Chapter 3 Receivables

Chapter 3 Receivables RECEIVABLES a) b) c) d) e)

Any legitimate claim from others for money, goods or services Claims that are expected to be settled by the receipt of cash Amounts collectible from customers Accrued revenue Other items such as loans and advances to offices etc. Legitimate claims against suppliers and insurance companies Claims against arising from nonrecurring transactions

CLASSSIFICATION As to source: Trade Receivables - from sale of goods/services in the normal course of business Non-trade Receivables – from sources other than from sale of goods/services in the normal course of business Examples: a) Loans to officers and employees b) Advances to affiliate c) Accrued interest and dividends d) Deposits to guarantee performance/payment or to cover possible damages/losses e) Subscriptions for the entity’s securities f) Deposit with creditors, claims for losses and damages g) Claims for tax refunds/rebates h) Claims against common carriers for damaged/lost goods i) Claims against creditors for returned, damaged or lost goods As to classification: Current Receivables – expected to be collected within a year or during the current operating cycle* Non-current Receivables – non-trade receivables that are not reasonably expected to be realized in cash within 12 mos from eop *Normal Operating Cycle - time between the acquisition of assets for processing and their realization in cash or cash equivalents- - period required for cash to be converted onto inventories through purchase and production, inventories into receivables trough sale and receivables back into cash/cash equivalents through collection RECOGNITION Trade discounts - Volume/quantity discounts - Means of converting a catalog list price to the prices actually charged to the buyer

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Always deducted from the list price prior to recording the AR arising from a credit transaction

Cash discounts - Sales discounts from the seller’s point of view - Reductions from the sales price as an inducement for prompt payment of an account - Reduce gross sales revenue a) Gross method - records discount when taken by customers  Record revenue at gross amount of sales  When customer takes the discount record cash discount - Lacks conceptual validity - Simplest and most widely used method because the cash discount is usually immaterial and record keeping is less complicated b) Net method  Record revenue at gross amount of sales less cash discount  When customer forfeits discount, record discounts taken  Report discounts forfeited as other revenue - Theoretically preferred over the gross method - Initially recognizes AR at its amortized cost - Requires an adjusting entry at yearend for SD forfeited c) Allowance Method  Record revenue at gross amount and available CD record as allowance for SD (credit)  When customer takes discount allowance for SD is debited  If accounts collected beyond discount period Allowance for SD is debited and SD forfeited account is credited INITIAL MEASUREMENT Short term receivables  Fair Value = Face value / Original invoice amount Interest bearing Long term receivables  Fair Value = Face value Non-interest bearing Long term receivables  Fair Value = Present Value of all Future Cash Flows Discounted using the Prevailing Market Value of Interest for Similar transaction SUBSEQUENT RECOGNITION  NRV = Gross AR – Estimated ADA

- Amount of cash expected to be collected/estimated recoverable amount a) Allowance for Freight Charge 1. FOB destination FOB destination, freight collect - Buyer’s ownership upon receipt Freight out XX - Seller responsible of freight charge 2. FOB shipping Allowance for freight charge XX - Buyer’s ownership upon shipment - Buyer responsible of freight 3. Freight collect - Paid by buyer 4. Freight prepaid - Paid by seller b) Allowance for Sales Return Sales return XX Allowance for sales return XX c) Allowance for Sales Discount Same as Cash Discount d) Allowance for Doubtful Accounts Account becomes uncollectible – Bad debt loss 1. Allowance Method  Recognize bad debt loss if the accounts are doubtful of collection DA XX ADA XX  Worthless/ Uncollectibe ADA XX AR XX - Based on matching principle - Estimated bad debts are matched against revenue - Must be followed if amount are material 2. Direct Write-off method  Recognize bad debt loss only when proved to be worthless/uncollectible Bad debts XX AR XX  No entry if only doubtful of collection - Used by small business - BIR recognize for income tax purposes - Violates the matching principle because bad debt loss often recognized in later accounting period Methods of Estimating DA

1. Aging the AR/ “SFP approach”- analysis of the accounts where they are classified into not due/past due 2. Percent of AR/ “SFP approach” – certain rate is multiplied by the open accounts at the end of the period 3. Percent of Sales – amount of sales for the year is multiplied by a certain rate to get DA expense