Chapter 2 - Receivables Citibank subsequently remits to SM the Se cervice tee mow of sales reduced by service fees. Assuming & ty Cots te Pott bank, which SM recognizes as a selling expense ke of SM is 76,000 Cash ‘ 1617%4.000 Credit Card Service Charge 1,200,000 Accounts Receivable-Citibank Visa Some credit card companies allow retailers to deposit credit carg drafts or receipts directly to a current account. The ae recoives the deposit slip and credit card drafts or receipts and increases the retailer, current account for the total amount less the credit card service charge, Under such arrangement, MS Department Store records the credit card sales as 1,176,000 Cash Credit Card Service Charge 24,000 1,200,000 Sales The transaction is, in effect, a cash sale, and the retail companies do not establish a receivable from the card issuing bank, Credit card sales are the bank's responsibility, and the customers pay directly to the bank. Meanwhile, uncollectibles from these transactions are considered losses for the card issuing bank. ACCOUNTING FOR NOTES RECEIVABLE A note receivable is a formal claim against another that is evidenced by a written promise, called a promissory note, or a written order, called a time draft, to pay at a later date, A promissory note is an unconditional written agreement to pay to the bearer or the order of the Payee a certain mui or money on@ specific or determinable date. .A time draft may I - draft (drawer orders drawee to pay the drawer) or a three, arty dont poate orders drawee to pay another Party, which is the payer) Trade notes generally ari : Be peso amounts where the been from sales involving relatively hilt nay Wi usual credit period. Likewise, eal? extend the payment beyond : io customers whose open accounts have bes tmes Tequest notes fo © become past due. 82ter 2 eceivable: A note or draft that provides interest for the period between the issuance date and the due date is called an interest-bearing note. On the date of the note receipt, the present value of an interest-bearing note, which bears a realistic interest rate, is equal to its face value After the date of the note or the draft, the present value of an interest- bearing note is equal to its face value plus accrued interest. Initial Recognition Following IFRS 9, an entity initially recognizes a note receivable when it becomes a party to the contractual provision of the instrument; that is, when the entity becomes the payee of the note that the payer issues. The payee initially recognizes the note at the transaction price based on the circumstance that gives rise to the receipt of the note. The transaction price is: (a) the amount of cash given up in exchange for the note; or (b) the fair value of the non-cash consideration given up in exchange for the note, or if such fair value cannot be practically determined, the fair value of the note received, which is the discounted cash flow of future collections, based on an implicit interest rate. Interest-Bearing Notes Receivable ‘The fair value of an interest-bearing note is generally its face value unless it is clear that the interest rate stated in the note does not teflect a realistic interest rate. Illustrative Problem for Interest-Bearing Notes To illustrate accounting for interest-bearing trade notes receivable, assume the following selected transactions completed by ABC Corporation during 2022: Aug. 5 Received a 60-day, 9%, P12,000 promissory note from X Company for merchandise sold. Oct. 4 Collected from X Company in settlement of its note dated August 5. 10 . Received a 30-day, 12%, P16,000 promissory note from Y Company to settle an overdue account. Nov. 6 Received a 120-day, 12%, P24,000 promissory note from Z Company to settle an account. 83Chapter 2 Receivables Nov. 9 Y Company dishonored its note on the maturity date, 30 Collected the amount due from Y Company on seal, overdue note. An additional charge for interest at 12% on maturity value from maturity date is also collected. Dec. 31 Year-end adjustments are made. The following are the journal entries for the given transactions; Aug. 5 Notes Receivable 12,000.00 Sales 12,000.09 Oct. 4 Cash 12,180.00 Notes Receivable 12,000.09 Interest Revenue 180.09 I= P12,000 x 9% x 60/360* 10 Notes Receivable 16,000.00 Accounts Receivable 16,000.00 Nov. 6 Notes Receivable 24,000.00 Accounts Receivable 24,000.00 9 Accounts Receivable 16,160.00 Notes Receivable 16,000.00 Interest Revenue 160.00 I= P16,000 x 12% x 30/360* 30 Cash 16,273, 12 Accounts Receivable 16,160.00 Interest Revenue 113.12 I= 16,160 x 12% x 21/360* Dec. 31-_ Interest Receivable 440.00 Interest Revenue 440.00 I= 24,000 x 12% x 55/360* “The interest computations in the Preceding entries are based on a 360-day year. A note must be negotiable; that is, order or bearer and not yet due to quali Receivable. Thus, a dishonored note recei 84Chapter 2 ~ Receivables descriptive account titles, such as Dishonored Notes Receivable or Overdue Notes Receivable. When a note makes no Provision for interest, it is said to be non- interest-bearing or zero-interest bearing. However, a non-interest- bearing note does not necessarily mean that no interest accries on the receivable. The promissory note is written in a form where the face value already inchides an imputed interest for the note's term. When an entity receives a non-interest-bearing note solely for cash lent, the present value or amortized cost of the note on that date is the cash proceeds exchanged. Suppose an entity receives a non. interest-bearing note in exchange for property, goods, or services. In that case, it records the transaction at the fair value of the goods given up or services rendered unless the note's fair value is more clearly determinable. When an enterprise cannot practicably determine the fair value of the note and the goods or services, it shall use an imputed rate to determine the note's present value. When a note bears an interest rate significantly different from the prevailing interest rate for similar notes or when the face value of the note is significantly different from the fair value of the consideration given up, the interest rate stated on its face is considered to be unrealistic. The amortized cost of the note on the date it is received is equal to the present vale of principal and interest payments discounted at the imputed interest rate, which should approximate the market rate of interest for similar instruments. An entity records the difference between the face amount of the note and its present value as a discount or premium. The excess of the face value of the note over its present value is credited to the Discount on Notes Receivable. In contrast, the excess of the present value of the note over its face value is charged to Premium on Notes Receivable. The discount or premium is amortized to interest revenue over the term of the note using the effective interest method. Any unamortized discount is deducted from the ledger balance of the Notes Receivable, and any unamortized premium is added to the Notes Receivable balance to arrive at the amortized cost to be presented in the statement of financial Position. To illustrate the difference in accounting for interest-bearing and non-interest-bearing, non-trade notes receivable, consider the following independent cases. 85Chapter 2 - Receivables Case 1: Long-Term Interest-Bearing Note with Realistic Interest Rate On January 1, 2022, ABC Manufacturing sold. a piece of equipment costing P800,000 and accumulated depreciation of 450,000. The company received P100,000 cash and a 15% interest bearing note for P400,000 due on December 31, 2024. The interest on the note is payable annually every December 31. The prevailing interest rate for a note of this type is 15%. ‘The entries relative to the note for its entire three-year term are as follows: 2022 van.1 Cash 100,000 Notes Receivable 400,000 Accumulated Depreciation-Equipment 450,000 Equipment 800,000 Gain on Sale of Equipment 150,000 Sales price of equipment (100,000 + 400,000) P500,000 Carrying value of equipment (800,000 ~ 450,000) 350,000 Gain on sale of equipment P150,000 Dec. 31 Cash 60,000 Interest Revenue 60,000 Receipt of annual interest (15% x 400,000) 2023 Dec. 31 Cash 60,000 Interest Revenue 60,000 Receipt of annual interest 2024 Dec. 31 Cash 460,000 Notes Receivable 400,000 Interest Revenue 60,000 Collection of note and interest due In the statement of financial position on December 31, 2022, the Notes Receivable balance of P400,000. shall be shown as part of non- current assets because the note is scheduled for collection two years from the end of the reporting period. On December 31, 2023, the same note will be classified as part of current assets because it is expected to be collected within 12 months from that date.Case 2: Long-Term Non-Interest-Bearing Note On January 1, 2022, ABC Manufacturing sold a piece of equipment costing P800,000 and accumulated depreciation of P450,000. | The company received P100,000 cash and a non-interest. bearing note for P400,000 due on December 31, 2023. The Prevailing interest for a note of this type is 15%. 2022 van.1 Cash 100,000 Notes Receivable 400,000 Accumulated Depreciation-Equipment 450,000 Equipment 800,000 Discount on Notes Receivable 137,000 Gain on Sale of Equipment 13,000 Face value of note P400,000 Present value of note (0.6575 x 400,000) 263,000 Discount on notes receivable 137,000 Cash received P100,000 Add present value of note 263,000 Total sales price of equipment P363,000 Carrying value of equipment 350,000 Gain on sale of equipment 213,000 The transaction is recorded at the Present value of the note’s maturity value since there is no available fair value for the equipment, The maturity value of P400,000 is discounted at the prevailing interest rate of 15% for 3 periods. The difference between the face value of the note and its present value is recorded as a credit to Discount on Notes Receivable. On each reporting date, a portion of the discount on notes receivable is amortized and transferred to interest revenue using the effective interest method. Amortization Table Date Interest Revenue Amortized Cost January 1, 2022 263,000. December 31, 2022 39,450 302,450 December 31, 2023 45,368, 347,818 December 31, 2024 52,182* 400,000, “Adjusted; the difference is due to rounding off. 87Chapter 2 - Receivables The following are the entries after its re 2022 Dec. 31 Discount on Notes Receivable Interest Revenue ‘Amortization of discount 15% x 263,000 2023 Dec. 31 Discount on Notes Receivable Interest Revenue Amortization of discount 15% x (263,000 + 39,450) 2024 Dec. 31 Cash Discount on Notes Receivable Notes Receivable Interest Revenue Collection of note and final amortization of discount 137,000 ~ 39,450 - 45,368 ceipt on January 1, 2022. On December 31, 2022, the balances are as follows: Notes Receivable Discount on Notes Receivable (137,000 - 39,450) Carrying value of the note 39,450 39,450 45,368 45,368 400,000 $2,182 400,000 52,182 P400,000 97,550 P302,450 The note is shown as a non-current asset on the December 31, 2022 statement of financial position at its amortized cost of P302,450. On December 31, 2023, the balances are as follows: Notes Receivable Discount on Notes Receivable (97,550 — 45,368) Carrying value of the note P400,000 52,182 P347,818 The note is classified as a current asset on December 31, 2023 « statement of financial position at because it will be due within 12 mont period. On Decethber 31, 2024, the ni discount on notes receivable balance simultaneous to collecting the princip its’ amortized cost. of P347,818 ths. from the end of the reporting ‘ote's maturity date, the remaining is transferred to interest revenue al amount.Chapter 2 ~ Receivables Case 3: Long-Term Non-Interest-Bearing Installment Notes Receivable On January 1, 2022, ABC Manufacturing sold a piece of equipment - costing P800,000 and accumulated depreciation of 450,000. The company received P100,000 cash and a non-interest- bearing note for P300,000 due in equal amounts of P100,000 every December 31, starting December 31, 2022. The prevailing interest for a note of this type is 15%. 2022 Jan.1 Cash 100,000 Notes Receivable 300,000 Accumulated Depreciation-Equipment 450,000 Loss on Sale of Equipment 21,680 Equipment 800,000 Discount on Notes Receivable 71,680 Because the note received is collectible in installments of P100,000 for three years, the present value of the note is computed using the present value of an ordinary annuity. The present value factor of an ordinary annuity of 1 discounted at 15% for three periods is 2.2832. Face value of note P300,000 Present value of note (100,000 x 2.2832) 228,320 Discount on notes receivable P_71,680 Cash received P100,000 Add present value of note 228,320 Total sales price of equipment P328,320 Carrying value of equipment 350,000 Loss on sale of equipment P_21,680 The following amortization table shows the amount of interest revenue ABC Manufacturing recognizes at the end of 2022, 2023, and 2024: Amortization Table aA B c Applied to ‘ Interest. | Applied to Periodic | (Previous D | Principal Date Payment x 15%) (A January 1, 2022 228,320 December 31, 2022 | 100,000 34,248 65,752 162,568 December 31, 2023 | 100,000 24,385 75,615 86,953 December 31, 2024 100,000 13,047* 86,953 2 * Adjusted; the difference is due to rounding off. 89FRR nr nr renter reer eT NE I Chapter 2 - Recetvables Based on the given table, the entries 0n December 31, 2022, 2023, and 2024 are as follows: 2022 Dec. 31 Discount on Notes Receivable 34,248 a Interest Revenue 248 Amortization of discount 31 Cash 100,000 Notes Receivable 100,000 Collection of the first installment 2023 Dec. 31 Discount on Notes Receivable 24,385 Interest Revenue Amortization of discount 24,385 31 Cash 100,000 Notes Receivable Collection of the second installment 100,000 2024 Dec. 31 Discount on Notes Receivable 13,047 Interest Revenue 13,047 Amortization of discount 31 Cash 100,000 Notes Receivable 100,000 Collection of the third and final installment » The balances of Notes Receivable and the related Discount on Notes Receivable on December 31, 2022 are analyzed as follows: Non- : Total Current Current Notes Receivable P200,000 + P100,000 =P 100,000 Discount on Notes Receivable 37,432 24,385 13,047 Carrying amount P162.568 P_75.615 Based on the amortization table, the amount of the princip#l (and accrued interest, if any) due within twelve months from the end of the reporting period is classified as a current asset. ‘The remainder is classified as non-current. %