MODULE 2: Loans and Receivables

RELATED STANDARDS: PAS 1 - Presentation of Financial Statements; PFRS 9

- Financial Instruments

INTRODUCTION
This module focuses in the accounting for loans and receivables. Loans
and receivables are non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market. They typically arise when an
entity provides money, goods or services directly to a debtor with no intention
of trading the receivable.

Learning Objectives:
1. Define and identify the different classification of receivables.
2. Explain the initial recognition, initial measurement, subsequent
measurement, financial statement presentation and derecognition of
receivables.
3. Explain the accounting discounts and freight and how will it affect
receivables account.
4. Apply the different methods of accounting for bad debts.
5. Explain and identify the different methods of receivable financing.

I. Loans and Receivables

 Measurement and classification (IFRS 9)

 IFRS 9 provide guidance on classifying and measuring loan receivables
and other financial assets. A debt instrument (i.e., a loan receivable or
debt security) that:
a) is held within a business model whose objective is to collect the
contractual cash flows and
b) has contractual cash flows that are solely payments of principal and
interest on the principal amount outstanding generally must be
classified and measured at amortized cost.
 All other debt instruments held must be classified and measured at fair
value through profit or loss.
 If the specified condition for election of the fair value option in paragraph
4.1.5 of IFRS 9 is met, an entity may classify and measure the debt
instrument at fair value, with changes in fair value recognized in profit or
loss, rather than at amortized cost.

II. Accounts receivables

 Presentation (IAS 1)
 Trade and nontrade receivables which are currently collectible shall be
presented in the statement of financial position as one-line item called
“trade and other receivables”
 Items under trade and other receivables:
- Accounts receivables
- Allowance for doubtful accounts as deduction from accounts
receivables to arrive at net realizable value
- Notes receivable
- Accrued income
- Short-term advances to (supplier, employees, officers, etc.)
- Subscriptions receivable collectible within one year
- Creditor’s account with debit balance
- Deposits collectible currently

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- Claims receivables

 Accounting for bad debts

 Bad debt is the amount of an account receivable that is considered to be
not collectible. This may be computed using two methods:
a. Direct write off
- This is done when it becomes apparent that a specific customer
invoice will not be collected or when accounts proved to be
worthless.
- This is a debit to the bad debt expense account and a credit to the
accounts receivable account.
b. Allowance method
- This method estimates the portion of the customers’ accounts that
are doubtful of collection.
- This is recorded as a debit to the bad debt expense account, and a
credit to the allowance for doubtful accounts.
- The actual elimination of unpaid accounts receivable is later
accomplished by drawing down the amount in the allowance
account.

 Methods of estimating bad debts (allowance method):

a. Percent of sales (Income statement approach)
- Bad debts are computed based on amount of credit sales.
- The resulting figure is recorded as the bad debts expense for the
period.
b. Percent of receivables (Statement of financial position approach)
- Bad debts are computed based on the amount of outstanding
receivables.
- The resulting figure is already the required allowance for bad debts
that is deducted from the receivables to arrive at the net realizable
value of receivables.
c. Aging of accounts receivables (Statement of financial position
approach)
- Similar to percent of receivables, the computed figure here is
already the required allowance for bad debts that is deducted from
the accounts receivable balance.
- This requires classification of past due customer accounts in terms
of length of time outstanding. Various rates are used to compute
the bad debts. Rates used in computation increases as the
receivables become “older”.
____________________________________________________________
III. Notes and Loans Receivable

 Measurements
 Financial instruments (including notes and loans receivable) are initially
measured at fair value plus, in the case of a financial asset not at fair
value through profit or loss, transaction costs (IFRS 9).
 Long-term notes and loan receivable shall be subsequently measured at
amortized cost using effective interest method.
 Initial measurement of loan receivable = Principal minus direct origination
fees received from borrower plus direct origination costs incurred by the
lender.
 Accounting for amortization of loan receivable:
Case Difference Amortization
Direct origination fees > Direct Unearned interest Increase interest

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origination costs income income

Direct origination costs > Direct Direct origination Decrease interest
origination fees costs income

 Impairment and credit losses

 Expected credit losses are required to be measured through a loss
allowance at an amount equal to:
a. The 12-month expected credit losses (expected credit losses that
result from those default events on the financial instrument that are
possible within 12 months after the reporting date); or
b. Full lifetime expected credit losses (expected credit losses that result
from all possible default events over the life of the financial instrument).
 The preceding IFRS 9 provision is the general approach on impairment
with the exception of purchased or originated credit impaired financial
assets
 A loss allowance for full lifetime expected credit losses is required for a
financial instrument if the credit risk of that financial instrument has
increased significantly since initial recognition, as well as to contract
assets or trade receivables that do not constitute a financing transaction in
accordance with IFRS 15.
 Any measurement of expected credit losses under IFRS 9 shall reflect an
unbiased and probability-weighted amount that is determined by
evaluating the range of possible outcomes as well as incorporating the
time value of money.
 Also, the entity should consider reasonable and supportable information
about past events, current conditions and reasonable and supportable
forecasts of future economic conditions when measuring expected credit
losses.
 Impairment loss = Carrying amount of loan receivable minus present value
of cash flows.
 Allowance for loan impairment is recorded and the allowance account
shall be amortized subsequently to interest income.

IV. Receivable Financing

 Definition
Receivable financing is a type of asset-financing arrangement in which a
company uses its receivables to raise money.

 Forms of receivable financing:

a. Pledging of accounts receivable
- Accounts receivable pledging is when a business uses its accounts
receivable as collateral on a loan, usually a line of credit.
- No special journal entry is made on the accounts receivable pledged.
Disclosure of pledging is sufficient.
b. Assignment of accounts receivable
- Assignment of accounts receivable is an agreement between a lending
company and a borrowing company in which the later assigns its
accounts receivable to the former in return for a loan.
- By assignment of accounts receivable, the lender gets a right to collect
the receivables of the borrowing company if it fails to repay the loan in
time.

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- An entry is made to reclassify the accounts receivables as “accounts

receivable –assigned”.
- The entity shall disclosed the equity in the assigned accounts. It is
computed by deducting the related notes payable from the accounts
receivable –assigned.
c. Factoring of accounts receivable
- A type of debtor finance in which a business sells its accounts
receivable to a third party (called a factor) at a discount.
- The parties to the factoring agreement assess the recoverability of the
accounts receivable. They agree on a suitable discount factor to
calculate the amount of fee to be charged by the factor.
- After deducting such fee from the value of accounts receivable, the
factor pays in cash to originating company. The factor may also
withheld an additional amount as a refundable security against bad
debts which may arise.
- In casual factoring, the accounts receivable is simply credited and the
related allowance for bad debts is debited. Gain or loss on factoring is
also determined.
- In a continuing agreement, the accounts receivable is credited and
receivable from factor is debited.
d. Discounting of notes receivable
- Notes are usually sold (discounted) with recourse, which means the
company discounting the note agrees to pay the financial institution if
the maker dishonors the note.
- When notes receivable are sold with recourse, the company has a
contingent liability that must be disclosed in the notes accompanying
the financial statements.
- The accounting entry include a credit to notes receivable discounted.
Notes receivable discounted is deducted from the total notes
receivable with disclosure of the contingent liability.

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Illustrative Problems

1. Loans and receivables may be classified under IFRS 9 at

A. Financial asset at amortized cost
B. Financial asset at fair value through profit or loss
C. Either A or B
D. Neither A nor B

2. Line item classification of short-term receivables under IAS 1 for financial

statement presentation.
A. Trade receivables
B. Trade and nontrade receivables
C. Trade and other receivables
D. Financial and nonfinancial receivables

3. Method of estimating doubtful accounts which computes for the provision

for bad debts for the period.
A. Aging of receivables C. Percentage of receivables
B. Direct write-off D. Percentage of sales

4. Which of the following will be deducted from the loan receivable on initial
recognition?
A. Direct origination fees received C. Both A and B
B. Direct origination costs incurred D. Neither A nor B

5. Receivable financing scheme that does not require additional journal entry
A. Pledging of accounts receivable
B. Factoring of accounts receivable
C. Assignment of accounts receivable
D. Discounting of notes receivable

6. Expected credit losses of loan receivables are required to be measured

through a loss allowance at an amount equal to (choose the exception)
A. 12-month expected credit losses
B. Monthly expected credit losses
C. Full lifetime expected credit losses
D. None of the foregoing

7. An agreement between a lending company and a borrowing company in

which the latter assigns its accounts receivable to the former in return for a
loan.
A. Pledging of accounts receivable
B. Factoring of accounts receivable
C. Assignment of accounts receivable
D. Discounting of notes receivable

8. The note receivable discounted account is

A. A contingent liability to be disclosed
B. Deducted from the notes receivable balance
C. Both A and B
D. Presented separately in the liability section of balance sheet

9. Which of the following methods of determining bad debt expense most

closely matches expense to revenue?
A. Charging bad debts only as accounts are written off as uncollectible.

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B. Charging bad debts with a percentage of sales for that period.

C. Estimating the allowance for doubtful accounts as a percentage of
accounts receivable.
D. Estimating the allowance for doubtful accounts by aging the accounts
receivable.

10. A method of estimating uncollectible accounts that emphasizes asset

valuation rather than income measurement is the allowance method
based on
A. Aging the receivables
B. Gross sales
C. Direct writeoff
D. Credit sales less returns and allowances

11. When a specific customer’s account receivable is written off as

uncollectible, what will be the effect on net income under each of the
following methods of recognizing bad debt expense?
Allowance Direct writeoff
A. None Decrease
B. Decrease None
C. Decrease Decrease
D. None None

12. When the allowance method of recognizing uncollectible accounts is used,

the entry to record the writeoff of a specific account would
A. Decrease both accounts receivable and the allowance for uncollectible
accounts.
B. Decrease accounts receivable and increase the allowance for
uncollectible accounts.
C. Increase the allowance for uncollectible accounts and decrease net
income.
D. Decrease both accounts receivable and net income.

13. An entity uses the allowance method for recognizing uncollectible

accounts. Ignoring deferred tax, the entry to record the writeoff of a
specific uncollectible account
A. Affects neither net income nor working capital.
B. Affects neither net income nor accounts receivable.
C. Decreases both net income and accounts receivable.
D. Decreases both net income and working capital.

14. A company uses the allowance method to recognized uncollectible

accounts expense. What is the effect at the time of the collection of an
account previously written off on each of the following accounts?
Allowance for doubtful accounts Uncollectible accounts expense
A. No effect Decrease
B. Increase Decrease
C. Increase No effect
D. No effect No effect

15. When an accounts receivable aging schedule is prepared at the end of the
fiscal year, a series of computation like the following is sometimes made:
5% of the total peso balance of accounts from 1-30 days past due, plus
10% of the total peso balance of accounts from 31-60 days past due, and
so on. Which of the following statements best describes how the sum of
the amounts determined in this series of computation is used?

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A. When added to the total accounts written off during the year, this new
sum is the desired credit balance of the allowance for doubtful
accounts to be reported in the year-end financial statements.
B. It is the amount of bad debt expense for the year.
C. It is the amount that should be added to the allowance for doubtful
accounts at year-end.
D. It is the amount of desired credit balance of the allowance of doubtful
accounts to be reported in the year-end financial statements.

16. Assuming that the ideal measure of short-term receivable in the balance
sheet is the discounted value of the cash to be received in the future,
failure to follow this practice usually does not make the balance sheet
misleading because
A. Most short-term receivables are not interest-bearing.
B. The allowance for uncollectible accounts includes a discount element.
C. The amount of the discount is not material.
D. Most receivables can be sold to a bank or factor.

17. After being held for 40 days, a 120-day 12% interest-bearing note
receivable was discounted at a bank at 15%. The proceeds received from
the bank equal
A. Maturity value less the discount at 12%.
B. Face value less the discount at 12%.
C. Maturity value less the discount at 15%.
D. Face value less the discount at 15%.

18. A 90-day 15% interest-bearing note receivable is solid to a bank without

recourse after being held for 60 days. The proceeds are calculated using a
12% interest rate. The amount credited to note receivable at the date of
the discounting transaction would be
A. The same as the cash proceeds.
B. The face value of the note.
C. Less than the face value of the note.
D. The maturity value of the note.

19. On July 1 of the current year, an entity received a one-year note bearing
interest at the market rate. The face amount of the note receivable and the
entire amount of the interest are due in one year. When the note
receivable was recorded on July 1, which of the following was debited?
I. Interest receivable
II. Unearned discount on note receivable
A. I only C. Neither I nor II
B. Both I and II D. II only

20. On July 1 of the current year, an entity received a one-year note

receivable bearing interest at the market rate. The face amount of the note
receivable and the entire amount of the interest are due on June 30 next
year. At December 31 of the current year, the entity should report in its
balance sheet
A. A deferred credit for interest applicable to next year
B. No interest receivable
C. Interest receivable for the entire amount of the interest due on June 30
of next year
D. Interest receivable for the interest accruing in the current year

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21. Y COMPANY provided the following information for Year 2:

Accounts receivable – January 1

2,000,000
Credit sales

10,000,000
Collection from customers, excluding the
recovery of accounts written off

8,000,000
Accounts written off as worthless 100,000
Sales returns 500,000
Recovery of accounts written off 50,000
Estimated future sales returns on December 31 150,000
Estimated uncollectible accounts on December 31 per aging 300,000
What is the net realizable value of accounts receivable on December 31,
Year 2?
A. 3,400,000 C. 2,950,000
B. 3,100,000 D. 2,900,000

22. The following data were taken from the records of Z COMPANY for the
year ended December 31, Year 1:
Accounts receivable determined to be worthless 25,000
Collections received in settlement of notes 180,000
Collections received to settle accounts

2,450,000
Discounts allowed by creditors 260,000
Discounts taken by customers 40,000
Merchandise returned by customers 15,000
Merchandise returned to suppliers 70,000
Notes given to creditors in settlement of accounts 250,000
Notes received to settle accounts 400,000
Payment to creditors

3,200,000
Payments on notes payable 100,000
Provision for doubtful accounts 90,000
Purchases on account

3,900,000
Sales on account

3,600,000
What is the net realizable value of accounts receivable on December 31,
Year 1?
A. 605,000 C. 825,000
B. 890,000 D. 670,000

23. A COMPANY reported current net receivables on December 31, Year 2

which consisted of the following:
Trade accounts receivable 930,000
Allowance for uncollectible accounts 20,000
Claim against shipper for goods in transit on November Year 1 30,000

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Selling price of unsold goods sent by Paolo on consignment at 130% of

cost and not included in the ending inventory 260,000
Security deposit on lease of warehouse used in storing inventories 300,000
What is the correct total of current net receivables on December 31, Year
2?
A. 1,500,000 C. 1,240,000
B. 1,200,000 D. 940,000

24. When examining the accounts of B COMPANY, it is ascertained that

balances relating to both receivables and payables are included in a single
controlling account called “receivable control” that has a debit balance of
P4,850,000. An analysis of the make-up of this account revealed the
following:
Debit/(Credit)
Accounts receivable – customers 7,800,000
Accounts receivable – officers 500,000
Debit balances – creditors 300,000
Postdated checks from customers 400,000
Subscription receivable 800,000
Accounts payable for merchandise (

4,500,000 )
Credit balances in customers’ accounts ( 200,000
)
Cash received in advance from customers for goods
not yet shipped ( 100,000
)
Expected bad debts ( 150,000
)
After further analysis of the aged accounts receivable, it is determined that
the allowance for doubtful accounts should be P200,000. What amount
should be reported as “trade and other receivables” under current assets?
A. 8,950,000 C. 8,600,000
B. 8,800,000 D. 8,850,000

25. From inception of operations, C COMPANY provided for uncollectible

accounts expense under the allowance method and provisions were made
monthly at 2% of credit sales. No year-end adjustments to the allowance
account were made. The balance in the allowance for doubtful accounts
was P1,000,000 on January 1, Year 2. During Year 2, credit sales totaled
P20,000,000, interim provisions for doubtful accounts were made at 2% of
credit sales, P200,000 of bad debts were written off, and recoveries of
accounts previously written off amounted to P50,000. An aging of
accounts receivable was made for the first time on December 31, Year 2
as follows:
Classification Balance
Uncollectible
November – December 6,000,000 10%
July – October 2,000,000 20%
January – June 1,500,000 30%
Prior to January 1, Year 2 500,000 50%
Based on the review of collectability of the account balances in the “prior
to January 1, Year 2” aging category, additional accounts totaling
P100,000 are to be written off on December 31, Year 2. Effective
December 31, Year 2, the entity adopted the aging method for estimating

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the allowance for doubtful accounts. What is the year-end adjustment to

the allowance for doubtful accounts on December 31, Year 2?
A. 900,000 debit C. 500,000 debit
B. 500,000 credit D. 0

26. During the current year, D COMPANY reported beginning allowance for
doubtful accounts P200,000, sales P9,500,00, sales returns and
allowances P1,000,000, sales discounts P500,000, accounts written off
P300,000 and recovery of accounts written off P50,000. It is estimated
that 5% of net sales may prove uncollectible. What is the allowance for
doubtful accounts at year end?
A. 350,000 C. 400,000
B. 375,000 D. 425,000

27. E COMPANY adopted a new method for estimating doubtful accounts at

an amount indicated by aging of accounts receivable.
Allowance for doubtful accounts, January 1 250,000
Provision for doubtful accounts recorded during the year (2% of credit
sales
of P10,000,000) 200,000
Accounts written off 205,000
Uncollectible accounts per aging, December 31 220,000
What is the year-end adjustment to the allowance for doubtful accounts?
A. 175,000 debit C. 25,000 debit
B. 175,000 credit D. 25,000 credit

28. F COMPANY reported accounts receivable on December 31, Year 2 as

follows:
Aye Company 800,000
Bee Company

2,000,000
Cee Company

1,200,000
Day Company

1,000,000
All other accounts receivable

5,000,000
The entity determined that Aye Company receivable is impaired by
P400,000 and Day Company receivable is totally impaired. The other
receivables from Bee and Cee are not considered impaired. The entity
determined that a composite rate of 5% is appropriate to measure
impairment on the remaining accounts receivable. What is the total
impairment of accounts receivable for Year 2?
A. 1,810,000 C. 1,650,000
B. 1,400,000 D. 1,830,000

29. On December 1, Year 1, G COMPANY assigned on a non-notification

basis accounts receivable of P5,000,000 to a bank in consideration for a
loan of 80% of the accounts less a 5% service fee on the accounts
assigned. The entity signed a note for the bank loan. On December 31,
Year 1, the entity collected assigned accounts of P2,000,000 less discount
of P200,000. The entity remitted the collections to the bank in partial

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payment for the loan. The bank applied first the collection to the interest
and the balance to the principal. The agreed interest is 1% per month on
the loan balance. The entity accepted sales returns of P100,000 on the
assigned accounts and wrote off assigned accounts totaling P300,000.
What is the balance of accounts receivable assigned on December 31,
Year 1?
A. 3,000,000 C. 2,400,000
B. 2,600,000 D. 2,900,000

30. Refer to the preceding problem. What is the equity of the assignor in
assigned accounts on December 31, Year 1?
A. 2,600,000 C. 360,000
B. 2,240,000 D. 0

31. H COMPANY factored P5,000,000 of accounts receivable. Control was

surrendered by the entity. The finance company assessed a fee of 5% and
retains a holdback equal to 10% of the accounts receivable. In addition,
the finance company charged 12% interest computed on a weighted
average time to maturity of the accounts receivable for 30 days. What is
the amount initially received from the factoring of accounts receivable?
A. 4,250,000 C. 4,700,685
B. 4,700,685 D. 4,200,685

32. Refer to the preceding problem. What total amount should be recognized
as loss on factoring?
A. 299,315 C. 250,000
B. 799,315 D. 0

33. I COMPANY factored P600,000 of accounts receivable on October 1,

Year 1. Control was surrendered by I COMPANY. The factor accepted the
accounts receivable subject to recourse for non-payment. The factor
assessed a fee of 3% and retains a holdback equal to 5% of the accounts
receivable. In addition, the factor charged 15% interest computed on a
weighted average time to maturity of 54 days. The fair value of the
recourse obligation is P9,000. What amount of cash was initially received?
A. 529,685 C. 547,685
B. 538,685 D. 556,685

34. On February 1, Year 1, J COMPANY factored receivables with a carrying

amount of P2,000,000 to K COMPANY. J COMPANY assesses a finance
charge of 3% of the receivables and retains 5% of the receivable. If the
factoring is treated as a sale, what amount of loss from sale should J
COMPANY report in its Year 1 statement of comprehensive income?
A. None C. 100,000
B. 60,000 D. 160,000

35. Refer to the preceding problem. Assume that J COMPANY retained

significant amount of risks and rewards of ownership and had a continuing
involvement on the factored financial asset, what amount of loss from
factoring should J COMPANY recognize?
A. None C. 100,000
B. 60,000 D. 160,000

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36. On January 1, Year 2, K COMPANY sold equipment with a carrying

amount of P4,800,000 in exchange for P6,000,000 noninterest bearing
note due January 1, Year 5. There was no established exchange price for
the equipment. The prevailing interest rate for this note was 10%. The
present value of 1 at 10% for three periods is 0.75. What amount should
be reported as gain on sale of equipment?
A. 1,200,000 gain C. 300,000 gain
B. 2,700,000 gain D. 300,000 loss

37. Refer to the preceding problem. What amount should be reported as

interest income for Year 2?
A. 600,000 C. 450,000
B. 500,000 D. 90,000

38. On December 31, Year 1, L COMPANY sold used equipment with carrying
amount of P2,000,000 in exchange for a noninterest bearing note
requiring ten annual payments of P500,000. The first payment was made
on December 31, Year 2. The market interest for similar note was 12%.
The present value of an ordinary annuity of 1 is 5.65 for ten periods and
5.33 for nine periods. What is the carrying amount of the note receivable
on December 31, Year 1?
A. 5,000,000 C. 2,665,000
B. 2,825,000 D. 4,500,000

39. On December 1, Year 1, N COMPANY gave O COMPANY a P200,000,

11% loan. The entity paid proceeds of P194,000 after the deduction of a
P6,000 nonrefundable loan origination fee. Principal and interest are due
in 60 monthly installments of P4,310, beginning January 1, Year 2. The
repayments yield an effective interest rate of 11% at a present value of
P200,000 and 12.4% at a present value of P194,000. What amount of
income from this loan should N report in Year 1?
A. 7,833 C. 2,005
B. 1,833 D. 0

40. On December 31, Year 1, Q COMPANY received two P2,000,000 notes

receivable from customers. On both notes, interest is calculated on the
outstanding principal balance at the annual rate of 3% and payable at
maturity. The first note, made under customary trade terms, is due in nine
months and the second note is due in five years. The market interest rate
for similar notes on December 31, Year 1 was 8%. The PV of 1 at 8% due
in nine months is 0.944 and the PV of 1 at 8% due in five years is 0.68. On
December 31, Year 1, what total carrying amount should be reported for
the two notes receivable?
A. 3,248,000 C. 3,360,000
B. 3,494,400 D. 3,564,000

41. R BANK granted a 10-year loan to a borrower in the amount of

P1,500,000 with the stated interest rate of 6%. Payments are due monthly
and are computed to be P16,650. The bank incurred P40,000 of direct
loan origination cost and P20,000 of indirect loan origination cost. In
addition, the bank charged the borrower a 4-point nonrefundable loan
origination fee. What is the carrying amount of the loan receivable to be
reported initially by the bank?
A. 1,440,000 C. 1,500,000
B. 1,480,000 D. 1,520,000

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42. On April 1, Year 1, S COMPANY discounted with recourse a nine-month,

10% note dated
January 1, Year 1 with face of P6,000,000. The bank discount rate is 12%.
The discounting transaction is accounted for as a conditional sale with the
recognition of contingent liability. On October 1, Year 1, the maker
dishonored the note receivable. The entity paid the bank the maturity
value of the note plus protest fee of P50,000. On December 31, Year 1,
the entity collected the dishonored note in full plus 12% annual interest on
the total amount due. What amount was received from the note
discounting on April 1, Year 1?
A. 6,063,000 C. 6,150,000
B. 6,450,000 D. 5,963,000

43. Refer to the preceding problem. What amount should be recognized as

loss on note discounting on April 1, Year 1?
A. 450,000 C. 87,000
B. 387,000 D. 63,000

44. Refer to the preceding problem. What is the total amount collected from
the customer on December 31, Year 1?
A. 6,450,000 C. 6,662,500
B. 6,500,000 D. 6,695,000

45. Refer to the preceding problem. If the discounting is secured borrowing,

what is included in the journal entry to record the transaction?
A. Debit loss on discounting P87,000
B. Credit liability for note discounted P6,063,000
C. Debit interest expense P87,000
D. Credit interest income P63,000

46. Q COMPANY loaned P7,500,000 to a borrower on January 1, Year 1. The

terms of the loan were payment in full on January 1, Year 5 plus annual
interest payment at 12%. The interest payment was made as scheduled
on January 1, Year 2. However, due to financial setbacks, the borrower
was unable to make the Year 3 interest payment. The bank considered
the loan impaired and projected the cash flows from the loan on
December 31, Year 3. The bank had accrued the interest on December
31, Year 2 but did not accrue interest for Year 3 due to the impairment of
the loan. The projected cash flows are:
Date of cash flows Amount projected
December 31, Year 4 500,000
December 31, Year 5 1,000,000
December 31, Year 6 2,000,000
December 31, Year 7 4,000,000
The PV of 1 at 12% is 0.89 for one period, 0.80 for two periods, 0.71 for
three periods and 0.64 for four periods.
What is the loan impairment loss to be recognized on December 31, Year
3?
A. 2,275,000 c. 5,225,000
B. 3,175,000 d. 2,175,000

47. Refer to the preceding problem. What is the interest income to be reported
by the bank in Year 4?
A. 627,000 c. 567,000

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Loans and Receivables

B. 900,000 d. 0

48. Refer to the preceding problem. What is the carrying amount of the loan
receivable on December 31, Year 4?
A. 5,352,000 c. 5,225,000
B. 4,725,000 d. 7,000,000

49. S COMPANY sold its inventory for P300,000 to T COMPANY on January

2, Year 1 and received a one-year note bearing an interest rate of 12% for
the full amount. On December 31, Year 1, S determined based on T’s
recent financial crisis that the amount of due on January 2, Year 2 will not
be collected and that only P210,000 of the principal will be collected with
some delay until the end of Year 3. What is the carrying amount of the
notes receivable on the Year 1 statement of financial position?
A. 167,412 c. 210,000
B. 187,500 d. 300,000

50. What is the amount of impairment loss to be recognized on the receivable

as of December 31, Year 1?
A. None c. 126,000
B. 90,000 d. 168,588

- End of discussion

“Excellence is the gradual result of always striving to do better.” Pat Riley

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Loans and Receivables

ANSWER KEY:
1. C 18. B 35. A
2. C 19. C 36. D
3. D
20. D 37. C
4. A
21. A 38. B
5. A
22. A 39. C
6. B
23. D 40. D
7. C
24. B 41. B
8. C
25. B 42. A
9. B
26. A 43. C
10. A
27. C 44. D
11. A
28. A 45. C
12. A
29. B 46. B
13. A
30. C 47. A
14. C
31. D 48. A
15. D
32. A 49. A
16. C
33. B 50. D
17. C
34. B

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