TOPIC 3: ACCOUNTS RECEIVABLE & excluding recovery

ESTIMATION OF DOUBTFUL ACCOUNTS Accounts written off 120, 000

Collection of accounts written off in 30, 000
 The recovery of AR that has been written off prior year (customer credit was not
does not affect the balance of AR because re-established)
the effect is offsetting Estimated uncollectible receivables 178, 000
per Aging at December 31
 Net realizable value of AR
Q: (a) What is the ending balance of AR?
AR Balance
Less: Allowance for Bad Debts (b) What is the net realizable value of AR?
Estimated future sales returns
Estimated Sales Discounts 2. Christopher Veyga Company provided the
 A security deposit is a non-current following data for the current year:
receivable. Sales on Account 3, 600, 000
 The allowance of doubtful accounts per Notes Received to settle accounts 400, 000
Aging, is the required allowance for bad Provision for doubtful accounts 90, 000
debts, it is used in the computation for the Accounts receivable written off 25, 000
NRV Purchases on Account 3, 900, 000
 Only bad debts expense decreases the Payments to creditors 3, 200, 000
Discounts allowed by creditors 260, 000
working capital
Merchandise returned by the 15, 000
 The write-off of uncollectible accounts does customer
not affect anymore the working capital Collections received to settle 2, 450, 000
because the effect is offsetting on current accounts
assets Notes given to creditors in 250, 000
 If the percentage of AR is used, the amount settlement of accounts
computed represents the required ending Merchandise returned to suppliers 70, 000
Payment on Notes Payable 100, 00
allowance for doubtful accounts
Discounts taken by customers 40, 000
 Under the percentage of sales method, the Collections received in settlement 180, 000
amount computed already represents the of notes
uncollectible accounts expense Q: (a) Ending Balance of AR
 Historical Bad Debt Loss Percentage
(Write off – Recovery)/ Credit Sales (b) Ending Balance of ABD
 Individually significant AR shall be (c) Net realizable value of AR
individually assessed for impairment, if
proven not to be impaired; it will be 3. Leonivic Company provided the following
included in other accounts receivables not information relating to current operations:
individually significant for collective
Accounts receivable January 1 4M
assessment of impairment. Accounts receivable collected 8.4M
Cash Sales 2M
ILLUSTRATIVE EXAMPLES:
Inventory, January 1 4.8M
1. Cobe Company provided the following Inventory, December 31 4.4M
Purchases 8M
information relating to accounts receivable for the
Gross Margin Sales 4.2M
current year: Q: What is the balance of AR on December 31?
Accounts Receivable on Jan 1 1, 550, 000 4. Julz Yong Company provided the following
Credit Sales 6, 200, 000
information for the current year:
Collections from customers, 4, 900, 000
 Jan 1 Dec 31
Accounts Receivable 1.2M
Allowance for DA 60,000
Sales 8M
Cash collected from customers 7M
The cash collections included a recovery of 10k
from a customer whose account had been written
off as worthless in prior year. During the year, it
was necessary to recognize doubtful accounts
expense of 100, 000 and write off worthless
customer’s accounts of 30, 000. At year-end, a
customer settled an account by issuing a 12% six-
month note for 400, 000.
Q: What is the net realizable value of AR on
December 31?
5. Corpus Company provided the following
transactions affecting AR during the current year:
Sales (Cash & Credit) 5.9 M
Cash received from credit customers, 3, 024, 000
all of whom took advantage of the
discount feature of the credit terms
4/10, n/30
Cash received from cash customers 2.1 M
AR written off as worthless 50, 000
Credit memo issued to credit 250, 000
customers for Sales Returns &
Allowances
Cash refunds given to cash customers 20, 000
for Sales Returns & Allowances
Recoveries on AR written off as 80, 000
uncollectible in prior periods not
included in cash received from
customers stated above
The balances on January 1 were as follows:
6. Norfida Company prepared an aging of AR on
December 31, 2018 and determined that the net
realizable of the AR was 2.5M.
Allowance for DA on Jan 1 280, 000
Accounts written off as uncollectible 230, 000
Accounts receivable on December 31 2.7 M
Uncollectible accounts recovery 50, 000
Q: What amount should be recognized as
doubtful accounts expense for the current year?
7. Christine Jane Company reported the following
balances after adjustment at year-end:
2018 2017
Accounts Receivable 5.25M 4.8M
Net realizable value 5.1M 4.725M
During 2015, the entity wrote off accounts totaling
160, 000 and collected 40, 000 on accounts written
off in previous year.
Q: What amount should be recognized as
doubtful accounts expense for the current year?
8. From inception of operations, Alexes Company
carried no allowance for DA. Uncollectible
accounts were expensed as written off and
recoveries were credited to income as collected.
During 2018, management recognized that the
accounting policy with respect to DA was not
correct and determined that an allowance for DA
was necessary. A policy was established to maintain
an allowance for DA based on historical bad debt
loss percentage applied to year-end AR.
The historical bad debt loss percentage is to be
recomputed each year on all available past years up
to a maximum of 5 years.

Accounts Receivable 950, 000 Year Credit Sales Write-offs Recoveries

Allowance for Doubtful Accounts 100, 000 2014 1.5M 15, 000 0
The entity provided for uncollectible accounts 2015 2.25M 38, 000 2, 700
losses by crediting allowance for DA in the amount 2016 2.95M 52, 000 2, 500
of 70, 000 for the current year. 2017 3.3M 65, 000 4, 800
2018 4M 83, 000 5, 000
Q: What is the balance of AR on December 31? (1) Bad debt rate in 2017? In 2018? (2) Allowance
for DA on December 31, 2017? (3) Allowance for
(b) What is the balance of ABD on December 31?
DA on December 31, 2018? (4) Bad debts expense
for 2018?
 SIMULATED BOARD EXAM debt expense is used, the entries at the time of
collection of an account previously written off
Topic 3: Accounts Receivable & Estimation of would
DA a. decrease the allowance for DA
b. increase net income
Required Time to finish: Score: c. Have no effect on the allowance for DA
d. Have no effect on net income
THEORIES

1. Trade receivables are classified as current assets 6. D’Morvie Hotel manages an extensive network
if these are reasonably expected to be collected of boutique hotels in the country. The entity has
a. Within 1 year significant AR from three customers namely:
b. Within the normal operating cycle Kail Eduave 5M
c. Within 1 year or within the operating cycle, Julz Yong 9M
whichever is shorter Mikee Delos Santos 8M
d. Within 1 year or within the operating cycle, Others, Not individually significant 4.5M
whichever is longer The entity has determined that Julz Yong receivable
is impaired by 1.5M and Mikee Delos Santos
2. Where the operating cycle extends beyond 1 year receivable is impaired by 2M. The receivable from
because of normal credit terms as in the case of Kail Eduave is not impaired.
installment sales of household appliances
a. It is proper to classify the entire receivables as The entity has also determined that a composite rate
current assets with disclosure of the amount not of 5% is appropriate to measure impairment on all
realizable within 1 year, if material. other AR.
b. The entire receivables are shown as non-current
assets What is the total impairment loss of AR?
c. The portion due in 1 year is shown as current and a. 4, 825, 000 b. 3, 975, 000
the balance as non-current c. 3, 500, 000 d. 3, 725, 000
d. The receivables are not recognized

7. Bigaon Company followed the procedure of

3. Which method of recording bad debt loss is debiting ba debt expense for 2% on all new sales.
consistent with accrual accounting? Sales ABD
a. Allowance Method 2016 3M 40, 000
b. Direct write-off method 2017 2.8M 60, 000
c. Percent of Sales Method 2018 3.5M 80, 000
d. Percent of Accounts Receivable method What amount was written off in 2018?

a. 50, 000 b. 10, 000

4. The advantage of relating the bad debt experience
to AR is that this approach
a. Gives a reasonably accurate measurement of
receivables in the statement of FP
b. Relates bad debt expense to the period of sale
c. is the only generally accepted method for
measuring accounts receivable
d. Makes estimate of uncollectible accounts
necessary
5. When the allowance method of recognizing bad
c. 70, 000 d. 86, 000
8. Capetown Company began operations on January
1, 2017. The entity has found that the estimated bad
debt expense has been consistently higher than
actual bad debts. Management proposed lowering
the percentage from 3% of credit sales to 2%. Credit
sales for 2018 totaled 5M & accounts written off as
uncollectible during 2018 totaled 550, 000. What is
the BDE for 2015?
(a) 150k (b) 100k (c) 550k (d) 240k