the loan contract.
No derecognition is done on the
assigned receivables.
However, an entry is needed to
specifically identify the assigned
receivables.
(“Receivables
–
assigned”)
Assigned receivables are part of the
“Trade and other receivables”
classification in the Balance Sheet.
However, the equity in the assigned
receivables shall be disclosed in the
notes.
Note:
 Basically, this is pledging but in a formal
way.
 There is a contract and it has a specific
identification of customers that he will use
as a payment for his loan.
Forms of Assignment
a. Notification Basis – debtors whose
receivables have been assigned are notified
of the assignment. Thus, the debtors will
remit payments not to the assignor (party
assigning the receivables) but to the
assignee (party to whom the receivables
where assigned). The assignee will inform
the assignor regularly on the collection of
assigned receivables.
b. Non-notification Basis – debtors whose
receivables have been assigned are not
notified. They will continue to remit
payments on the receivables to the assignor.
(This is the common form of assignment)
Note:
 For example, Sir Patrick notify
Customer A that the receivable is
assigned to Lender X. Question: To
whom will Customer A pay? Lender X
because that is the purpose of notifying
the customer to remit the receivable to
the lender. Furthermore, Lender X must
inform Sir Patrick if Customer A pay the
receivable.
 In non-notification basis, Customer A
will continue to remit the receivable to
Sir Patrick because Customer A has not
been notified about the assignment of
receivable for a loan. Then, Sir Patrick
will be the one who will pay Lender X.
 If the problem is silent you will nonnotification basis.
3. Factoring
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

Sale of Receivables (notification
basis) to a financial institution
known as “Factor.”
It is usually done on a notification
basis and either on a without
recourse or with recourse basis.
Note:
 You sell your receivable to a factor
(financial institutions or a bank).
 When the company has a receivable of
500,000 and they sell it to Bank ABC, this
transaction is what we call “factoring”.
Bank ABC what we called a factor.
 If there is a sale of receivables it should be
in a notification basis because your
customers will remit the receivables to Bank
ABC. There is a charge or a fee that you will
pay and that is what we called “Factor’s
Fee”.
Without recourse – the factor assumes the risk of
uncollectibility and absorbs any credit losses. The
seller is not held liable in case the debtor fails to
pay. It is an outright sale and there is a need to
derecognize the receivables from the Balance sheet.
*Most factoring transactions are done on a without
recourse basis.
With recourse – seller guarantees payment to the
factor in the event the debtor fails to pay. No
transfer of assets happened.
Factor’s Holdback - factor usually retains a
certain percentage of the transferred receivables to
serve as cushion for sales returns, discounts, and
allowances. This is considered as a “Receivable
from factor” and is included in the balance of
“Trade and Other Receivables.”
Commission and Interest Charges – recorded as
regular expenses.
Cost of Factoring – incurred by a transferor
consists of service fees and interest expenses plus
any amount that the transferor is obliged to pay to
the factor.
Example:
You sell 100,000 worth of accounts receivable are
factored.
5% fee, 10% holdback.
100,000 x 5% = 5,000  Expense  Income
Statement
100,000 x 10% = 10,000  Receivable from Factor
 Trade and Other Receivable
100,000 – 5,000 – 10,000 = 85,000  Cash to be
received from factor
Journal Entry:
Cash
85,000
Expense
5,000
Factor Holdback
10,000
Trade and other receivables
100,000
SAMPLE PROBLEM
PANELO Co. factored 60,000 accounts receivable
to TRILLANES Financing Corporation on a
without recourse basis on January 01, 2021.
TRILLANES charged a 4% service fee and retained
a 10% holdback to cover expected sales returns. In
addition, TRILLANES charged at 12% interest
computed on a weighted average time to maturity of
the receivables of 73 days based on 365 days.
Required:
1. How much proceeds is received from the
factoring on January 01?
Receivables
60,000
Less: 4% Service Fee
(2,400)
Less: 10% Holdback
(6,000)
Less: 12% Interest
(1,440)
Proceeds
50,160
Computation of Interest: 12% x 60,000 x 73/365
2. How much is the cost of factoring?
Service Fee
2,400
Interest
1,440
Cost of Factoring
3,840
3. Make the necessary journal entries.
Cash
50,160.00
Receivable from factor 6,000.00
Service charge
2,400.00
Interest expense
1,440.00
Receivables
60,000.00
OR
Cash
50,160
Receivable from factor
6,000
Loss on Receivables
3,840
Accounts Receivable
60,000
4. Discounting of notes
 The holder endorses the note to a bank in
exchange for the maturity value of the note
less a discount. At maturity, the bank
collects the maturity value of the note from
the maker.
Without recourse – the holder is not held liable
in case the maker fails to pay. The note
discounted has essentially been sold outright
and therefore, derecognized.
Note:
 Only notes receivable is discounted.
Important Formula
1. Maturity Value = Principal + Interest
2. Interest = Principal x Rate x Time
3. Discount = Maturity value x discount rate x
time (unexpired)
4. Net Proceeds = Maturity Value – Discount
5. Book Value = Principal + Accrued Interest
(expired portion)
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6. Gain/Loss on Discounting = Net Proceeds –
Book Value
Sample Problem
On November 01, 2021, LENI Co. discounted a
1,000,000, 6 – month, 12% note, received from a
customer on July 01, 2021, with a bank at 16% on a
without recourse basis. Provide the entry to record
the discounting.
1. Maturity Value = 1,000,000 + 600,000 =
1,060,000
2. Interest = 1,000,000 x 12% x 6/12 = 60,000
3. Discount = 1,060,000 x 16% x 1/6 = 28,267
4. Net Proceeds = 1,060,000 – 28,267 =
1,031, 7333
5. Book Value = 1,000,000 + 40,000 =
1,040,000
6. Gain/Loss on Discounting = 1,031,733 –
1,040,000 = 8,267
Cash
1,031,733
Loss on discounting
8,267
Notes Receivable Discounted
1,000,000
Interest Income
40,000
With recourse – the holder is held liable in case the
maker fails to pay. Note discounted is not
derecognized.
creditors
Postdated checks from
customers
Subscription Receivable
Accounts payable for
merchandise
Credit
balances
in
customer’s accounts
Cash received in advance
from
customers
for
goods not yet shipped
Expected bad debts
ILLUSTRATION 1
When examining the accounts of MyValentine
Company, it is ascertained that balances relating to
both receivables and payables are included in a
single controlling account called “receivable
control” with a debit balance of P4,850,000. An
analysis of the make-up of this account
revealed the following:
Accounts Receivable –
customers
Advances to suppliers
Debit
balances
–
Debit
7,800,00
0
500,000
300,000
800,000
4,500,000
200,000
100,000
150,000
After further analysis of the aged accounts
receivable, it is determined that the allowance for
doubtful accounts should be P200,000. What
amount should be reported as “trade and other
receivables” under current assets?
Accounts receivable – customers
Advances to suppliers
Debit balance – creditors
Postdated checks from customers
Allowance for Doubtful Accounts
Trade And Other Receivables
7,800,000
500,000
300,000
400,000
(200,000)
8,800,000
Note:

a. Conditional Sale – a contingent liability
equal to the face amount of the note
discounted is disclosed only in the noted to
financial statements.
Cash
xx
Loss on discounting xx
Notes receivable discounted xx
Interest Income
xx
b. Secured Borrowing – a liability equal to the
face amount of the note discounted is
recognized on the discounting.
Cash
xx
Interest Expense
xx
Liability on note discounted xx
Interest Income
xx
400,000


The debit balance to creditors is
included in the trade and other
receivables because it is a your
receivable from your creditors due to
your overpayment.
Postdated checks is included in the trade
and other receivables because it is still
not your cash so it is a receivable on
your part,
Expected bad debts is not included in
your trade and other receivables
because our entry for your bad debts is
debit Bad Debts Expense and credit
Allowance for Bad Debts.
ILLUSTRATION 2
The Gift Company provided the following
information relating to current operations:
Accounts receivable, January 1
Accounts receivable collected
Cash sales
Inventory, January 1
Inventory, December 31
Purchases
Gross margin on sales
4,000,000
8,400,000
2,000,000
4,800,000
4,400,000
8,000,000
4,200,000
Credit
What is the balance of accounts receivable on
December 31?
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Beg. 4,800,000
Purchases 8,000,000
COGS 8,400,000
4,800,000 +
8,000,000 – 4,400,000
End 4,400,000
Sales
COGS
Gross Margin on Sales
Sales
Cash Sales
Credit Sales
12,600,000
8,400,000
4,200,000
12,600,000
(2,000,000)
10,600,000
ACCOUNTS RECEIVABLE
Beg 4,000,000
Credit Sales 10,600,000
End
ILLUSTRATION 3
GreatestLove Co. provided for doubtful accounts
expense monthly at 3% of credit sales. The balance
in the allowance for doubtful accounts was
P1,000,000 on January 1, 2015. During 2016, credit
sales totaled P 20,000,000, interim provisions for
doubtful accounts were made at 3% of credit sales,
P200,000 accounts were written off, and recoveries
of accounts previously written off amounted to
P50,000.
An aging of accounts receivable was made on
December 31, 2016,
61-180 days
181-360 days
More than one year
Beg
1,000,000
Write-off 20,000 Doubtful account expenses 800K
Recovery 50,000
End
1,650,000
Workback (1,650,000 – 1,000,000 – 50,000 +
20,000)
b. What is the year-end adjustment to the
allowance for doubtful accounts on
December 31, 2016?
Percentage of sales method
600,000
(20,000,000*3%)
Aging of receivables method
800,000
Decrease in doubtful accounts
200,000
expense (credit)
Collections 8,400,000
6,200,000
1-60 days
ALLOWANCE FOR DOUBTFUL ACCOUNTS
6,000,000 10%
uncollectible
2,000,000 20%
uncollectible
1,500,000 30%
uncollectible
400,000 50%
uncollectible
9,900,000
a. What amount should be reported as doubtful
accounts on December 31, 2016?
1-60 days
6,000,000 x 10% 600,000
61-180 days
2,000,000 x 20% 400,000
181-360 days
1,500,000 x 30% 450,000
More than one
400,000 x 50% 200,000
year
9,900,000 ADA, 1,650,00
end
0
c. What is the net realizable value of accounts
receivable on December 31, 2016?
A/R Ending
9,900,000
Less: ADA
(1,650,000)
Net Realizable Value
8,250,000
ILLUSTRATION 4
TilThereWasYou Company’s allowance for doubtful
accounts was P 1,000,000 at the end of 2016 and P
900,000 at the end of 2015. For the year ended
December 31, 2016, the entity reported doubtful
accounts expense of P 160,000 in the income
statement. What amount was debited to the
appropriate account to write off uncollectible
accounts in 2016?
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Beg
Write-off 60,000
900,000
Doubtful accounts expense 160,000
Ending
1,000,000
Workback (900,000 + 160,000 – 1,000,000) =
60,000
ILLUSTRATION 5 – RECEIVABLE
FINANCING
ICouldntAskForMore
Company
assigned
P4,000,000 of accounts receivable as collateral for a
P2,000,000 6% of loan with a bank. The entity also
paid a finance fee of 5% on the transaction upfront.
What amount should be recorded as a gain or loss
on the transfer of accounts receivable?
Answer: 0 because it is an assignment. If there is an
assignment it means that the total of your accounts
receivable is not affected. In short, there is no gain
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or loss. You will only have a gain or loss on
factoring and discounting of notes.
ILLUSTRATION 6
ItMightBeYou Company factored P750,000 of
accounts receivable at year-end. Control was
surrendered. The factor accepted the accounts
receivable subject to recourse for nonpayment. The
factor assessed a fee of 2% and retained a holdback
equal to 4% of the accounts receivable. In addition,
the factor charged 12% interest computed on a
weighted-average time to maturity of fifty-one days.
The fair value of the recourse obligation is P15,000.
a. What is the amount of cash initially received
from factoring?
Receivable
750,000
Less: 2% Fee
(15,000)
Less: 4% Holdback
(30,000)
Less: Interest
(750,000*12%*51/365)
(12,575)
Net proceeds
692,425
b. Assuming all accounts receivable are
collected, what is the cost of factoring the
accounts receivable?
Fee
15,000
Interest
12,575
Cost of Factoring
27,575
ILLUSTRATION 7 – DISCOUNTING THE
NOTE
On July 1, 2016, WhenIFallInLove Company sold
goods in exchange for P2,000,000, 8 month, noninterest-bearing note receivable. At the time of the
sale, the market rate of interest was 12%. The entity
discounted the note at 10% on September 1, 2016.
a. What is the cash received from discounting?
Net proceeds = Maturity Value – Discount
= 2,000,000 – 100,000
Net proceeds = 1,900,000
Discount = Maturity Value x Rate x Unpired Time
= 2,000,000 x 10% x 6/12
Discount = 100,000
Jul 1 – Sep. 1 = 2 months
8 months – 2 months = 6 months
Fallin Company accepted from a customer a
P4,000,000, 90 – day, 12% interest-bearing note
dated August 31, 2015. On September 30, 2015, the
entity discounted the note with recourse at the Apex
State Bank at 15%. However, the proceeds were not
received until October 1, 2015. The discounting
with recourse is accounted for as a conditional sale
with recognition of a contingent liability.
a. What is the amount received from the
discounting of note receivable?
Maturity Value = Principal + Interest
= 4,000,000 + 120,000
Maturity Value = 4,120,000
Interest = Principal x Rate x Time
= 4,000,000*12%*90/360
Interest = 120,000
Discount = Maturity value x discount rate x time
(unexpired)
= 4,120,000*15%*60/360
Discount = 103,000
Net Proceeds = Maturity Value – Discount
= 4,120,000 – 103,000
Net Proceeds = 4,017,000
b. What is the loss on note receivable
discounting?
Book Value = Principal + Accrued Interest (expired
portion)
= 4,000,000 +
(4,000,000*12%*30/360)
= 4,000,000 + 40,000
Book Value = 4,040,000
Gain/Loss on Discounting = Net Proceeds – Book
Value
= 4,017,000 –
4,040,000
Gain/Loss on Discounting = 23,000
Time Value of Money
Interest
-
b.
What is the loss on note receivable
discounting?
Loss on Discounting = Net proceeds – Book Value
= 1,900,000 – 2,000,000
Loss on Discounting = 100,000
ILLUSTRATION 8
It is the amount that you pay when
you borrow money.
Two kinds of Interest
1. Simple Interest
Mathematics of Investment which
is the formula is I = P x R x T.
I = interest
P = principal
R= rate
T = time
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2. Compound Interest
Is set to be the 8th wonder of the
world.
*Kapag ginamit mo yung compound
interest, yung interest mo nag – e – earn
din ng interest. So, mas mabilis yung
earning capacity mo when you used
compound interest.
PV of Annuity Due
Formula: 1.i ÷÷ = (no. of periods) – 1
÷ i x 1.i
*Note: There is no negative in the
present value. Get the 4 decimal.
Future Value
*When we discuss time value of money,
we used the compound interest.
-yung alam natin is the value of present
but hindi natin alam yung value ng
future.
*When you say time value of money, the
money you have today is worth more
than the money of tomorrow.
*Kunwari magpapasok ako ng pera
ngayon magkano kaya ang amount niya
in the future.
*”A peso of today is worth more than the
pesos of tomorrow.”
*Mas valuable yung pera or yung worth
niya or importance niya at the present
compare in the future. That is why kung
titignan mo you need to
make
adjustments on the value and we use
interest in order for you to know what is
the real value of your money in the
future.
Present Value
*When we say present value, if I want to
have this kind of amount in the future.
What do I need to put now? Ano ba yung
kailangan ko ipunin ngayon para ganito
yung makuha kong amount in the future?


Present Value of 1
-Lumpsum
-Once ka lang makaka receive ng
amount na yun.
Present Value of Annuity
-from the word annuity means
annually.
 PV of Ordinary Annuity
-kailan ka nakaka receive or
nagbibigay it is every end of
the year.
 PV of Annuity Due or In
Advance
-nakakareceive
ka
or
nagbabayad
ka
every
beginning of the year.
PV of 1
Formula: 1.i ÷÷ = (no. of periods)
PV of Ordinary Annuity
Formula: 1.i ÷÷ = (no. of periods) – 1
÷i


Future Value of 1
-once ka lang magpapasok
ng
pera
ngayon
and
kokomputin mo yun in the
future.
Future Value of Annuity
-every ka nagpapasok ng
pera
FV of Ordinary Annuity
-magpapasok ka ng pera every year at
the end of the year.
FV of Annuity Due or In Advance
-nagpapasok ka ng pera every beginning
of the year.
Formula: FV of 1
1.i xx = (no. of periods -1 )
Formula: FV of Ordinary Annuity
1.i xx = (no. of periods -1 ) – 1 ÷ i
Formula: FV of Annuity Due
1.i xx = (no. of periods -1 ) – 1 ÷ I x 1.i
Note receivables
 A note receivable is a claim supported by a
formal promise to pay a certain sum of
money at a specific future date usually in the
form of promissory note.
 Interest-bearing vs. non-interest bearing
notes
Note:
 It is an interest-bearing when the amount
presented in the note is the principal and if
you want to compute for the interest, you
just multiply the percentage interest to the
principal. It is a simple interest.
 When it is a non-interest bearing notes the
amount presented in the note already
contains the interest. In short, you need to
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compute for the present value because it is
already the maturity value.
 When it comes to interest there is two which
is the simple interest wherein only the
principal has an interest. On the other hand,
when it comes to compound interest, the
interest also earn interest.
 Under compound interest we have the
present value. Under present value we have
two which is the present value of 1 if the
customer paid lumpsum and present value of
annuity if it is paid yearly.
 The present value of annuity is divided into
two: If the customer will pay at the
beginning of the year we call that Annuity
Due or Annuity Advance and payment at the
end of the year we call that the Ordinary of
Annuity. If the problem was silent, we
assume that we have the Ordinary Annuity
which is paid every at the end of the year.
Initial Measurement
 Receivables are initially recognized at fair
value plus transaction costs that are directly
attributable to the acquisition of, except
trade receivables.
(500,000 x 10% x 3/12)
Sample Problem 2: Compound Interest; LumpSum Payment
On January 01, 2021, DUTERTE Co. extended a
1,000,000, loan to one of its officers as part of the
company’s car and housing assistance program. The
note received is due on January 01, 2024 and bears
a 10% interest compounded annually. Make the
necessary journal entries.
Sample Problem 1: Simple Interest; Installment
Payments
(100,000 + 110,000 + 121,000) = 331,000
On April 01, 2021, PNOY Co. received a 1,500,000,
10%, 3-year note receivable in exchange for a
vacant lot carried in the book at 850,000. Principal,
in three equal installments, plus interest are due
annually starting April 01, 2022. Current market
rates as of April 01, 2021, December 31, 2021, and
December 31, 2022 are 10%, 12%, and 13%,
respectively. Make the necessary journal entries.
April 01 – December 31 = 9 months
(1,500,000 x 10% x 3/12)
3 equal installments = 1,500,000/3= 500,000
January to April 1= 3 months
Sample Problem 3: Non-interest bearing note;
Lump Sum
On January 01, 2021, ROQUE Co. sold a
transportation equipment with a historical cost of
2,000,000 and accumulated depreciation of 700,000
in exchange for cash of 100,000 and a non-interest
bearing note receivable of 1,000,000 due on January
01, 2024. The prevailing interest rate for this type of
loan is 12%. Make the necessary journal entries.
PV of 1
Formula: 1.i ÷÷ = (no. of periods)
Interest = 12%
No. of Periods/Years = 3
Formula: 1.12 ÷÷ = (3)
0.71178
Principal = (1,000,000) (0.71178)
= 711,780
Unearned Interest = 1,000,000 – 711,780
= 288,220
Note:
1,000,000 is the maturity value
Amortization Table
(1,000,000 x 10% x 3/12)
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Computation: Interest Income
o 711,780*12%=85,413.60
o 797,193.60*12%=95,663.23
o 892,856.83*12%=107,143.17
Computation: Unearned Interest
o 288,200-85,413.60=202,806.40
o 202,806.40-95,663.23=107,143.17
o 107,143.17-107,143.17=0
Computation: Present Value
o 711,780 + 85,413.60 = 797,193.60
o 797,193.60 + 95,663.23 = 892,856.83
o 892,856.83 + 107,143.17 = 1,000,000
Computation: Interest Income
o 759,337.50*12%=91,120.50
o 600,458*12%=72,054.96
o 422,512.96*12%=50,701.56
o 233,214.52*12%=26,785.74
Computation: Amortization
o 250,000-91,120.50=158,879.50
o 250,000-72,054.96=177,954.04
o 250,000-50,701.56=199,298.44
o 250,000-26,785.74=223,214.26
Computation: Present Value
o 759,337.50 - 158,879.50= 600,458
o 600,458 - 177,945.04= 422,512.96
o 422,512.96 - 199,298.44= 233,214.52
o 233,214.52 - 223,214.26 = 0
Sample Problem 4: Non-interest bearing note;
Installment
On January 01, 2021, KRIS Co. sold a
transportation equipment with a historical cost of
2,000,000 and accumulated depreciation of 700,000
in exchange for cash of 100,000 and a non-interest
bearing note receivable of 1,000,000 due in four
equal annual installments starting December 31,
2021 and every December thereafter. The prevailing
interest rate for this type of loan is 12%. Make the
necessary journal entries.
PV of Ordinary Annuity
Formula: 1.i ÷÷ = (no. of periods) – 1 ÷ i
Interest = 12%
No. of periods/Year = 4 yrs.
Formula: 1.i ÷÷ = (no. of periods) – 1 ÷ i
=1.12 ÷÷ (4) -1 ÷ 0.12
= 3.03735
1,000,000/4 equal installments = 250,000
Principal = (250,000) (3.03735)
= 759,337.50
Unearned Interest = 1,000,000 - 759,337.50
= 240,662.50
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