ACCOUNTING FOR TRADE AND OTHER RECEIVABLES
OVERVIEW OF IFRS 15
Which statement is incorrect regarding PFRS 15?
a. The standard outlines a single comprehensive model for entities to use in
accounting for revenue arising from contracts with customers.
b. The standard supersedes revenue recognition guidance in PAS 18 Revenue
and PAS 11 Construction Contracts and related interpretations.
c. The core principle is that an entity recognizes revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those
goods or services.
d. None, all the statements are correct.
LECTURE NOTES:
The following standards and related interpretations are superseded by IFRS 15:
PAS 18 – Revenue
PAS 11 – Construction Contracts
IFRIC 13 – Customer Loyalty Programmes
IFRIC 15 – Agreements for the Construction of Real Estate
IFRIC 13 – Transfers of Assets from Customers
SIC 31 – Revenue – Barter Transactions Involving Advertising Services
Arrange in proper sequence the five-step approach that entities will follow in
recognizing revenue in accordance with PFRS 15:
I. Determine the transaction price
II. Identify the contract(s) with the customer
III. Identify the separate performance obligations in the contract
IV. Recognize revenue when (or as) each performance obligation is satisfied
V. Allocate the transaction price to separate performance obligations
a. I, II, III, IV and V
b. II, III, I, V and IV
c. III, II, I, V and IV
d. II, III, V, I and IV
For PFRS 15 to apply, a contract with a customer should meet which of the
following conditions?
I. The contract has been approved by the parties to the contract.
II. Each party’s rights in relation to the goods or services to be transferred can be
identified.
III. The payment terms for the goods or services to be transferred can be
identified.
IV. The contract has commercial substance.
V. It is probable that the consideration to which the entity is entitled to in
exchange for the goods or services will be collected.
a. I, II, III, IV and V
b. I, III, IV and V
c. I, II, III and V
d. I, II, III and IV
Performance obligation is a promise in a contract with a customer to transfer to
the customer
a. A good or service (or a bundle of goods or services) that is distinct.
b. A series of distinct goods or services that are substantially the same and that
have the same pattern of transfer to the customer.
c. Either a or b.
d. Neither a nor b.
Which statement is incorrect regarding transaction price in accordance with
PFRS 15?
a. 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.
b. An entity shall consider the terms of the contract and its customary business
practices to determine the transaction price.
c. The nature, timing and amount of consideration promised by a customer
affect the estimate of the transaction price.
d. The consideration promised in a contract with a customer may include fixed
amounts but not variable amounts.
When determining the transaction price, an entity shall consider the effects of:
I. Variable consideration
II. Constraining estimates of variable consideration
III. The existence of a significant financing component in the contract
IV. Non-cash consideration
V. Consideration payable to a customer
a. I, II, III, IV and V
b. II, III, IV and V only
c. III, IV and V only
d. III and IV only
For the purpose of determining the transaction price, an entity shall assume
a. That the goods or services will be transferred to the customer as promised in
accordance with the existing contract.
b. That the contract may be cancelled.
c. That the contract may be renewed
d. That the contract may be modified.
Statement 1: For the purpose of determining the transaction price, an entity shall
assume that the goods or services will be transferred to the customer as
promised in accordance with the existing contract, and such contract will not
be cancelled, renewed or modified.
Statement 2: For the purpose of determining the transaction price, an entity shall
assume that the goods or services will be transferred to the customer as
promised in accordance with the existing contract, and such contract will be
cancelled, renewed or modified.
a. Statement 1 is true.
b. Statement 2 is true.
c. Both statements are true.
d. Both statements are false.
Where a contract has multiple performance obligations, an entity will allocate
the transaction price to the performance obligations in the contract by
reference to their relative
a. Standalone selling prices.
b. Fair values.
c. Net realizable values.
d. Any of the above.
Which statement is incorrect regarding recognition of revenue?
a. Revenue is recognized as control is passed, either over time or at a point in
time.
b. Control of an asset is defined as the ability to direct the use of and obtain
substantially all of the remaining benefits from the asset.
c. Control includes the ability to prevent others from directing the use of and
obtaining the benefits from the asset.
d. The benefits related to the asset are the potential cash flows that may be
obtained only directly.
In accordance with PFRS 15, a contract asset is
a. An entity’s right to consideration that is unconditional (only the passage of
time is required before payment of that consideration is due).
b. An entity’s right to consideration in exchange for goods or services that the
entity has transferred to a customer when that right is conditioned on something
other than the passage of time (for example, the entity’s future performance).
c. An entity’s obligation to transfer goods or services to a customer for which the
entity has received consideration (or the amount is due) from the customer.
d. A party that has contracted with an entity to obtain goods or services that
are an output of the entity’s ordinary activities in exchange for consideration.
In accordance with PFRS 15, a contract liability is
a. An entity’s right to consideration that is unconditional (only the passage of
time is required before payment of that consideration is due).
b. An entity’s right to consideration in exchange for goods or services that the
entity has transferred to a customer when that right is conditioned on something
other than the passage of time (for example, the entity’s future performance).
c. An entity’s obligation to transfer goods or services to a customer for which the
entity has received consideration (or the amount is due) from the customer.
d. A party that has contracted with an entity to obtain goods or services that
are an output of the entity’s ordinary activities in exchange for consideration.
In accordance with PFRS 15, a customer is
a. An entity’s right to consideration that is unconditional (only the passage of
time is required before payment of that consideration is due).
b. An entity’s right to consideration in exchange for goods or services that the
entity has transferred to a customer when that right is conditioned on something
other than the passage of time (for example, the entity’s future performance).
c. An entity’s obligation to transfer goods or services to a customer for which the
entity has received consideration (or the amount is due) from the customer.
d. A party that has contracted with an entity to obtain goods or services that
are an output of the entity’s ordinary activities in exchange for consideration.
DEFINITION OF TRADE AND OTHER RECEIVABLES
In accordance with PFRS 15, a receivable is
a. An entity’s right to consideration that is unconditional (only the passage of
time is required before payment of that consideration is due).
b. An entity’s right to consideration in exchange for goods or services that the
entity has transferred to a customer when that right is conditioned on something
other than the passage of time (for example, the entity’s future performance).
c. An entity’s obligation to transfer goods or services to a customer for which the
entity has received consideration (or the amount is due) from the customer.
d. A party that has contracted with an entity to obtain goods or services that
are an output of the entity’s ordinary activities in exchange for consideration.
RECOGNITION OF TRADE AND OTHER RECEIVABLES
At initial recognition, an entity shall measure trade receivables at their
transaction price (as defined in PFRS 15) if the trade receivables
a. Do not contain a significant financing component in accordance with PFRS
15.
b. When the entity applies the practical expedient in accordance with
paragraph 63 of PFRS 15.
c. Either a or b.
d. Neither a nor b.
Statement 1: The practical expedient in accordance with paragraph 63 of PFRS
15 may be applied if the term is not more than one year.
Statement 2: The practical expedient in accordance with paragraph 63 of PFRS
15 may be applied if the term is more than one year.
a. Statement 1 is true.
b. Statement 2 is true.
c. Both statements are true.
d. Both statements are false.
MEASUREMENT OF TRADE AND OTHER RECEIVABLES
LECTURE NOTES:
Measure of Receivables in Summary
Initial Measurement
Trade receivables
Non-trade receivables
Transaction price (PFRS 15)
FV plus transaction costs (PFRS 9)
Subsequent Measurement
Trade receivables
Non-trade receivables
Amortized cost using the effective interest
method
Amortized cost using the effective interest
method
Receivables not measured initially at their transaction price are measured
initially at
a. Fair value
b. Fair value less costs to sell
c. Fair value minus transaction costs that are directly attributable to the
acquisition of the financial asset.
d. Fair value plus transaction costs that are directly attributable to the
acquisition of the financial asset.
In accordance with PFRS 9, receivables shall be measured at amortized cost if
a. The receivables are held within a business model whose objective is to hold
assets in order to collect contractual cash flows.
b. The contractual terms of the receivables give rise on specified dates to cash
flows that are solely payments of principal and interest on the principal amount
outstanding.
c. Both a and b.
d. Either a or b.
The ideal measure of short-term receivables in the statement of financial position
is the discounted value of the cash to be received in the future, failure to follow
this practice usually does not make the statement of financial position
misleading because
a. The amount of the discount is not material.
b. Most short-term receivables are not interest bearing.
c. The allowance for uncollectible accounts includes a discount element.
d. Most receivables can be sold to a bank or factor.
Accounts receivable are normally reported at the:
a. Present value of future cash receipts.
b. Current value plus accrued interest.
c. Expected amount to be received.
d. Current value less expected collection costs.
Accounts receivable are normally reported at the:
a. Present value of future cash receipts.
b. Current value plus accrued interest.
c. Net realizable value.
d. Current value less expected collection costs.
New Corp has the following data relating to accounts receivable at the end of
the current year:
Accounts receivable
Allowance for doubtful accounts
Allowance for sales discounts
Allowance for sales returns
Allowance for freight
1,880,000
94,000
10,000
15,000
3,000
What is the net realizable value of New Corp.’s accounts receivable?
a. P2,708,000
b. P1,880,000
c. P1,758,000
d. P1,752,000
The following information pertains to an entity’s accounts receivable:
Accounts receivable, beginning
Credit sales
Sales returns
Collections
Promissory notes received in payment of accounts receivable
Accounts receivable written off as uncollectible
Collections on accounts previously written off
Accounts receivable used as collateral
3,800,000
18,000,000
280,000
15,300,000
2,000,000
160,000
60,000
1,000,000
The entity’s accounts receivable balance at the end of the period is
a. P6,060,000
b. P4,060,000
c. P3,060,000
d. P3,000,000
LECTURE NOTES:
Accounting for Freight
Buyer
Seller
Deduct from AR
Add to AR
Who should pay?
FOB shipping point
FOB destination
FOB destination
FOB shipping point
Who actually paid?
Freight collect
Freight prepaid
Freight collect
Freight prepaid
Gross and Net method of recording Sales
Cash discounts
Cash discounts granted
Gross
Deducted from sales
when granted
Deducted from sales
(sales discounts)
Net
Deducted from sales
whether granted or not
Not accounted for
separately since
Cash discounts not
granted
Included in sales
already deducted from
sales
Reported as other
income (Forfeited sales
discounts)
On June 9, Seller Corp. sold merchandise with a list price of P5,000 to Buyer on
account. Seller allowed trade discounts of 30% and 20%. Credit terms were 2/15,
n/40 and the sale were made FOB shipping point. Seller prepaid P200 of delivery
costs for Buyer as an accommodation. On June 25, Seller received from Buyer a
remittance in full payment amounting to
a. P2,744
b. P2,940
c. P2,944
d. P3,000
The Pacifier Company uses the net price method of accounting for cash
discounts. In one of its transactions on December 15, Pacifier sold merchandise
with a list price of P500,000 to a client who was given a trade discount of 20%
and 15%. Credit terms were 2/10, n/30. The goods were shipped FOB destination,
freight collect. On December 20, the client returned damaged goods originally
billed at P60,000. Total freight charges paid by the buyer amounted to P7,500.
What is the net realizable value of this receivable on December 31?
a. P272,500
b. P274,400
c. P280,000
d. P333,200
An advantage of using the net price method of recording cash discounts on
credit sales is
a. It simplifies recording of sales returns and allowances.
b. It eases communication with customers about their balances.
c. It requires less record-keeping efforts than the gross method.
d. It properly reflects current period sales revenue.
The following are advantages of using the gross price method of recording cash
discounts on credit sales, except
a. It simplifies recording of sales returns and allowances.
b. It eases communication with customers about their balances.
c. It requires less record-keeping efforts than the gross method.
d. It properly reflects current period sales revenue.
Statement 1: Theoretically, net price method is preferred over the gross price
method.
Statement 2: For convenience purposes, traditionally, gross price method is used
instead of net price method.
a. Statement 1 is true.
b. Statement 2 is true.
c. Both statements are true.
d. Both statements are false.
In accordance with PFRS 15, how should volume rebates and/or discounts on
goods or services applied retrospectively be accounted for?
a. As variable consideration.
b. As customer options to acquire additional goods or services at a discount.
c. Either a or b.
d. Neither a nor b.
In accordance with PFRS 15, how should volume rebates and/or discounts on
goods or services applied prospectively be accounted for?
a. As variable consideration.
b. As customer options to acquire additional goods or services at a discount.
c. Either a or b.
d. Neither a nor b.
Statement 1: In accordance with PFRS 15, volume rebates and/or discounts on
goods or services applied prospectively shall be accounted for as a separate
performance obligation.
Statement 2: In accordance with PFRS 15, volume rebates and/or discounts on
goods or services applied retrospectively shall be accounted for as a separate
performance obligation.
a. Statement 1 is true.
b. Statement 2 is true.
c. Both statements are true.
d. Both statements are false.
In accordance with PFRS 15, how are variable considerations accounted for?
a. Included in transaction price.
b. Included in the transaction price only to the extent that it is highly probable
that a significant reversal in the amount of cumulative revenue recognized will
occur when the uncertainty associated with the variable consideration is
subsequently resolved.
c. Included in the transaction price only to the extent that it is highly probable
that a significant reversal in the amount of cumulative revenue recognized will
not occur when the uncertainty associated with the variable consideration is
subsequently resolved.
d. Excluded from transaction price.
LECTURE NOTES:
Accounting for Cash Discount
Traditional
Gross method – deducted from sales
when granted.
Net method – deducted from sales
whether granted or not. The forfeited
sales discount is treated as other
income.
PFRS 15
Included in sales if the entity expects
to be entitled (that is, the customer
will not avail).
The forfeited sales discount is treated
as adjustment to sales.
To account for the transfer of products with a right of return (and for some
services that are provided subject to a refund), an entity shall recognize
a. Revenue for the transferred products in the amount of consideration to which
the entity expects to be entitled (therefore, revenue would not be recognized
for the products expected to be returned).
b. A refund liability.
c. An asset (and corresponding adjustment to cost of sales) for its right to
recover products from customers on settling the refund liability.
d. All of these.
Which statement is incorrect regarding a refund liability?
a. An entity shall recognize a refund liability if the entity receives consideration
from a customer and expects to refund some or all of that consideration to the
customer.
b. A refund liability is measured at the amount of consideration received (or
receivable) for which the entity does not expect to be entitled.
c. The refund liability shall be updated at the end of each reporting period for
changes in circumstances.
d. Changes in refund liability shall be recognized as other income or expense.
Statement 1: Changes in refund liability shall be recognized as other income or
expense.
Statement 2: Changes in refund liability shall be recognized as an adjustment to
revenue.
a. Statement 1 is true.
b. Statement 2 is true.
c. Both statements are true.
d. Both statements are false.
Which statement is incorrect regarding an asset recognized for an entity’s right
to recover products from a customer on settling a refund liability?
a. It shall initially be measured by reference to the former carrying amount of the
product (for example, inventory) less any expected costs to recover those
products (including potential decreases in the value to the entity of returned
products).
b. At the end of each reporting period, an entity shall update the measurement
of the asset arising from changes in expectations about products to be
returned.
c. An entity shall offset the asset and the refund liability.
d. None, all the statements are correct.
LECTURE NOTES:
Accounting for Sales Return
Traditional
Deducted from sales as returns
occurs.
PFRS 15
Recognized as refund liability (if
expected to be returned).
Changes in refund liability, treated as
an adjustment to sales.
Changes in right to recover asset
from a customer on settling a refund
liability, treated as an adjustment to
cost of sales.
Ely Corp. sold merchandise to various customers with a list price of P1,000,000.
The customers were given trade discounts of 20% and 15%. Credit terms were
2/10, n/30. Based on experience, Ely expects that 50% will avail of the cash
discounts and 10% will return the products. In accordance with PFRS 15, Ely
should recognize revenue of
a. P680,000
b. P673,200
c. P605,200
d. P598,400
Seller Corporation sold P21,000 of merchandise during the month of December,
which was charged to a national credit card. On December 15, Seller bills the
independent national credit card company for these sales and is assessed a 5%
service charge. On December 21, a customer returned merchandise originally
sold for P2,000 and Seller notifies the credit card company of the return. On
December 29, the credit card company remitted amount owed to Seller.
Which statement is incorrect?
a. In recording this sale, Seller should record an account receivable from the
credit card company.
b. Seller received P18,050 from the credit card company.
c. Seller should recognize P18,050 as net revenue.
d. None, all the statements are correct.
LECTURE NOTES:
Direct write-off vs Allowance method
Direct write-off method
Doubtful of collection
No journal entry
Definitely uncollectible
Debit: Doubtful
Account Expense
Credit: Accounts
Receivable
Recovery
Debit: Cash
Credit: Bad Debt
Recovery
Allowance method
Debit: Doubtful
Account Expense
Credit: Allowance for
Doubtful Accounts
Debit: Allowance for
Doubtful Accounts
Credit: Accounts
Receivable
Debit: Accounts
Receivable
Credit: Allowance for
Doubtful Accounts
Debit: Cash
Credit: Accounts
Receivable
Accounting for doubtful accounts – Allowance method
Profit or loss approach
• % of sales
FOCUS: Doubtful accounts expense (Matching)
SFP approach
• % of accounts receivable
• Aging
FOCUS: Allowance for doubtful accounts (NRV of AR)
What is the effect on net income at the time of the collection of an account
previously written off under each of the following methods?
Direct write-off method
No effect
Increase
Increase
No effect
a.
b.
c.
d.
Allowance method
Increase
Increase
No effect
No effect
Bangui Company provides for doubtful accounts expense at the rate of 3
percent of credit sales. The following data are available for last year:
Allow. for Doubtful Accounts, Jan. 1
Accounts written off as uncollectible
Collection of accounts written off
Credit sales, year-ended December 31
54,000
60,000
15,000
3,000,000
The allowance for doubtful accounts balance at December 31, after adjusting
entries, should be
a. P45,000
b. P84,000
c. P90,000
d. P99,000
On January 1, 2020, the balance of accounts receivable of Burgos Company
was P5,000,000 and the allowance for doubtful accounts on same date was
P800,000. The following data were gathered:
2017
2018
2019
2020
Credit sales
10,000,000
14,000,000
16,000,000
25,000,000
Write-offs
250,000
400,000
650,000
1,100,000
Recoveries
20,000
30,000
50,000
145,000
Doubtful accounts are provided for as percentage of credit sales. The
accountant calculates the percentage annually by using the experience of the
three years prior to the current year. How much should be reported as 2020
doubtful accounts expense?
a. P750,000
b. P812,500
c. P330,000
d. P875,000
John Corp. has the following data relating to accounts receivable for the year
ended December 31, 2020:
Accounts receivable, January 1, 2020
Allowance for doubtful accounts, January 1, 2020
Sales during the year, all on account, terms 2/10, 1/15, n/60
Cash received from customers during the year
Accounts written off during the year
480,000
19,200
2,400,000
2,560,000
17,600
An analysis of cash received from customers during the year revealed that
P1,411,200 was received from customers availing the 10-day discount period,
P792,000 from customers availing the 15-day discount period, P4,800
represented recovery of accounts written-off, and the balance was received
from customers paying beyond the discount period.
The allowance for doubtful accounts is adjusted so that it represents certain
percentage of the outstanding accounts receivable at year end. The required
percentage at December 31, 2020 is 125% of the rate used on December 31,
2019.
The doubtful accounts expense for 2020 is
a. P6,880
b. P7,120
c. P8,720
d. P8,960
The accounts receivable subsidiary ledger of Besao Corporation shows the
following information:
Customer
Maybe, Inc.
12/31
Account balance
140,720
Perhaps Co.
83,680
Pwede Corp.
122,400
Perchance Co.
180,560
Invoice
Date
12/06
11/29
09/02
08/20
12/08
10/25
11/17
Amount
56,000
84,720
48,000
35,680
80,000
42,400
92,560
Possibly Co.
126,400
Luck, Inc.
69,600
723,360
10/09
12/12
12/02
09/12
88,000
76,800
49,600
69,600
723,360
The estimated bad debt rates below are based on the Corporation’s receivable
collection experience.
Age of accounts
0 – 30 days
31 – 60 days
61 – 90 days
91 – 120 days
Over 120 days
Rate
1%
1.5%
3%
10%
50%
The Allowance for Doubtful Accounts had a credit balance of P14,000 on
December 31, 2020, before adjustment.
The adjusting journal entry to adjust the allowance for doubtful accounts as of
December 31, 2020 will include a debit to doubtful accounts expense of
a. P52,795
b. P38,795
c. P24,795
d. P14,000
RECEIVABLE FINANCING
Why would a company sell receivables to another company?
I. In order to accelerate the receipt of cash from receivables.
II. Because money is tight and access to normal credit is unavailable or too
expensive.
III. To avoid violating existing lending agreements.
IV. Because billing and collection of receivables are often time-consuming and
costly.
a. I, II, III and IV
b. I only
c. I and II only
d. I, II and III only
An entity shall derecognize a financial asset when, and only when:
a. The contractual rights to the cash flows from the financial asset expire.
b. The entity transfers the financial asset and the transfer qualifies for
derecognition.
c. Either a or b.
d. Neither a nor b.
An entity transfers a financial asset if, and only if, it
a. Transfers the contractual rights to receive the cash flows of the financial asset.
b. Retains the contractual rights to receive the cash flows of the financial asset,
but assumes a contractual obligation to pay the cash flows to one or more
recipients in an arrangement that meets the “pass-through” conditions.
c. Either a or b.
d. Neither a nor b.
When an entity retains the contractual rights to receive the cash flows of a
financial asset (the ‘original asset’), but assumes a contractual obligation to pay
those cash flows to one or more entities (the ‘eventual recipients’), the entity
treats the transaction as a transfer of a financial asset if, and only if, certain
conditions are met including
a. The entity has no obligation to pay amounts to the eventual recipients unless
it collects equivalent amounts from the original asset.
b. The entity is prohibited by the terms of the transfer contract from selling or
pledging the original asset other than as security to the eventual recipients for
the obligation to pay them cash flows.
c. The entity has an obligation to remit any cash flows it collects on behalf of the
eventual recipients without material delay.
d. All of these.
How is transfer of risks and rewards evaluated?
a. By comparing the entity’s exposure, before and after the transfer, with the
variability in the amounts and timing of the net cash flows of the transferred
asset.
b. By determining the transferee’s ability to sell the asset.
c. Either a or b.
d. Neither a nor b.
Examples of when an entity has retained substantially all the risks and rewards of
ownership of transferred financial asset include
a. A sale and repurchase transaction where the repurchase price is a fixed price
or the sale price plus a lender’s return.
b. A sale of a financial asset together with a total return swap that transfers the
market risk exposure back to the entity.
c. A sale of short-term receivables in which the entity guarantees to
compensate the transferee for credit losses that are likely to occur.
d. All of these.
Which of the following transfers qualify for derecognition?
a. An entity sells a financial asset with a carrying amount of P100,000 for
P143,000. On the date of sale, the entity enters into an agreement with the
buyer to repurchase the asset in three months for P145,000.
b. An entity sells a financial asset with a carrying amount of P500,000 for
P600,000 and simultaneously enters into a total return swap with the buyer under
which the buyer will return any increases in value to the entity and the entity will
pay the buyer interest plus compensation for any decreases in the value of the
investment. The entity expects the fair value of the financial asset to decrease
by P40,000.
c. An entity sells a portfolio of short-term accounts receivables carried on its
books at P2,100,000 for P2,000,000 and promises to pay up to P60,000 to
compensate the buyer if and when any defaults occur. Expected credit losses
are significantly less than P60,000, and there are no other significant risks.
d. None of the above
Which statement is incorrect regarding transfers that do not qualify for
derecognition because the entity has retained substantially all the risks and
rewards of ownership of the transferred asset?
a. The entity shall continue to recognize the transferred asset in its entirety.
b. The entity shall recognize a financial liability for the consideration received.
c. In subsequent periods, the entity shall recognize any income on the
transferred asset and any expense incurred on the financial liability
d. The asset and the associated liability shall be offset.
LECTURE NOTES:
Accounting for transfers of receivables
Have substantially all the risks and rewards been transferred?
YES – Record as a sale:
1. Derecognize the asset sold.
2. Recognize assets obtained and
liabilities incurred.
3. Record gain or loss.
NO – Record as a secured
borrowing:
1. Do not derecognize the asset.
2.Record liability.
3. Record interest expense.
If an entity neither transfers nor retains substantially all the risks and rewards of
ownership of a transferred asset, the entity shall
a. Derecognize the financial asset and recognize separately as assets or
liabilities any rights and obligations created or retained in the transfer.
b. Continue to recognize the financial asset.
c. Determine whether it has retained control of the financial asset.
d. Continue to recognize the transferred asset to the extent of its continuing
involvement.
How is transfer of control evaluated?
a. By comparing the entity’s exposure, before and after the transfer, with the
variability in the amounts and timing of the net cash flows of the transferred
asset.
b. By determining the transferee’s ability to sell the asset.
c. Either a or b.
d. Neither a nor b.
An entity has not retained control of a transferred asset if
a. The transferee has the practical ability to sell the transferred asset.
b. The transferee does not have the practical ability to sell the transferred asset.
c. The entity retains an option to repurchase the transferred asset and the
transferee cannot readily obtain the transferred asset in the market if the entity
exercises its option.
d. A put option or guarantee constrains the transferee from selling the
transferred asset.
Which statement is incorrect if an entity neither transfers nor retains substantially
all the risks and rewards of ownership of a transferred asset, and retains control
of the transferred asset?
a. The entity continues to recognize the transferred asset to the extent to which
it is exposed to changes in the value of the transferred asset.
b. When an entity continues to recognize an asset to the extent of its continuing
involvement, the entity also recognizes an associated liability.
c. The transferred asset and the associated liability are measured on a basis that
reflects the rights and obligations that the entity has retained.
d. The entity shall offset any income arising from the transferred asset with any
expense incurred on the associated liability.
Bago Company sells a portfolio of short-term accounts receivable with a
carrying amount of P900,000 for P1,000,000 and promises to pay up to P30,000 to
compensate the buyer if and when any defaults occur. Bago Company neither
transfers nor retains substantially all the risks and rewards of ownership of the
transferred asset, and retains control of the transferred asset. How much should
be recognized as continuing involvement in the receivables?
a. P1,000,000
b. P900,000
c. P30,000
d. P 0
Bago Company sells a portfolio of short-term accounts receivable with a
carrying amount of P900,000 for P1,000,000 and promises to pay up to P930,000
to compensate the buyer if and when any defaults occur. Bago Company
neither transfers nor retains substantially all the risks and rewards of ownership of
the transferred asset, and retains control of the transferred asset. How much
should be recognized as continuing involvement in the receivables?
a. P1,000,000
b. P900,000
c. P930,000
d. P 0
LECTURE NOTES:
The entity continues to recognize the transferred asset to the extent to which it
is exposed to changes in the value of the transferred asset.
Continuing involvement = CA of asset vs Guarantee made by the entity,
whichever is lower.
Which statement is incorrect regarding pledge of accounts receivable?
a. New receivables can be substituted for the ones collected.
b. The accounts pledged are not transferred to a special ledger control
account.
c. No special accounting for the borrowing is needed.
d. Does not require note disclosure relating to details of transaction.
LECTURE NOTES:
Pledge vs Assignment
Specific accounts involved are identified
Substitution
Special control account
Special accounting for borrowing
Disclose details of transaction
PLEDGE
No
Yes
No
No
Yes
ASSIGNMENT
Yes
No
Yes
No
Yes
Sipalay Co. assigned P500,000 of accounts receivable to Hinigaran Finance Co.
as security for a loan of P420,000. Hinigaran charged a 2% commission on the
amount of the loan; the interest rate on the note was 10%. During the first month,
Sipalay collected P110,000 on assigned accounts after deducting P380 of
discounts. Sipalay accepted returns worth P1,350 and wrote off assigned
accounts totaling P3,700. Entries to record the foregoing transactions would
include a
a. debit to Cash of P110,380.
b. debit to Bad Debts Expense of P3,700.
c. debit to Allowance for Doubtful Accounts of P3,700.
d. debit to Accounts Receivable of P115,430.
On November 30, accounts receivable in the amount of P900,000 were assigned
to Kaban Finance Co. by Kalan as security for a loan of P750,000. Kaban
charged a 3% commission on the accounts; the interest rate on the note is 12%.
During December, Kalan collected P350,000 on assigned accounts after
deducting P560 of discounts. Kalan wrote off a P530 assigned account. On
December 31, Kalan remitted to Kaban the amount collected plus one month's
interest on the note.
How much is Kalan’s equity in the assigned accounts receivable as of
December 31?
a. P149,470
b. P141,970
c. P141,410
d. P148,910
Use the following information for the next two questions.
Entity A factors P500,000 of accounts receivable. Entity A transfers the
receivable records to the factor, which will receive the collections. Factor
assesses a finance charge of 3 percent of the amount of accounts receivable
and retains an amount equal to 5 percent of the accounts receivable (for
probable adjustments).
If the transfer is on a non-guarantee (or without recourse) basis, which statement
is correct?
a. Entity A reports both a receivable and a liability of P500,000 in its statement of
financial position.
b. Entity A records a loss of P40,000.
c. The factor’s net income will be the difference between the financing income
of P15,000 and the amount of any uncollectible receivables.
d. None of the above.
If Entity A issues a guarantee to factor to compensate the factor for any credit
losses on receivables transferred, which statement is correct?
a. Entity A reports both a receivable and a liability of P500,000 in its statement of
financial position.
b. Entity A records a loss of P15,000.
c. The factor’s net income will be the difference between the financing income
of P15,000 and the amount of any uncollectible receivables.
d. None of the above.
Sleeping Corporation factored P600,000 of accounts receivable to Beauty
Finance Co. Control was surrendered by Sleeping. Beauty accepted the
receivables subject to recourse for nonpayment. Beauty assessed a fee of 3%
and retains a holdback equal to 5% of the accounts receivable. In addition,
Beauty charged 15% interest computed on a weighted average time to
maturity of the receivables of 54 days. The fair value of the recourse obligation is
P9,000. The loss on factoring to be recognized by Sleeping Corporation is
a. P31,315
b. P40,315
c. P61,315
d. P70,315
Use the following information for the next three questions.
The Hinoba-an Department Store wishes to discount a note receivable arising
from the sale of merchandise in order to meet some maturing obligations. The
note has a face amount of P50,000. The note bears interest of 12% and is due in
one year. The bank rate in discounting notes is 12%. Assuming that the note was
discounted ten months prior to maturity.
The proceeds from this discounted note amounted to
a. P56,000
b. P51,000
c. P50,400
d. P50,000
If the note discounting is treated as a sale without recourse, the loss on
discounting is
a. P1,000
b. P600
c. P400
d. P0
Which statement is incorrect if the note discounting is treated as borrowing?
a. The entity shall continue to recognize the note receivable in its entirety.
b. The entity shall recognize a financial liability for the consideration received.
c. The entity shall report net interest income of P400.
d. None of the above.
On May 17, Sagay Co. accepted a P6,500, 8%, 90-day note from a customer.
On June 11, the note was discounted at 10%. At maturity date, the note was
dishonored and the bank charged a P25 protest fee. The amount that Sagay
Co. would debit to Notes Receivable Dishonored is:
a. P6,655
b. P6,525
c. P6,535
d. P6,130
An entity shall disclose information that enables users of its financial statements
a. To understand the relationship between transferred financial assets that are
not derecognized in their entirety and the associated liabilities.
b. To evaluate the nature of, and risks associated with, the entity’s continuing
involvement in derecognized financial assets.
c. Both a and b.
d. Neither a nor b.
PRESENTATION OF TRADE AND OTHER RECEIVABLES
Which statement is incorrect regarding presentation of receivables in the
statement of financial position?
a. Trade receivables are reported under current assets.
b. Non-trade receivables are included in the line item ‘trade and other
receivables’ if they are expected to be realized within twelve months after the
reporting period.
c. Non-trade receivables are reported as non-current if they are not expected
to be realized within twelve months after the reporting period
d. None of these.
The following are normally included in the line-item trade and other receivables,
except
a. Advances to officers and employees
b. Advances to subsidiaries and affiliates
c. Receivables from sale of securities or property other than inventory.
d. Dividends and interest receivable.
DISCLOSURE REQUIREMENTS FOR TRADE AND OTHER RECEIVABLES
In relation to receivables, an entity is required by PFRSs to
a. Classify receivables as current and non-current in the statement of financial
position.
b. Disclose any receivables pledged as collateral.
c. Disclose all significant concentrations of credit risk arising from receivables.
d. All of these.