Chapter 6

Receivables – Additional Concepts

PROBLEM 1: TRUE OR FALSE

1. TRUE
2. TRUE
3. TRUE
4. FALSE
5. FALSE – original effective interest rate
6. TRUE
7. FALSE
8. TRUE
9. TRUE
10. TRUE

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. Solution:
5,000,000 + 100,000 – (5,000,000 x 6%) = 4,800,000

2. B

3. B

4. A

5. Solutions:

July 1, 20x1

July 1, Loan receivable 2,000,000

20x1 Cash 2,000,000
July 1, Impairment loss* 20,000
20x1 Loss allowance 20,000

* Equal to 12-month expected credit losses (2.5% x 800,000)

December 31, 20x1

Dec. 31, Impairment loss 71,000

20x1 Loss allowance (91K – 20K) 71,000

Lifetime expected credit losses = (3.0% + 10%) x 700,000 = 91,000

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Dec. 31, Interest receivable 100,000
20x1 Interest income (2M x 10% x 6/12)** 100,000

** Interest revenue is computed on the gross carrying amount because the

loan is not credit-impaired (i.e., Stage 2 rather than Stage 3).

December 31, 20x2

Dec. 31, Loss allowance (91K – 5K) 86,000

20x2 Impairment gain 86,000

12-month expected credit losses = (1% x 500,000) = 5,000

Dec. 31, Interest receivable 100,000

20x2 Interest income (2M x 10% x 6/12) 100,000

6. Solutions:
Requirement (a):
The PV of the remaining cash flows is computed as follows:
Date Cash flows PV of 1 @11% PV factors Present value
1/1/x3 1,000,000 n=0 1 1,000,000
1/1/x4 1,500,000 n=1 0.900900901 1,351,351
1/1/x5 1,500,000 n=2 0.811622433 1,217,434
3,568,785

The carrying amount of the loan is computed as follows:

Initial measurement:
Face amount 4,000,000
Direct origination costs 364,098
Origination fees (240,000)
Initial carrying amount 4,124,098

Subsequent measurement:
Date Collections Interest income Amortization Present value
1/1/x1 4,124,098
12/31/x1 480,000 453,651 26,349 4,097,749
12/31/x2 480,000 450,752 29,248 4,068,501
.
The impairment loss is computed as follows:
PV of remaining cash flows 3,568,785
Less: Carrying amount (4,068,501)
Impairment loss (499,716)

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Requirement (b):
(3,568,785 – 1,000,000) x 11% = 282,566

7. Solution:
Requirement (a):
Date Cash 180,000
Loss on transfer 20,000
Loans receivable 200,000

Requirement (b):
Date Cash 180,000
Liability on repurchase agreement 180,000

Requirement (c):
Date Cash 180,000
Loss on transfer 20,000
Loans receivable (200K – 20K) 180,000
Liability on repurchase agreement 20,000

8. Solution: ₱200,000 – the gross amount. Offsetting is not applicable

because ABC Co. does not intend to settle the accounts receivable and
accounts payable simultaneously.

9. Solution:

(a) Accounts receivable – assigned 900,000

Accounts receivable 900,000
Cash 723,000
Discount on loan payable 27,000
Loans Payable 750,000
(b) Cash 350,000
Sales Discounts 560
Allowance for Doubtful Accounts 530
Accounts Receivable - assigned 351,090

(c) Loans Payable 350,000

Interest Expense 7,500
Cash 357,500

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(d)
A/R - assigned (900K - 351,090) 548,910
Loan payable (750K - 350K) (400,000)
Equity in assigned receivables 148,910

10. Solutions:
(a) Cash 368,000
Due from Factor (2% × ₱400,000) 8,000
Loss on Sale of Receivables (6% × ₱400,000) 24,000
Accounts Receivable 400,000

(b) Accounts Receivable 400,000

Due to Dexter 8,000
Financing Revenue 24,000
Cash 368,000

(c) Cash 368,000

Due from Factor 8,000
Loss on Sale of Receivables 31,000
Accounts Receivable 400,000
Recourse Liability 7,000

11. Solution:
September 1, 2002
Notes Receivable 400,000
Accounts Receivable 400,000

October 1, 2002
Cash 405,066
Interest income 3,945
Notes Receivable 400,000
Gain 1,121

MV = 400,000 + (400,000 x 12% x 90/365) = 411,836

D = 411,836 x 10% x 60/365 = 6,770
NP = 411,836 – 6,770 = 405,066
Interest income = 400,000 x 12% x 30/365 = 3,945

PROBLEM 3: EXERCISES – MULTIPLE CHOICE

1. C (200,000 x 12% x 1/12) = 2,000

2. B
Solution:
Principal amount 150,000

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Direct loan origination costs 4,000
Origination fee (150K x 4%) (6,000)
Carrying amount 148,000

3. A
Solution:
Principal amount 150,000
Origination fee (150K x 4%) (6,000)
Carrying amount 144,000

4. C (194,000 x 12.4% x 1/12) = 2,005

5. A Bigco, Inc. has not surrendered control over any amount of

transferred receivables because it is obligated to repurchase
the receivables.

6. D Since the transfer of the bond is used only as security for the
loan, and not as a sale of the bond, Dayco would not recognize
the bond in its books at the time of the transfer. The bond would
be recognized in Dayco's books on the date Rayco defaulted. The
bond is measured at fair value.

7. C
Solution:
Year Expected fees Fractions
1 40,000 40/80
2 30,000 30/80
3 10,000 10/80
80,000

60,000 servicing asset x 40/80 fraction in Year 1 = 30,000

amortization

8. D equal to the face amount

9. C Maturity value = 500,000 + (500,000 x 8%) = 540,000

Discount = 540,000 x 10% x 6/12 = 27,000
Net proceeds = 540,000 – 27,000 = 513,000

10. A
Solution:
NP = MV - D
MV = 10,000 + (10,000 x 60/360 x 6%) = 10,100
D = 10,100 x 9% x 30/360 = 75.75

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NP = 10,100 – 75.75 = 10,024.25

PROBLEM 4: CLASSROOM ACTIVITY

1. C

2. C

3. Solutions:

July 1, 20x1

July 1, Loan receivable 2,400,000

20x1 Cash 2,400,000
July 1, Impairment loss* 24,000
20x1 Loss allowance 24,000

* Equal to 12-month expected credit losses

December 31, 20x1

Dec. 31, Impairment loss 85,200

20x1 Loss allowance (109.2K** – 24K) 85,200

** Lifetime expected credit losses

Dec. 31, Interest receivable 144,000

20x1 Interest income 144,000
(2.4M x 12% x 6/12)***

*** Interest revenue is computed on the gross carrying amount because the
loan is not credit-impaired (i.e., Stage 2 rather than Stage 3).

December 31, 20x2

Dec. 31, Loss allowance (109.2K – 6K****) 103,200

20x1 Impairment gain 103,200

****12-month expected credit losses

Dec. 31, Interest receivable 144,000

20x1 Interest income 144,000
(2.4M x 12% x 6/12)

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PROBLEM 5: MULTIPLE CHOICE - THEORY
1. B 6. A 11. D 16. D
2. A 7. A 12. C 17. D
3. B 8. D 13. A 18. A
4. B 9. D 14. B 19. B
5. B 10. C 15. B 20. C