Accounting for Receivables

BCSV

Problem 1:
Sheik Company provided the following information:

INVOICE:
CUSTOMER NO. ACCOUNTS RECEIVABLE, DATE: AMOUNT:
DEC. 31, 2014
0001 P 35,180 12/06/14 P 14,000
11/29/14 21,180

0002 20,920 09/27/14 12,000

08/20/14 8,920

0003 30,600 12/08/14 20,000

10/25/14 10,600

0004 45,140 11/17/14 23,140

10/09/14 22,000

0005 31,600 12/12/14 19,200

12/02/14 12,400

0006 17,400 09/12/14 17,400

The estimated bad debt rates below are based on Sheik’s receivable collection experience.

Age of Rate:
accounts:
0 – 30 days 1%
31 – 60 days 1.5%
61 – 90 days 3%
91 – 120 days 10%
Over 120 days 50%

The allowance for bad debts account had a debit balance of P 5,500 on December 31, 2014,
before adjustments.

1. How much is the bad debts expense for the year 2014?
2. What is the net realizable value of accounts receivable at December 31, 2014?

Problem 2:
Star Box Company produces paint and related products for sale to the construction industry
throughout Metro Manila. While sales have remained relatively stable despite a decline in the
amount of new construction, there has been a noticeable change in the timeliness with which
the company’s customers are paying their bills.

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The company sells its products on payment terms of 2/10 n/30. In the past, over 75% of the
credit customers have taken advantage of the discount by paying within 10 days of the invoice
date. During the year ended December 31, 2015, the number of customers taking the full 30
days to pay has increased. Current indications are that less than 60% of the customers are now
taking the discount. Uncollectible accounts as a percentage of total credit sales have risen from
the 1.5% provided in the past years to 4% in the current year.

In response to your request for more information on the deterioration of accounts receivable
collections, the company’s controller has prepared the following report:

Star Box Company

Accounts Receivable Collections
December 31, 2015

The fact that some credit accounts will prove uncollectible is normal, and annual bad debt write-offs
had been 1.5% of total credit sales for many years. However, during the year 2015, this percentage
increased to 4%. The accounts receivable balance is P 1,500,000, and the condition of this balance in
terms of age and probability of collection is shown below:

Proportion to total: Age of accounts: Probability of collection:

64% 1 – 10 days 99.0%
18% 11 – 30 days 97.5%
8% 31 – 60 days past due 95.0%
5% 61 – 120 days past due 80.0%
3% 121 – 180 days past due 65.0%
2% Over 180 days past due 20.0%

At the beginning of 2015, the Allowance for Bad debts account had a credit balance of P
27,300. The company has provided for a monthly bad debt expense accrual during the year
based on the assumption that 4% of total credit sales will be uncollectible. Total credit sales for
the year 2015 amounted to P 8,000,000, and write-offs of uncollectible accounts during the
year totaled P 292,500.

3. How much is the additional bad debts expense recognized on December 31,
2015?
4. What is the Net realizable value of the accounts receivable on December 31,
2015?

Problem 3:
On January 1, 2015, Pink Guy Company sold land that originally cost P 400,000 to Blue Berry
Company. As payment, Blue Berry gave Pink Guy a P 600,000 note. The note bears an interest
rate of 4% and is to be repaid in annual installments of P 200,000 plus interest on the
outstanding balance. The first payment is due on December 31, 2015. The market price of the
land is not reliably determinable. The prevailing rate of interest for note of this type is 14% on
January 1, 2015 and 17% on December 31, 2015.

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Pink Guy made the following entries in relation to the sale of land and the related note
receivable:

Jan. 1 Notes Receivable 600,000

Land 400,000
Gain on Sale of Land 200,000

Dec. 31 Cash 224,000

Notes receivable 200,000
Interest income 24,000

Pink Guy reported the notes receivable in the statement of financial position at December 31,
2015 as part of trade and other receivables. (Use 4 decimal places for PV factors)

Determine the following as of and for the year ended December 31, 2015:
5. Correct gain on sale of land.
6. Correct interest income.
7. Overstatement or understatement of profit.
8. Correct carrying amount of the note.
9. Overstatement or understatement of working capital.

Problem 4:
On January 1, 2012, PAT MORITA Corporation loaned P 3,000,000 to CRAIG Company. Under
the loan agreement, CRAIG is to make an annual principal payment of P 600,000 plus interest
at 8%. The first principal and interest payment is due on January 1, 2013. The required
payments were made by CRAIG for 2013 and 2014. However, during 2014, CRAIG Company
began to face financial difficulties, requiring PAT MORITA to re-evaluate the collectability of the
loan. On December 31, 2014, PAT MORITA determines that it will be able to collect the
remaining principal, but it is unlikely that the interest will be collected. (Use 5 decimal places for
PV factor)

10. What is the amount of loan impairment on December 31, 2014?

11. What amount of interest income should be recognized for 2015?

Problem 5:
On December 5, 2015, CM Co. sold its accounts receivable (NRV is P 260,000) for cash of P
230,000. 10% of the proceeds was withheld by the factor to allow possible customer returns
and other account adjustments. The related allowance for bad debts is P 40,000.

12. What amount of loss on factoring should be recognized?

Problem 6:
AMY Institution Company loaned P 16,500,000 to INTERCON Inc. on January 1, 2014. The
initial loan repayment terms include a 10% interest rate plus annual principal payments of P
3,300,000 on January 1 of each year. INTERCON made the required interest payment for 2014
but did not make the P 3,300,000 principal repayment nor the interest payment for 2015. AMY

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is preparing its annual financial statements on December 31, 2015. INTERCON is having
financial difficulty, and AMY has concluded that the loan is impaired.
Analysis of INTERCON’s financial condition on December 31, 2015, indicates the principal
payments will be collected, but the collection of interest is unlikely. It is the policy of AMY
Institution not to accrue interest on the year the loan is concluded to be impaired. (Use 4 decimal
places for PV factor)

The projected cash flows are:

December 31, 2016 – P 5,250,000
December 31, 2017 – P 6,000,000
December 31, 2018 – P 5,250,000

13. What is the loan impairment loss on December 31, 2015?

14. What is the interest income to be reported by AMY in 2016?
15. What amount relating to the loan shall be presented as part of current assets on
December 31, 2016?
16. What is the carrying value of the loan on December 31, 2017?
17. What is the interest income in 2017?
18. What is the interest income in 2018?

Problem 7:
On August 31, 2015, Pennsylvania Co. sold a tract of land to an entity. As payment,
Pennsylvania received a 9% promissory note with face value of P 6,949,800. The principal and
interest, compounded annually, are due on August 31, 2018.

19. Compute for the interest income for the years 2015, 2016, 2017, and 2018.

Problem 8:
On April 1, 2015, The Red Horse Inc. sold five units of delivery truck to an entity. As payment,
Red Horse received a four-year, non-interest bearing, P 3,200,000 note. The note is payable in
annual installments of P 800,000, the first installment is due on March 31, 2016. There was no
equivalent cash price for the delivery trucks and the note had no ready market. The prevailing
interest rate for a note of this type is 9%. (Use 4 decimal places for PV factor)

20. At what amount should the note be recorded on April 1, 2015?

21. What is the total interest income in 2016?
22. What amount relating to the note shall be presented as part of non-current assets
on December 31, 2016?
23. What amount relating to the note shall be presented as part of current assets on
December 31, 2017?
24. What is the total interest income on December 31, 2017?
25. What is the balance of the discounts on notes receivable as of December 31,
2017?
26. What is the carrying value of the note on December 31, 2018?

Problem 9:

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On April 1, 2015, The POT Manufacturing Co. sold a non-current operating asset to an entity.
As payment, POT received a four-year, 9% promissory note with face value of P 2,591,760. The
note and accrued interest are payable in equal amounts of P 800,000 every March 31, starting
March 31, 2016. The periodic payment of P 800,000 is to be applied first to interest, and the
remainder to the principal.

27. Compute for the total interest income for the years 2015 through 2019.
28. What amount relating to the note shall be presented as part of current assets at
December 31, 2016?
29. What amount relating to the note shall be presented as part of current assets at
December 31, 2017?
30. What amount relating to the note shall be presented as part of current assets at
December 31, 2018?

“Push yourself because, no one else is going to do it for you”.

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Answers:
1. 15,199
2. 171,141
3. P 22,300
4. P 1,422,900
5. P 103,105
6. P 70,435
7. P 50,460
8. P 349,540
9. P 232,936
10. 130,038
11. P 85,597
12. 30,000
13. P 2,824,500
14. P 1,367,550
15. P 5,020,695
16. P 4,772,355
17. P 979,305
18. P 477,645
19. 2015 – P 208,494; 2016 – P 644,246; 2017 – P 702,229; 2018 – P 495,423
20. P 2,591,760
21. P 195,004
22. P 1,407,270
23. P 768,337
24. P 140,554
25. P 97,739
26. P 783,481
27. 2015 – P 174,944; 2016 – P 195,004; 2017 – P 140,554; 2018 – P 81,204; 2019 – P
16,534
28. P 754,437
29. P 768,337
30. P 783,481

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