Intacc-1a-reviewer-conceptual-framework-and-accounting-standards

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Intacc-1A ( Reviewer) - Conceptual Framework and Accounting Standards Financial Accounting And Reporting (Adamson University)

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INTERMEDIATE ACCOUNTING – 1A (REVIEWER) CASH AND CASH EQUIVALENTS CASH INCLUDES:      

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Money Any other negotiable instrument that is payable in money and acceptable by the bank for deposit and immediate credit. Checks Bank drafts Money orders Cash on Hand – undeposited cash collections and other cash items awaiting deposit such as: o Customers’ checks o Cashier’s or manager’s checks o Traveler’s checks o Bank drafts o Money orders. (postal money order) Cash in Bank – includes: o Demand deposit o Checking account o Savings deposit o All of the above must be unrestricted as to withdrawal. Cash fund – set aside for current purposes such as: (depende talaga sa purpose pag cash fund) o Petty cash fund o Payroll fund o Dividend fund o Interest fund

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o Travel fund o Tax fund o Bond Sinking Fund – basta one year after the reporting period. Deposits in foreign currency which are not subject for foreign exchange restriction are included in cash. Undelivered or Unreleased Check Postdated Check Delivered Stale Check Given.

NOT INCLUDED IN CASH 

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Postdated checks received. (unacceptable by the bank for deposit and immediate credit or outright encashment.) (“cash in bank includes customer check of 200,000 outstanding for 18 months) Restricted Cash IOU NSF Check – if na redeposit within the year, di na ileless or ignored nalang. Sinking fund Preference share redemption fund Contingent fund Insurance fund Fund for acquisition and construction of PPE Savings Deposit in Closed Bank “the cash receipt journal was held open until Jan 15, 2021 during which time an amount of 450,000 was collected and recorded on Dec 31, 2021. A/R 450,000 Cash 450,000

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UNRESTRICTED CASH  

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There is no specific dealings with “cash”. An entity shall classify an asset as current when the asset as cash or cash equivalents unless it is restricted to settle a liability for more than 12 months after the end of the reporting period. To be reported as “cash”, an item must be unrestricted in use. Cash must be readily available and not subject to any restriction, contractual or otherwise.

o BSP treasury bill that was purchased 1 year ago cannot qualify as cash equivalent even if the remaining maturity is three months or less. INVESTMENT OF EXCESS CASH  

CASH EQUIVALENTS 

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Short-term and highly liquid investments that are readily convertible into cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Only highly liquid investments that are acquired 3 months before maturity can qualify as cash equivalents Examples of Cash Equivalents are: o Three-month BSP Treasury Bill. o Three-year BSP Treasury Bill purchased 3 months before date of maturity. o Three-month time deposit. o Three-month money market instrument or commercial paper. o Preference shares with specified redemption date acquired 3 months before date of maturity. o Time Deposit and Commercial Paper if silent is included. o Certificate of Deposit Not examples of Cash Equivalents: o Equity Securities (do not have maturity date)

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Entity must maintain sufficient cash for use in current operations. Any cash accumulated in excess of that needed for current operations should be invested even temporarily in some type of revenue earning investment. Excess cash may be invested in time deposit, money market instrument and treasury bills for the purpose of earning interest income.

CLASSIFICATIONS OF INVESTMENT OF EXCESS CASH 

Investment in time deposit, money market instruments and treasury bills should be classified as: o If the term is three months or less, such instruments are classified as cash equivalents. o If the term is more than 3 months but within one year, such investments are classified as short-term financial asset or temporary investments and presented as current assets. o If the term is more than 1 year, such investments are classified as non-current or long term investment. o If such investments become due within one year from the end of the reporting period, they are reclassified as current or temporary investments.

MEASUREMENT OF CASH

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Measured at face value Cash in foreign currency is measured at the current exchange rate. If a bank or financial institution holding the funds of an entity is in bankruptcy or financial difficulty, cash should be written down to estimated realizable value if the amount of recoverable is estimated to be lower than the face value.

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FOREIGN CURRENCY 

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Should be translated to Philippine Pesos using current exchange rate.  Deposits in foreign currency which are not subject for foreign exchange restriction are included in cash.  Deposit in foreign bank subject to foreign restriction should be classified as non-current assets. IF material and restricted – Part of NCA If Immaterial and restricted – part of C&CE Without restriction – part of C&CE If restricted and silent – part of NCA

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BANK OVERDRAFT – mas madami kang inissue na check kesa sa naka deposit 

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CASH FUND FOR CERTAIN PURPOSE 

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Part of cash and cash equivalents. o Petty cash fund, payroll fund, travel fund, interest fund, dividend fund and tax fund. Not part of cash and cash equivalents. o Sinking fund, P/S redemption fund, contingent fund, insurance fund and fund for acquisition and construction of PPE.

Should be parallel in the classification of the related liability. o Example, sinking fund that is set aside to pay a bond payable shall be classified as current asset when due within one year after the end of the reporting period, part of cash and cash equivalent o Preference share Redemption fund – depende kung current or not, pag current part of cash. Cash fund set aside for the acquisition of a noncurrent asset, future expansion for PPE. should be classified as noncurrent regardless of the year of disbursement. Cash Fund set aside for current purpose – part of cash

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Credit Balance of CASH IN BANK. o Results from the issuance of checks in excess of the deposits. Classified as current liability NOT TO BE OFFSET against other bank accounts with debit balances from the same bank. EXAMPLE: a. Cash in Bank – First bank, which is overdrawn by 10,000 b. Cash in Bank – Second Bank, with a debit balance of 100,000. o Net Cash Balance is 90,000. It is not necessary to adjust and open a bank overdraft account in the ledger. o In other words, Cash in Bank – First Bank account is maintained in the ledger with a credit balance. Overdrafts are not permitted in the Philippines.

CLASSIFICATION OF CASH FUND

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EXCEPTION TO THE RULE ON OVERDRAFT. 

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When an entity maintains two or more accounts in one bank and one account results in an overdraft, such overdraft can be offset against the other bank account with a debit balance in order to show cash, net of bank overdraft or bank overdraft, net of other bank account. An overdraft can also be offset against the other bank account if the amount is not material. Under IFRS, bank overdraft can be offset against other bank account when payable on demand and often fluctuates from positive to negative as an integral part of cash management.

Possible Questions:

COMPENSATING BALANCE 

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Pag legally restricted as to withdrawal yung amount ng compensating balance, I miminus siya sa Cash in Bank account. o It will be classified as “cash held as compensating balance” under current assets if the related loan is short term. o If Long term, compensating balance is classified as noncurrent investment. Pag not legally restricted as to withdrawal yung amount ng compensating balance, hindi siya ileless sa cash in bank. (in effect, part siya ng cash)

Generally takes the form of minimum checking or demand deposit account balance that must be maintained in connection with a borrowing arrangement with a bank. Example: o Entity borrows P 5,000,000 from a bank and agrees to maintain a 10% or 500,000 minimum compensating balance in a demand deposit account. In effect, this arrangement results in the reduction of the amount borrowed because the compensating balance provides a source of fund to the bank as partial compensation for the loan extended. Naka charge to normally sa cash in bank account. If silent, assume as not legally restricted.

1. What is the correct amount of Cash? a. Cash only, not included si cash equivalents. 2. What is the correct amount of cash in the notes to financial statements? a. Cash only, not included si cash equivalents 3. What is the correct amount of cash in the SFP? a. Cash and Cash Equivalents 4. What is the correct amount of cash and cash equivalents? a. Cash and Cash Equivalents

CLASSIFICATION OF COMPENSATING BALANCE Chapter 2 Bank Reconciliation Bank Deposits

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3 kinds of bank deposit o Demand Deposit o Saving Deposit o Time Deposit

Demand Deposit 

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Current account or checking account or commercial deposit where deposits are covered by deposit slips and where funds are withdrawable on demand by drawing checks against the bank. Noninterest bearing

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Saving Deposit  

Depositor is given a passbook upon the initial deposit. Passbook is required when making deposits and withdrawals. Interest bearing

RECONCILING ITEMS 

Time Deposit   

Similar to saving deposit in the sense that it is interest bearing. Evidenced by a formal agreement embodied in an instrument called certificate of deposit. May be preterminated or withdrawn on demand or after a certain period of time agreed upon.

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Book Reconciling Items o Credit Memo o Debit Memo o Erros Bank Reconciling Items o Deposit in Transit o Outstanding Checks o Errors

CREDIT MEMOS

BANK RECONCILIATION 

A bank statement is a monthly report of the bank to the depositor showing: o Cash balance per bank at the beginning o Deposits made by the depositor acknowledged by the bank o Checks drawn by the depositor and paid by the bank o Daily cash balance per bank during the month When bank statement is received, attached thereto are the depositor’s canceled checks and any debit or credit memo that have affected the depositor’s account. Cancelled Check – checks issued by the depositor and paid by the bank during the month

Statement which brings into agreement the cash balance per book and cash balance per bank. Prepared monthly because bank provides the depositor with the bank statement at the end of every month.

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Items that are not deposits credited by the bank to the account of the depositor but not yet recorded by the depositor as cash receipts. Has the effect of increasing the bank balance.

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Typical examples of credit memos are: o Notes Receivables collected by bank in favor of the depositor and credited to the account of the depositor. o Proceeds of bank loan credited to the account of the depositor. o Matured time deposit transferred by the bank to the current account of the depositor.

DEPOSIT IN TRANSIT  

DEBIT MEMOS 

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Items that are not checks paid by bank which are charged or debited by the bank to the account of the depositor but not yet recorded by the depositor as cash disbursement. Have the effect of decreasing the bank balance. Mga auto debits ganon. Typical examples of debit memos are: o NSF or No Sufficient Fund Checks – checks deposited but returned by the bank because of insufficiency of fund. Other name is DAIF or “drawn against insufficient fund” o Technically Defective Checks – checks deposited but returned by the bank because of technical defects such as absence of signature or countersignature, erasures not countersigned, mutilated checks, conflict between amount in words and amount in figures. o Bank Service Charges – bank charges for interest, collection, checkbook and penalty. o Reduction of loan – amount deducted from the current account of the depositor in payment for loan which the depositor owed to the bank and which has already matured.

Collections already recorded by the depositor as cash receipts but not yet reflected on the bank statement. It includes: o Collections already forwarded to the bank for deposit but too late to appear in the bank statement. o Undeposited collections or those still in the hands of the depositor. In effect, these are cash on hand awaiting delivery to bank for deposit.

OUTSTANDING CHECKS  

Checks already recorded by the depositor as cash disbursements but not yet reflected on the bank statement. It includes: o Checks drawn and already given to payees but not yet presented for payment. o Certified Check – one where the bank has stamped on its face word “accepted” or “certified indicating sufficiency of fund”  When the bank certifies a check, the account of the depositor is immediately debited or charged to insure the eventual payment of the check.  SHOULD BE DEDUCTED FROM THE TOTAL OUTSTANDING CHECKS (if included therein) because they are no longer outstanding for Bank Recon.

FORMS OF BANK RECONCILIATION

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1. Adjusted Balance Method – the book balance and the bank balance and the bank balance are brought to a correct cash balance that must appear on the balance sheet. 2. Book to Bank Method – the book balance is reconciled with the bank balance or the book balance is adjusted to equal the bank balance. 3. Bank to Book Method – bank balance is reconciled with the book balance or the bank balance is adjusted to equal the book balance.

Errors will have to be analyzed if it is a deduction or addition. 2. BOOK TO BANK METHOD Book Balance xxx Add: Credit Memo Outstanding Checks xxx Total xxx Less: Debit Memo Deposit in Transit (xx) Bank Balance xxx

PROFORMA RECONCILIATION 1. ADJUSTED BALANCE METHOD Book Balance Add: Credit Memo Total Less: Debit Memo Adjusted Book Balance xxx Bank Balance Add: Deposit in Transit Total Less: Outstanding Checks Adjusted Bank Balance xxx

xxx xxx xxx (xx)

xx xx

xx xx

3. BANK TO BOOK METHOD Bank Balance Add: Deposit in Transit Debit Memo Total xxx Less: Outstanding Checks Credit Memo Book Balance xxx

xxx xxx xxx (xx)

Illustration

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xxx xx

xx xxx

xx xx

(xx)

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The cash records of Company X show the following for the month CASH RECEIPTS Jan 5 60,000 Jan 13

20,000

Jan 25

30,000

Jan 31

40,000 150,000

Jan 11 Jan 12 Jan 14 Jan 17 Jan 26 Jan 26 Jan 30 Jan 30

CASH DISBURSEMENT Jan 6 Check No. 5,000 721 Jan 7 Check No. 10,000 722 Jan 10 Check No. 18,000 723 Jan 14 Check No. 2,000 724 Jan 28 Check No. 37,000 725 Jan 31 Check No. 28,000 726 100,000

The general ledger shows the cash in bank account with a debit balance of 150,000 and credit balance of 100,000. So the balance of the cash in bank in depositor’s account is 50,000 Usually pag Jan 1 yung tas “balance” yung description, di siya kasama kase beginning balance yon ng cash account

722 723

10,000 18,000

724

2,000

20,000 30,000 15,000 CM 5,000 RT 1,000 SC

The following data are gathered in connection with the CM and DM appearing on the bank statement: a. The CM of 15,000 on Jan 26 represents proceeds of note collected by bank in favor of company. b. The RT of 5,000 represents check of customer deposited previously but returned by the bank because of NSF. c. The last amount on the balance of the bank statement is the unadjusted balance per bank amount.

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Deposit in Transit Outstanding Checks Check No. 725 Check No. 726

40,000 37,000 28,000 6,000 15,000

Debit memo Credit memo

BANK STATEMENT Date Jan 6 Jan 8

Check No. 721

Withdrawals

5,000

Deposits

Balance

60,000

60,000 55,000

45,000 27,000 47,000 45,000 75,000 90,000 85,000 84,000

Adjusted Balance Method: Balance per book Add: Credit Memo

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50,000 15,000

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Total Less: Debit Memo Adjusted Balance per book

65,000 (6,000) 59,000

Balance per Bank Add: Deposit in Transit Total Less: Outstanding Check Adjusted Balance per Bank

84,000 40,000 124,000 65,000 59,000

Bank to Book Method Balance per Bank Add: Deposit in Transit Debit Memo Total Less: Outstanding Check Credit Memo (80,000) Balance per Book

84,000 40,000 6,000 46,000 130,000 65,000 15,000

Chapter 3 Proof of Cash TWO-DATE BANK RECONCILIATION  

Literally involves 2 dates Same procedure as to 1 date bank recon.

Formula of Book Balance

Book to Bank Method Balance per Book Add: CreditMemo Outstanding Check 80,000 Total Less: Debit Memo Deposit in Transit (46,000) Balance per Bank

Balance per book – beginning of the month xxx Add: Book Debits during the month xxx Total Less: Book Credits during the month (xx) Balance per book – end of the month xxx

50,000 15,000 65,000 130,000 6,000 40,000 84,000

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xxx

Book Debits – refer to cash receipts or all items debited to the cash in bank account. Book Credits – cash disbursement or all items credited to the cash account.

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Formula of Bank Balance Balance per bank – beginning of the month Add: Bank Credits during the month Total Less: Bank Debits during the month (xx) Balance per bank – end of the month xxx 

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xxx xxx xxx Formula of Outstanding Checks

Bank Credits – all items credited to the account of the depositor which includes deposits acknowledged by bank and credit memos. o In the absence of any statement to the contrary or if the problem is silent, bank credits are assumed to be deposits acknowledged by bank. Bank Debits – all items debited to the account of the depositor which include checks paid by bank and debit memos. o In the absence of any statement to contrary or if the problem is silent, bank debits are assumed to be checks paid by bank.

Formula of Deposit in Transit Deposit in Transit – beginning of the month Add: Cash Receipts deposited during the month xxx Total deposits to be acknowledged by bank Less: Deposits acknowledged by bank during the month (xx) Deposit in Transit – end of the month xxx

xxx

xxx

Outstanding Checks – beginning of the month Add: Checks drawn by depositor during the month Total checks to be paid by the bank Less: checks paid by the bank during the month (xx) Outstanding Checks – end of the month xxx

xxx xxx xxx

Illustration Cash in bank per ledger Balance, January 31 50,000 Book debits for February including January CM for note collected of P15,000 200,000 Book Credits for February, including NSF check of 5,000 and service charge of 1,000 for January 180,000 Bank statement for Feburary Balance, January 31 84,000 Bank Credits for February, including CM for note collected of 20,000 and January

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deposit in transit of 40,000 170,000 Bank Debits for February, including NSF check of 10,000 and January outstanding check of 65,000 130,000

Bank Recon for the month of January Balance per book – January 31 50,000 Note collected by bank in January 15,000 Total NSF check for January (5,000) Service Charge for January (1,000) Adjusted book balance 59,000 Balance per bank, January 31 84,000 Deposit in Transit for January 40,000 Total

Outstanding check for January (65,000) Adjusted bank balance 59,000 Computation of Book Balance Balance per book – January 31 50,000 Add: Book Debits during February 200,000 Total Less: Book Credits during February (180,000) Balance per book – Feb 28 70,000

65,000

Computation of Bank Balance Balance per bank – January 31 84,000 Add: Bank Credits during February 170,000 Total Less: Bank Debits during February (130,000) Balance per bank – February 28 124,000

124,000

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250,000

254,000

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Computation of Deposit in Transit Deposit in Transit – January 31 40,000 Add: Cash Receipts deposited during February: Book Debits 200,000 Less: January Credit Memo (15,000) 185,000 Total 225,000 Less: Cash Disbursement during February: Bank Credits 170,000 Less: Feb. CM for note collected (20,000) 150,000 Deposit in Transit – Feb 28 75,000

Computation of Outstanding Checks Outstanding Checks – January 31 65,000 Add: Check drawn by depositor during February: Book Credits 180,000 Less: January DM (6,000) 174,000 Less: Checks paid by bank during February Bank Debits 130,000 Less: February NSF (10,000) 120,000 Outstanding Checks – February 28 119,000

Bank Reconciliation in February Balance per Book Add: Note collected by Bank in Feb (CM) 20,000 Total Less: NSF Check for February (DM) (10,000) Adjusted Book Balance 80,000

Balance per Bank Deposits in Transit for Feb Total Outstanding Checks for February Adjusted Bank Balance 80,000 Bal. per Book Note Collected Jan Feb NSF Check Jan Feb Service Charge: Jan Adjusted Book Bal

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Jan 31 50,000

Receipts 200,000

15,000

(15,000) 20,000

(5,000)

(1,000) 59,000

205,000

Disbursement 180,000

70,000

90,000

124,000 75,000 199,000 (119,000)

Feb 28 70,000

20,000 (5,000) 10,000

(10,000)

184,000

80,000

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Balance per Bank Deposit in Transit Jan Feb Outstanding Checks January Adjusted Bank bal

84,000

170,000

40,000

(40,000) 75,000

(65,000) 59,000

205,000

130,000

124,000

75,000

(65,000) 119,000 184,000

(119,000) 80,000

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 Notes Receivable o Accounts Receivables – open account arising from the sale of goods and services in the ordinary course of business and not supported by promissory notes.  If A/R is related to trade receivables, it is part of current even if more than 12 months.  AKA customers’ accounts, trade debtors, and trade accounts receivable. o Notes Receivables – those supported by formal promise to pay in the form of notes. Nontrade Receivables – represents claims arising from sources other than the sale of merchandise or services in the ordinary course of business.

Classification  Chapter 4 Accounts Receivables

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Definition  

Financial assets that represent a contractual right to receive cash or another financial asset from another entity. For retailers or manufacturers, receivables are classified into trade receivables and nontrade receivables.

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Trade and Nontrade Receivables 

Trade Receivables – claims arising from sale of merchandise or service in the ordinary course of business. o Includes:  Accounts Receivable

Trade Receivables – if expected to be realized in cash within the normal operating cycle or one year whichever is longer, are classified as current assets. Nontrade Receivables – if expected to be realized in cash within one year, the length of operating cycle notwithstanding, are classified as current asset. o If collectible beyond one year, nontrade receivables are classified as noncurrent assets. An entity shall classify an asset as current when the entity expects to realize the asset or intends to sell or consume it in the entity’s normal operating cycle, or when the entity expects to realize the asset within 12 months after the reporting period.

Presentation 

One line item, trade and other Receivables.

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Customers’ Credit balances

Example of Nontrade receivables a. Advances to or receivables from shareholders, directors, officers or employees. If collectible in one year, such advances or receivables should be classified as current assets, otherwise noncurrent. b. Advances to affiliates are usually treated as long-term investments. c. Advances to supplier for the acquisition of merchandise are current assets. d. Subscription Receivables current asset if collectible within one year, otherwise noncurrent. e. Creditor’s accounts may have debit balances as a result of overpayment or returns and allowances. It is classified as current asset. a. Accounts Payable with debit balance. i. If not material, offset against the creditors accounts with credit balances and only net accounts payable may be presented. f. Special Deposits on contract bids normally are classified as noncurrent assets. a. if collectible currently, current assets. g. Accrued income are usually current asset such as: a. Dividend Receivable b. Accrued Rent Receivable c. Accrued Royalties Receivable d. Accrued interest receivable on bond investment. h. Claims Receivable are current asset such as a. Claims against common carriers for losses or damages b. Claim for rebates and tax refunds c. Claim from insurance entity

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Credit balances in accounts receivables resulting from: o Overpayments o Returns and allowances o Advance payments from customers Classified as current liabilities and are not offset against the debit balances in other customers’ accounts, except when the same is not material.

Initial measurement of Accounts Receivable 

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Recognized initially at fair value plus transaction costs that are directly attributable to the acquisition. o The fair value of the asset is usually the transaction price, meaning the fair value of the consideration given. For short-term receivables, the fair value is equal to the face amount or original invoice amount. Cash flows relating to short-term receivables are not discounted. Accounts receivable – shall be measured initially at face amount or original invoice amount.

Subsequent Measurement  

Amortized cost. o It is the net realizable value of accounts receivable. The net realizable value of accounts receivable is the amount of cash expected to be collected or the estimated recoverable amount.

Net Realizable Value

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The initial amount recognized for accounts receivable shall be reduced by adjustments which in the ordinary course of business will reduce the amount recoverable from the customer. In estimating the net realizable value of trade accounts receivables, the following deductions are made: o Allowance for freight charge o Allowance for sales return o Allowance for sales discount o Allowance for doubtful accounts

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Example. An entity has a 100,000 account receivable at the end of accounting period. The terms are 2/10, n/30, FOB destination and freight collect. The customer paid freight charge of 5,000.

Terms related to freight charge 

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FOB destination o Owner of the goods is the seller o Seller should pay the freight o Buyer will only own it upon receipt or when it reached the company. FOB shipping point o Owner of goods while in transit is the buyer o Buyer should pay the freight o Buyer will be the owner upon shipment. Freight Collect o Freight charges is not yet paid o Buyer actually paid Freight prepaid o Paid by the seller.

Accounting for Freight Charge 

Sometimes, goods are sold FOB destination but shipped freight collect with the understanding that the buyer will pay for

the freight charge and deduct the same when remittance is made by him. On the part of the seller, the freight charge is recorded by debiting freight out and crediting allowance for freight charge.

To record the sale: Accounts Receivable 100,000 Freight out 5,000 Sales 100,000 Allowance for freight charge 5,000 To record the collection within the discount period: Cash 93,000 Sales Discount 2,000 Allowance for freight charge 5,000 Accounts Receivable 100,000 Allowance for Sales Returns 

Measurement of accounts receivables shall also recognize the probability that some customers will return goods that are unsatisfactory or will make other claims requiring reduction in the amount due as in the case of shipment shortages and defects.

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Accounts Receivable 100,000

Example An amount of 50,000 of the total accounts receivable at yearend represents selling price of goods that will probably returned. The journal entry to recognize the probable return is: Sales Return 50,000 Allowance for Sales Return 50,000 Sales Discount   

Illustration – Net Method 

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Cash discounts. It is known as sales discount for the seller, and purchase discount for the buyer. Methods of recording credit sales o Gross Method – recorded at gross amount. o Net Method – recorded at net amount

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Illustration – Gross Method 

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Sale of Merchandise for 100,000, terms 5/10, n/30. Accounts Receivable 100,000 Sales 100,000 Assume collection is made within the discount period Cash 95,000 Sales Discount 5,000 Accounts Receivable 100,000

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Sale of merchandise for P100,000, terms 5/10, n/30. Accounts Receivable 95,000 Sales 95,000 Assume collection is made within the discount period. Cash 95,000 Accounts Receivable 95,000 Assume collection is made beyond the discount period Cash 100,000 Accounts Receivable 95,000 Sales Discount forfeited 5,000 The sales discount forfeited is classified as other income.

Allowance for Sales Discount Of the accounts receivable of 1,000,000 at the end of the reporting period, it is estimated that the discounts to be taken will amount to 50,000. Sales Discount 50,000 Allowance for Sales Discount 50,000

Assume collection is made beyond the discount period. Cash 100,000

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The adjustment may be reversed at the beginning of the next period in order that discounts can then be charged normally to sales discount account.

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Accounting for Bad Debts 

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Two methods: o Allowance method o Direct write-off method 

Allowance Method 

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Requires recognition of a bad debt loss if the accounts are doubtful of collection. Doubtful Accounts Expense xxx ADA xxx The ADA is deduction from A/R If the allowance was found worthless ADA xxx A/R xxx

Recoveries of Accounts written off 

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Illustration – Allowance Method

The same accounts that are previously written off are unexpectedly recovered or collected. A/R 30,000 ADA 30,000 Cash 30,000 A/R 30,000

Direct Write-Off Method    

Requires recognition of a bad debt loss only when the accounts proved to be worthless or uncollectible. It is used by the BIR for tax purposes. It violates the matching principle. Not permitted under IFRS

Illustration – Direct Write-off Method 

If a collection is made on account previously written off as uncollectible, the procedure is first to recharge the customer’s account. Simple reverse the original entry.

Accounts of 30,000 are considered doubtful of collection Doubtful Accounts 30,000 ADA 30,000 The accounts are subsequently discovered to be worthless or uncollectible. ADA 30,000 A/R 30,000

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Accounts of 30,000 are considered doubtful of collection No entry The accounts proved to be worthless. Bad debts expense 30,000 A/R 30,000 The same accounts that are previously written off as worthless are recovered and collected.

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A/R Bad Debts expense Cash A/R

30,000 30,000 30,000 30,000

1. Aging of Accounts Receivable or “statement of financial position approach” 2. Percent of Accounts Receivable or also “statement of financial position approach” 3. Percent of Sales or “income statement approach” AGING OF ACCOUNTS RECEIVABLES

Chapter 5 Estimation of Doubtful Accounts



Involves analysis where accounts are classified into not due or past due.

Methods of Estimating Doubtful Accounts a. b. c. d. 



  

Not due 1 to 30 days past due 31 to 60 days past due 61 – 90 days past due

e. f. g. h.

The allowance is determined by multiplying the total of each classification by the rate or percent of loss experienced by the entity for each category. The major argument for the use of this method is the more accurate and scientific computation of the allowance for doubtful accounts. It has the advantage of presenting fairly the accounts receivable in the statement of financial position at net realizable value. The objection of this method is it violates the matching process. This method is time consuming if a large number of accounts are involved.

Illustration

91-120 days past due 121 to 180 days past due 181 to 365 past due More than 1 year past due

The following data are summarized in aging the accounts receivable at the end of the period: Balance Not due 1-30 days past due 31-60 days past due 61-90 days past due 91-180 days past due 181-365 days past due

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500,000 300,000

Experience rate 1% 2%

Required Allowance 5,000 6,000

200,000

4%

8,000

100,000

7%

7,000

50,000

10%

5,000

30,000

30%

9,000

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More than 1 year

20,000

50%

1,200,000

o Moreover, the loss experience rate may be difficult to obtain and may not be reliable.

10,000 50,000

Illustration

The amount computed, which is 50,000 is the required balance of ADA at the end of the period.

The balance of accounts receivable is 2,000,000 and the credit balance in the allowance for doubtful accounts is 10,000. Doubtful accounts are estimated at 3% of accounts receivable.

Thus, if the ADA has a credit balance of 10,000 before the adjustment, the doubtful accounts expense is determined as follows: Required Allowance 50,000 Less: ADA before adjustment 10,000 Doubtful Accounts Expense 40,000 The Journal Entry to record the doubtful accounts expense is: Doubtful Accounts Expense 40,000 ADA 40,000

Required Allowance (2,000,000)(3%) 60,000 Less: Credit Balance in Allowance 10,000 Doubtful Accounts Expense 50,000 Journal Entry: Doubtful Accounts Expense ADA

When is an Account Past Due 



Credit terms will determine whether an account is past due. o For example: 2/10, n/30, and the account is 45 years old, it is considered to be 15 days past due. The term “past due” refers to the period beyond the maximum credit term.

  

PERCENT OF SALES    

PERCENT OF ACCOUNTS RECEIVABLES A certain rate is multiplied by the open accounts at the end of the period in order to get the required allowance balance. It has the advantage of presenting accounts receivable at estimated NRV. The approach is also simple to apply. This approach violates the principle of matching bad debt loss against the sale revenue.

50,000 50,000

 

The amount of sales for the year is multiplied by a certain rate to get the doubtful accounts expense. The computed amount is the amount of doubtful accounts expense and not the required ADA. The rate may be applied on credit sales or total sales. The rate to be used is computed by dividing bad debt losses in prior years by the charge sales of prior years. (in case na hindi given yung rate) The rate obtain is multiplied by the current year’s charge sales to arrive at the doubtful accounts expense. There is no substantial difference if in the computation of the rate, the basis is total sales of the prior periods.

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



o In such case, the rate obtained is multiplied by the current year’s total sales to get the doubtful accounts expense. This procedure of determining the rate has the advantage of eliminating the extra work of making a record of cash sales and credit sales. However, this approach may prove unsatisfactory when there is a considerable fluctuation in the proportion of cash and credit sales periodically.

Accounts Receivable Sales Sales Return Allowance for doubtful accounts

If doubtful accounts are estimated at 1% of net sales, the doubtful accounts expense is 50,000 or (1% of 5,000,000)

Argument for Percent of Sales Method 

 

When the “percent of sales” method is used in computing doubtful accounts, proper matching of cost against revenue is achieved. This is so because bad debt loss is directly related to sales and reported in the year of sale. This method is an income statement approach, because it favors the income statement.

Argument against percent of sales method. 

 

Doubtful Accounts Expense 50,000 ADA 50,000 The allowance of doubtful accounts now have a total balance of 70,000. Correction in Allowance for Doubtful Accounts  

The accounts receivable may not be shown at estimated realizable value because the ADA may prove excessive or inadequate. Thus, it becomes necessary that from time to time the accounts should be “aged” to ascertain the probable loss. As a consequence, the rate applied on sales should be revised accordingly.

Illustration The following accounts are gathered from the ledger:

1,000,000 5,050,000 50,000 20,000



The correction is to be reported in the income statement either as an addition to or subtraction from doubtful accounts expense. Inadequate allowance is adjusted as follows: Doubtful Accounts xxx ADA xxx An excessive allowance is recorded as follows: ADA xxx Doubtful Accounts xxx When the allowance is excessive, there is a corollary problem when the discrepancy is more than the debit balance in the doubtful accounts expense account. For example, if the amount of correction due to excessive allowance is 30,000 and the DAE has a debit balance of 20,000, following the above procedure will result to a credit balance in

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the doubtful accounts expense account of 10,000. Such balance is obviously abnormal.

To continue the illustration, if on Dec. 31, the required allowance is 40,000, the adjustment should be:

The 10,000 difference should be treated in the determination of income of the current period. ADA

30,000 DAE Miscellaneous Income

DAE

ADA Required allowance Add: DR balance in allowance 20,000 DAE

20,000 10,000

Debit balance in allowance account 

 

60,000 40,000

60,000

In certain instances, it may have a debit balance because it may be the policy of the entity to adjust the allowance at the end of the period and record accounts written off during the year. For Example, on Jan 1, the allowance account before adjustment has a credit balance of 30,000 and during the year, an account of 50,000 is written off and recorded as follows: ADA 50,000 A/R 50,000 Thus, on Dec. 31, the allowance has a debit balance of 20,000 before adjustment



60,000

The debit balance does not indicate that the allowance is inadequate because the accounts written off during the year and charged to the allowance may have arisen from current year sales. Thus, the charge to the allowance account simply predates the recording of doubtful accounts. At the end of the period, when adjustments are made, the debit balance should be considered.

Notes Receivable Type of Receivable

Initial Measurement

Short Term Receivable Long Term interest bearing note reasonable interest rate (above market rate)

Face Amount

Subsequent Measurement Face Amount

Face Amount

Face Amount

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Long Term interest bearing note unreasonable (below market rate)

Order of Priority: 1. F.V. of property given, cash price equivalent. 2. F.V. of property received or P.V. Long term Order of Priority: noninterest bearing 1. F.V. of property note given, cash price equivalent. 2. F.V. of property received or P.V.

Amortized Cost Effective Interest Method

Amortized Cost Effective Interest Method

Future Value=PV (1+i)t Example what will be paid on maturity = 1,404,928. The total interest received is 404,928. Example – Noninterest Bearing Note An entity manufactures and sells machinery. On Jan 1, 2020, the entity sold machinery costing 280,000 for 400,000. The buyer signed a non-interest bearing note for 400,000 payable in four equal installments every December 31. The cash sale price of the machinery is 350,000.  Long-term noninterest bearing note. And may cash sales price na given. Face Value of Note Present Value – Cash Sale Price Unearned Interest Income

400,000 350,000 50,000

Example: An entity owned a tract of land costing 800,000 and sold the land for 1,000,000. The entity received a 3-year note for 1,000,000 plus interest of 12% compounded annually.  The note is a long term interest bearing note. So the 1,000,000 is its present value. The Lumpsum formula can be used in this problem when determining the FUTURE value of the note and interest per year.

2020 2021 2022 2023

Note Receivable 400,000 300,000 200,000 100,000 1,000,000

Fraction 4/10 3/10 2/10 1/10

Interest Income 20,000 15,000 10,000 5,000 50,000

What is the current portion of the note on December 31, 2020? NR – Current Portion 100,000

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Unearned Interest Income (15,000) Carrying Amount 85,000

Jan 1, 20x2

Xx

Xx

xx

xx

Tables to be used: For Lumpsum: A B Interest Income Unearned (c x rate) Interest Income (bal – a) xx xx xx xx 0

Date

Jan 1, 20x1 Dec 31, 20x1 Sa dulo

C Present value (bal + a) xx xx Amount of loan

For Ordinary Annuity Date

Collectio n

Jan 1, 20x1 Dec 31, 20x1 Sa dulo

Interest Income

Amortizatio n

xx

Xx

xx

Present Value xx xx

xx

xx

xx

xx

For Annuity Due Date Jan 1, 20x1 Jan 1, 20x1

Loans Receivables Initial Carrying Amount of Loan is: Principal Amount Direct Origination Cost Origination Fees Received Initial Carrying Amount

xx xx (xx) xxx

Yung initial carrying amount din yung P.V. sa effective interest method table. Principal amount less Initial Carrying amount = unearned interest income If ang given lang is Principal tas may nominal at effective rate. Pag tinanong ang what is the amount of cash paid to the borrower or initial carrying amount ganto gagawin: Ex. Dec. 31, 2019, London Bank granted a 5,000,000 loan to a borrower with 10% stated rate payable annually and maturing in 5 years. The loan was discounted at the market interest rate of 12%. Initial carrying amount of loan is?

Collectio n Xx

Interest Income

Amortizatio n xx

Present Value xx xx

PV of Principal = (5,000,000)(.57) = 2,850,000 PV of Interest = (500,000)(3.6) = 1,800,000 Initial Carrying Amount 4,650,000 Loan Impairment:

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  





Kalian gagamit ng PV of Principal plus PV of Interest? o Kapag ma cocollect mo both interest and principal. Kailan gagamit ng PV of Principal lang o If principal nalang ma cocollect mo. Be careful sa date kung kalian tinatanong yung carrying amount. Minsan kase 2019 yung loan tas 2021 carrying amount yung tinatanong. Impairment loss is always = Carrying Amount on the year of impairment xx Less: Present Value (xx) Impairment Loss (xx) If inaccrue ni bank yung interest, kasama yun sa carrying amount.

Receivable Financing – Pledge, Assignment, Factoring PLEDGE  In banking, if it is discounted, it means that interest from the loan is deducted in advance. o Example: On Nov. 1, 2020, entity borrowed 1,000,000. The term is 1 year and discounted at 12%. The entity pledged A/R for 2,000,000. Cash 880,000 Discount on Note Payable 120,000 Note Payable Bank 1,000,000 Face Value of Loan 1,000,000 Interest in Advance (12%)(1m) (120,000) Net Proceeds 880,000

o Subsequent Entries: Nov 31, 2020 Interest Expense 10,000 Note Payable 10,000 Dec 31, 2020 Interest Expense 10,000 Note Payable 10,000 (120,000/12) = 10,000 per month. Carrying Amount of Note Payable at Year end: Note Payable – Bank 1,000,000 Discount on Note Payable(120k-20K) (100,000) Carrying Amount 900,000 ASSIGNMENT     

A more formal type of pledging. Assignor = Borrower, Assignee = Lender Notification Basis = Customer is paying to Assignee or Lender of Loan. Non – Notification Bases = Customer is paying to Assignor and assignor remits the payment to the assignee. There is transfer of rights with regards to A/R but there is no transfer of ownership. Non-notification Basis: Apr. 1. An entity assigned 700,000 of A/R to a bank under a non-notification basis. The bank advances 80% less a service charge of 5,000. The entity signed a promissory note that provides for interest of 1% per month on the unpaid loan balance.

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To separate the assigned accounts. A/R – Assigned 700,000 A/R 700,000 To record the Loan: Cash (700,000)(80%) – 5,000 555,000 Service Charge 5,000 Note-Payable Bank 560,000 5. Issued credit memo for sales return to a customer whose account was assigned, 20,000: Sales Return 20,000 A/R – Assigned 20,000 10. Collected 300,000 of the assigned account less 2% discount. Cash 294,000 Sales Discount (2%)(300,000) 6,000 A/R – Assigned 300,000 30. Remitted Total Collections to the bank plus interest for 1 month: Note Payable Bank 294,000 Interest Expense (1%)(560k) 5,600 Cash 299,600 May 7. Assigned Accounts of 15,000 proved worthless ADA 15,000 A/R 15,000 20. Collected 300,000 of the assigned Accounts Cash 300,000 A/R – Assigned 300,000 30. Remitted the total amount due the bank to pay off the loan balance plus interest for one month. Note Payable – Bank (560-294) 266,000 Interest Expense (1%)(266,000) 2,660

Cash 268,660 To transfer the remaining balance of assigned accounts to A/R Accounts Receivable 65,000 A/R – Assigned 65,000 Notification Basis: July 1. An entity assigned 1,000,000 of A/R to a bank under a notification arrangement. The bank loans 80% less 4% service charge on the gross amount assigned. The entity signed a promissory note that provides for 1% interest per month on the unpaid loan balance. To separate accounts assigned: A/R – Assigned 1,000,000 A/R 1,000,000 July 1 To record the loan: Cash (1m)(80%) – 40,000 760,000 Service Charge 40,000 Note Payable – Bank 800,000 July 31 Received notice from bank that 600,000 of the assigned accounts were collected less 2% discount. A check was sent to the bank for the interest due. Note Payable – Bank 588,000 Sales Discount (2% x 600,000) 12,000 A/R – Assigned 600,000 Aug 31 Received notice from bank that 300,000 of the assigned accounts were collected. Final settlement was made by the bank for the excess collections together with the uncollected assigned accounts of 100,000. Cash 85,880

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Interest Expense Note Payable – Bank A/R – Assinged 300,000 A/R

2,120 212,000

100,000

A/R – assigned 100,000 Computation: Loan from Bank Less: July Collection by bank Balance due the bank August collection by bank Less: Loan Balance Excess Collection Less: Interest (1% x 212,000) Remittance from bank

800,000 588,000 212,000 300,000 (212,000) 88,000 2,120 85,880

Equity in assigned accounts  A/R assigned less Note Payable Outstanding. FACTORING  Sale of accounts receivable on a without recourse notification basis.  There is transfer of ownership.  The entity sells accounts receivable to a factor (bank or finance entity)  Casual Factoring or Continuing Agreement

 Factor’s Holdback – factor withhold a predetermined amount as protection against customer returns and allowances and other special adjustments.  If hinahanap yung net realizable value, yung factored amounts ay di kasama.  “Weighted Average” sa interest – use 365 days. Cash Received from Factoring Gross Amount Less: Sales discount xx Commission Factor’s Holdback Factoring Fee xx Interest xx Cash Received

xxx xx xx (xx) xxx

Initial loss from Factoring Factoring Fee xx Interest xx Recourse Obligation xx Sales Discount xx Commission xx Loss Initially Recognized xxx  Wala yung Factor’s holdback sa initial loss. If accounts are not collected by the factor  The loss on factoring will include the recourse obligation. Hindi siya ileless. As is na yung initial loss If accounts are collected

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The recourse obligation is not included in the loss on factoring i miminus siya sa initial loss on factoring.

Step 5 = 604,800 – 610,000 = (5,200).

Receivable Financing – Discounting of Notes Receivable  5 Steps: o Maturity Value = Face Amount + Total Interest o Discount = Maturity Value x Discount Rate x Unexpired Term (exclude the 1st day and include the last day) o Net Proceeds = M.V. less Discount o Carrying Amount = Face + Accrued Interest o Gain or Loss = Proceeds less Carrying Amount  Example: On June 30. Rain Company discounted at the bank a customer’s 600,000, 6-month, 10% note receivable dated April 30 2020. The bank discounted the note at 12% o What amount should be reported as proceeds from the discounted note? o Prepare Necessary entries o Prepare entries assuming that the note is paid by the maker on maturity o Prepare entries assuming that the note is dishonored by the maker.

With Recourse Conditional Sale Borrowing Cash 604,800 Cash 604,800 604,800 Loss 5,200 Loss 5,200 5,200 NR 600,000 NR 600,000 600,000 Int.Inc 10,000 Int.Inc Int Inc 10,000 No Entry 600k

NRD 600,000 NR

No Entry

Cash Int Exp Liab for NRD 10,000

Liab for NRD

600,000

A/R 634,000 Cash

Secured

NR

600K

A/R 634,000 634,000 Cash

634,000 NRD 600,000 Liab for NRD 600,000 NR 600,000 NR

Step 1. M.V. = 600,000 + (600,000)(10%)(6/12) = 630,000 Step 2. Discount = 630,000 x 12% x (4/12) = 25,200 Step 3. Net Proceeds = 630,000 – 25,200 = 604,800 Step 4. Carrying Amount = 600,000 + (30,000 interest)/6) x 2 months accrued = 610,000

600,000

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 Shall not include foreign exchange differences.  If tinanong, what amount of cash was received from the bank? Net proceeds yon.X`

INVENTORIES    

Held for sale in the ordinary course of business. In process of production for such sale. Materials or supplies to be consumed in the production process Consumed in rendering services.

CLASSES OF INVENTORIES  Trading Concern o Merchandise Inventory  Manufacturing concern o Finished Goods o Work in Process/ Goods in Process o Raw Materials o Factory or manufacturing supplies

Method

Date of Purchase

Gross Net Allowanc e

Gross Net Net

Payment w/ discount Net Net Net

Payment w/ out discount Gross Net Net

 Freight o If the perspective is that we are the buyer, and the term is FOB Shipping point, the freight charge is capitalized as cost of inventory.  Import Duties and Irrevocable Purchase Taxes o Exclude the VAT  Handling and Other Cost Directly Attributable to the Acquisition. COST OF CONVERSION  Direct Labor + Overhead Other Cost  Necessary to bring the inventories to their present location and condition  Purchase Discount Loss – part of other expense in Income Statement.

INITIAL MEASUREMENT  Cost of Purchase o Purchase price  subject to Trade discount & Cash discount.  Methods of Recording Cash Discounts: Gross, Net, Allowance

Cost of Item Excluded from Cost of Inventories  Abnormal blabla  Storage cost for Finished Goods (unless necessary for production process before a further production stage)

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        

Administrative Overhead Selling Expense Interest Expense Goods held on consignment “Specifically segregated per sale contract”, if included in count, deduct mo. Items in receiving department refused because of damage Freight is on account of seller “kay seller yung inventory” Items included in count, damaged and unsaleable “if included, deduct mo” Unexpired insurance (asset kase to prepaid insurance)

Goods Includible in Inventory  Goods owned & on hand  Goods purchased and in transit FOB Shipping Point (tayo ang buyer)  Goods sold and in transit FOB Destination (tayo ang seller)  Goods out on consignment  Goods in the hands of salesman or agent  Goods held by customer on approval or on trial  Items in the shipping Department Title or Control  FOB Destination – Inventory of the Seller (except if received)  FOB Shipping point – Inventory of the buyer (except if not yet shipped)

CONSIGNED GOODS  Goods out on Consignment o Inventory of the entity o Cost = Costs + Handling cost + Shipping Costs  Goods held on Consignment o Not part of the entity’s inventory Special Orders  If still in process – inventory of the seller  If finished – Inventory of the buyer even if not yet delivered  Stock items of seller – not considered as special orders. If undelivered, inventory of the seller. Installment Sales  Inventory of the buyer. Conditional Sale  Goods sold with buyback agreement – Inventory of the seller.  Goods sold with refund orders o If the seller can estimate future returns – inventory of the Buyer o If items are unpredictable – inventory of the seller until the expiration of refund period.  Goods held on approval – Inventory of the Seller  Goods held for storage/processing/shipment – inventory of the Seller

(note) Contract of Sale vs Contract to Sell

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 Contract of sale – inventory of the buyer regardless of payment.  Contract to sell – inventory of the seller until full payment, there is transfer of title upon full payment. Items Ordered – tayo ang buyer Items Shipped – tayo ang seller INVENTORY SHORTAGE & OVERAGE  Overage: Physical Count > Ledger Balance  Shortage: Physical Count < Ledger Balance

 All accounts for inventory is included except sales allowance and sales discount.  Sales returns – increases the number of inventory (add to)  New weighted average unit cost must be computed after every purchase and purchase returns.  GOLDEN FORMULA TGAS xxx Less: Ending Inventory (xx) COGS xxx

Normal Overage/Shortage  Charged to inventory short or over then closed to COGS Abnormal Overage/ Shortage  Theft, ganon.  Charged to Gain or Loss and becomes part of other expenses or income. FAS = Shipping Point CIF = Shipping Point Ex-Ship = Destination FOB Buyer = Destination FOB Seller = Shipping Point 40% above cost = GP based on Cost Normally sell for or Marked to sell = multiply to cost ratio. INVENTORY COST FLOW  FIFO  Weighted Average – Periodic  Moving Average – Perpetual  TGAS in PESO / TGAS in Units

Inventory beg. Purchases 3/7 Purchases 7/15 Sale 5/20 Sale 6/30 Sale 9/17 Inventory End

Units 250 200 275 (120) (55) (250) 300

FIFO Method Ending Inventory = 300 TGAS = 725 Therefore, COGS = 425 Ending Inventory = (275)(11.75) = 3,231.25 (25)(11) = 275 Total 3,506.25 COGS (250)(10.5) = 2,625

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Unit Cost 10.5 11 11.75

Selling Price

14 15 16

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(175)(11) TOTAL

= 1,925 4,550

Purchase Returns Abnormal chuchu Departmental In Departmental out Markup Markup Cancellation Mark Down Mark Down Cancellation TGAS

Weighted Average Method TGAS in Peso/ TGAS in Units 8,056.25/725 = 11.11 Ending Inventory = (300)(11.11) = 3,333 Cost of Goods Sold = (425)(11.11) = 4,721 LCNRV  NRV = Selling price less Estimated cost to complete less Estimated Cost to sell. Inventory Estimation  GP METHOD  RETAIL METHOD GP METHOD  

(xx) (xx) xx (xx) xx (xx) (xx) xx

xx

xx

Sales Sales Returns Employee Discount Normal chuchu End inventory @ Retail

xxx (xx) xx xx

xx XXX

Cost = TGAS @ Cost / TGAS @ RETAIL

Based on sales = GP = (40%)(Net Sales) Based on COGS = GP = (40/140)(Net Sales)

Average Method = Included lahat Conventional Method = From Beginning inventory to markup cancellation. FIFO = di kasama beginning inventory

RETAIL METHOD Beginning Inventory Purchases Purchase Discount Freight In Purchase Allowance

(xx) (xx) xx (xx)

Cost xx xx (xx) xx (xx)

Retail xx xx

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