Since 1977

FAR OCAMPO/OCAMPO
FAR.2919-Loans and Receivables – Long Term

DISCUSSION PROBLEMS
1. Which statement is incorrect regarding measurement 4. On January 1, 2020, Santayana Company sold a
of receivables? special machine that had a cash price of P900,000.
a. Trade receivables are usually measured initially at The buyer paid P100,000 cash and signed a 4-year
their transaction price. note. The note specified that it would be paid off in
b. Receivables not measured initially at their four equal annual payments of P274,565 each starting
transaction price are measured initially at fair on December 31, 2020. The payments include 14%
value plus transaction costs that are directly interest. The carrying amount of the receivable on
attributable to the acquisition of the financial December 31, 2020 is
asset. a. P525,435 c. P701,435
c. Receivables are usually measured subsequently at b. P637,435 d. P725,435
amortized cost using the effective interest method.
d. The fair value of a long-term loan or receivable 5. On December 30, 2020, Chang Co. sold a machine to
that carries no interest can be estimated as the Door Co. in exchange for a noninterest-bearing note
future value of all cash receipts. requiring ten annual payments of P10,000. Door made
the first payment on December 30, 2020. The market
LECTURE NOTES: interest rate for similar notes at date of issuance was
Fair value of loans and receivables (L&R) 8%. Information on present value factors:

Short Term = Face value/Transaction price Present Value Present Value of Ordinary
Period of 1 at 8% Annuity of 1 at 8%
Long Term: 9 0.50 6.25
Interest bearing: 10 0.46 6.71
Realistic/Market rate = Face value/Transaction price In its December 31, 2020 statement of financial
Unrealistic/Not at market rate: position, what amount should Chang report as note
1) Cash price receivable?
2) PV of cash flows discounted using prevailing IR a. P45,000 c. P62,500
Non-interest bearing: b. P46,000 d. P67,100
1) Cash price
2) PV of cash flows discounted using prevailing IR Use the following information for the next two questions.

2. On December 31, 2020, Paoay Company received two On December 31, 2019, Sadanga Company finished
P5,000,000 notes receivable from customers in consultation services and accepted in exchange a
exchanged for consulting services rendered. On both promissory note with a face value of P300,000, a due date
notes, interest is calculated on the outstanding of December 31, 2022, and a stated rate of 5%, with
principal balance at the annual rate of 4% and payable interest receivable at the end of each year. The fair value
at maturity. The note from Emong Corporation, made of the services is not readily determinable and the note is
under customary trade terms, is due on October 1, not readily marketable. Under the circumstances, the note
2021 and the note from Bobads Corporation is due on is considered to have an appropriate imputed rate of
December 31, 2025. The market interest rate for interest of 10%.
similar notes on December 31, 2020 was 10%. The
6. The service revenue to be recognized for the year
compound interest factors to convert future value into
ended December 31, 2019 is
present value at 10% follow: present value of 1 due in
a. P300,000 c. P262,694
nine months, 0.93, and present value of 1 due in five
b. P273,953 d. P247,920
years, 0.62. At what amounts should these two notes
receivable be reported in Paoay’s December 31, 2020
7. The carrying amount of the note receivable as of
statement of financial position?
December 31, 2020 is
Emong Bobads a. P300,000 c. P262,694
a. P4,650,000 P3,100,000 b. P273,953 d. P247,920
b. P5,000,000 P3,720,000
c. P5,000,000 P3,100,000
d. P4,836,000 P3,720,000 Use the following information for the next two questions.

3. The amortized cost of a financial asset is the amount On January 1, 2020, Comforter Company sold equipment
at which it is measured at initial recognition with a carrying amount of P800,000 to Cold Company. As
a. Minus the principal repayments payment, Cold gave Comforter Company a P1,200,000
b. Plus or minus the cumulative amortization using note. The note bears an interest rate of 5% and is to be
the effective interest method of any difference repaid in three annual installments of P400,000 (plus
between the initial amount and the maturity interest on the outstanding balance). The first payment
amount was received on December 31, 2020. The prevailing rate
c. Adjusted for any loss allowance of interest for a note of this type at January 1 was 10%
d. All of these and 9% on December 31.

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EXCEL PROFESSIONAL SERVICES, INC.

8. The gain on sale of equipment is 13. The effective interest rate on this loan is
a. P400,000 c. P109,735 a. P14% c. P12%
b. P297,348 d. P102,652 b. P13% d. P11%

9. The interest income to be recognized in 2021 is 14. The carrying amount of the loan receivable on
a. P 40,000 c. P 74,709 December 31, 2020 is
b. P 69,587 d. P109,735 a. P4,000,000 c. P3,756,920
b. P3,807,730 d. P3,711,520
SOLUTION GUIDE:
15. When the contractual cash flows of a financial asset
Prin- Int. PVF @ PV,
are renegotiated or otherwise modified and the
Date cipal (5%) Total 10% 1/1/20
renegotiation or modification does not result in the
12/31/20 400T 60T 460T 0.9091 418,186 derecognition of that financial asset in accordance with
PFRS 9, an entity shall
12/31/21 400T 40T 440T 0.8264 363,616 a. Recalculate the gross carrying amount of the
12/31/22 400T 20T 420T 0.7513 315,546 financial asset as the present value of the
renegotiated or modified contractual cash flows
1.2M 1,097,348 that are discounted at the financial asset’s original
effective interest rate.
10. What is effective interest rate? b. Recognize a modification gain or loss in profit or
a. The rate that exactly discounts estimated cash loss.
receipts through the expected life of the financial c. Both a and b.
asset to the gross carrying amount of a financial d. Neither a nor b.
asset.
b. The rate that exactly discounts estimated cash 16. Grey Company holds a note receivable of P800,000.
receipts through the expected life of the financial The effective interest rate is 8%. Grey agreed to the
asset to the amortized cost of a financial asset. following modification of terms on December 31, 2020:
c. The rate that exactly discounts the estimated • Reduced the principal to P600,000.
future cash payments or receipts through the • Extended the maturity date to December 31, 2022.
expected life of the financial asset to the amortized • Annual interest of P40,000 is to be paid to Grey on
cost of a financial asset that is a purchased or December 31, 2021 and 2022.
originated credit-impaired financial asset. The present value of the interest and principal
d. The rate that an entity would incur to borrow over payments to be received by Grey Company discounted
a similar term, and with a similar security, the for two years at 8% is P585,734.
funds necessary to purchase an asset.
As a result of the modification of the contractual cash
11. When calculating the effective interest rate, an entity flows, Grey shall
shall include a. Adjust the gross carrying amount of the note
a. All fees and points paid or received between receivable to P585,734.
parties to the contract that are an integral part of b. Recognize modification loss of P214,266 in 2020.
the effective interest rate. c. Recognize interest income of P46,859 in 2021.
b. All other premiums or discounts. d. Do all of these.
c. Incremental costs that are directly attributable to
the acquisition, issue or disposal of a financial
asset or financial liability. 17. PFRS 9 impairment requirements do not apply to
d. All of these. a. Contract assets under PFRS 15.
b. Financial assets that are debt instruments that are
Use the following information for the next three questions. measured at amortized cost.
c. Financial assets that are debt instruments
Money Bank granted a loan to a borrower on January 1, measured at fair value through other
2020. The interest rate on the loan is 10% payable comprehensive income.
annually starting December 31, 2020. The loan matures in d. Financial assets that are debt instruments
five years on December 31, 2024. The data related to the measured at fair value through profit or loss.
loan are:
Principal amount P4,000,000 18. The impairment requirements in PFRS 9 are based on
Direct loan origination cost 61,520 a. An expected credit loss model
Indirect loan origination cost 26,400 b. An incurred loss model
Origination fee received from borrower 350,000 c. Either a or b
d. Neither a nor b
12. Origination fees may include compensation for
activities such as: 19. In applying the PFRS 9 impairment requirements, an
I. Evaluating the borrower’s financial condition entity needs to follow
II. Evaluating and recording guarantees, collateral a. The general approach
and other security arrangements b. The simplified approach
III. Negotiating the terms of the instrument c. The purchased or originated credit-impaired
IV. Preparing and processing documents and closing approach
the transaction d. Any of the above

a. I, II, III and IV

b. I, II and III only
c. I and II only
d. II and III only

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EXCEL PROFESSIONAL SERVICES, INC.

LECTURE NOTES: a. The expected credit losses that result from all
possible default events over the expected life of a
The general approach
financial instrument.
b. The weighted average of credit losses with the
respective risks of a default occurring as the
weights.
c. All cash shortfalls discounted at the original
effective interest rate (or credit-adjusted effective
interest rate for purchased or originated credit-
impaired financial assets).
d. The amount by which the carrying amount of an
asset exceeds its recoverable amount.

24. To help enable an entity’s assessment of significant

increases in credit risk, PFRS 9 provides which of the
following operational simplifications?
a. A ‘low credit risk’ threshold equivalent to
‘investment grade’.
b. A more than 30 days past due rebuttable
presumption.
c. Use of a change in the 12-month risk of a default
20. Which statement is incorrect regarding the general
as an approximation for change in lifetime risk.
approach of applying the impairment requirements of
d. All of the above.
PFRS 9?
a. At each reporting date, an entity recognizes a loss
25. Evidence that a financial asset is credit-impaired
allowance based on either 12-month ECLs or
include observable data about the following events:
lifetime ECLs, depending on whether there has
I. Significant financial difficulty of the issuer or
been a significant increase in credit risk on the
obligor.
financial instrument since initial recognition.
II. A breach of contract, such as a default or past
b. If the credit risk increases significantly and the
due event.
resulting credit quality is not considered to be low
III. The lender of the borrower, for economic or
credit risk, full lifetime expected credit losses are
contractual reasons relating to the borrower’s
recognized.
financial difficulty, having granted to the
c. When the entity has no reasonable expectations of
borrower a concession that the lender would not
recovering the financial asset, then the gross
otherwise consider.
carrying amount of the financial asset should be
IV. It is becoming probable that the borrower will
directly reduced in its entirety.
enter bankruptcy or other financial
d. Increases in the loss allowance balance are
reorganization.
recognized in profit or loss as an impairment loss
V. The disappearance of an active market for that
but decreases are not recognized.
financial asset because of financial difficulties.
VI. The purchase or origination of a financial asset at
21. If, at the reporting date, the credit risk on a financial
a deep discount that reflects the incurred credit
instrument has not increased significantly since initial
losses.
recognition
a. An entity shall not recognize a loss allowance for a. I, II, III, IV, V and VI.
that financial instrument. b. I, II, IV and VI only.
b. Interest revenue is calculated based on the c. I, II, III, IV and V only.
amortized cost of the financial asset. d. I, IV and VI only.
c. An entity shall measure the loss allowance for that
financial instrument at an amount equal to full Use the following information for the next two questions.
lifetime expected credit losses.
d. An entity shall measure the loss allowance for that Entity X provided the following information regarding its
financial instrument at an amount equal to 12- Notes Receivable at December 31, 2020:
month expected credit losses. 12-
Lifetime month Credit risk
22. What are 12-month expected credit losses? Note Gross CA ECL ECL assessment
a. The portion of lifetime expected credit losses that A P3,000,000 P300,000 P50,000 Low credit
represent the expected credit losses that result risk
from default events on a financial instrument that B 2,000,000 400,000 40,000 31 days past
are possible within the 12 months after the due
reporting date. C 1,000,000 500,000 60,000 Credit-
b. These are not the expected cash shortfalls over the impaired
next twelve months—instead, it is the effect of the
entire credit loss on an asset weighted by the 26. The loss allowance that Entity X should recognize at
probability that this loss will occur in the next 12 December 31, 2020 is
months a. P1,200,000 c. P900,000
c. These are also not the credit losses on assets that b. P 950,000 d. P590,000
are forecast to actually default in the next 12
months. 27. Assuming that the effective interest rate on all notes is
d. All of the above. 10%, the interest income to be recognized in 2021
profit or loss is
23. As defined in PFRS 9, lifetime expected credit losses a. P600,000 c. P505,000
are b. P550,000 d. P480,000

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EXCEL PROFESSIONAL SERVICES, INC.

Use the following information for the next four questions. At December 31, 2020, because of the improvement in the
credit rating of Ms. Leading, Entity X reassessed the
The following information pertains to Lender A’s loan
collectibility of the note and now expects to collect
portfolio at December 31, 2020:
P900,000 from Ms. Leading at maturity date.
• Lender A considers all loans over 90 days past due to
be credit-impaired based on historical experience with 32. The impairment loss to be recognized in 2019 is
recovering the associated debt. a. P572,920 c. P332,740
• The aging of Lender A’s loans on December 31, 2020 b. P524,900 d. P284,720
follows:
Current P1,400,000 33. The impairment gain to be recognized in 2020 is
More than 30 days past due 75,000 a. P524,900 c. P239,150
More than 60 days past due 100,000 b. P276,170 d. Nil
More than 90 days past due 125,000
Total P1,700,000 34. Which statement is incorrect if an entity revises its
• Lender A monitors certain loans more closely on an estimates receipts (excluding modifications in
individual basis given their significance and unique accordance with PFRS 9 paragraph 5.4.3 and changes
characteristics. These loans are not included in the in estimates of expected credit losses)?
P1,700,000 loan portfolio. The following information is a. The entity shall adjust the gross carrying amount
available without undue cost or effort on an individual of the financial asset to reflect actual and revised
loan basis: estimated contractual cash flows.
b. The entity recalculates the gross carrying amount
Past Due PV of Expected
of the financial asset as the present value of the
Loan Amount Status Future Cash Flows
estimated future contractual cash flows that are
1 P200,000 90 days P180,000
discounted at the financial instrument’s original
2 150,000 Current Not calculated
effective interest rate.
3 50,000 60 days 37,000 c. The entity shall recognize the adjustment in the
Other information: gross carrying amount in profit or loss as income
Loan 1 – The borrower has filed for bankruptcy. or expense.
Loan 2 – None d. None, all the statements are correct.
Loan 3 – The borrower recently lost his job due to an
economic recession and was granted a 35. Which of the following describes the ‘simplified
concession to skip payments. approach’ of accounting for impairment of financial
• Additional information taking into account historical assets?
information, current conditions and forward- looking a. An entity shall not recognize a loss allowance.
information, including actual loss experience and b. An entity shall always measure the loss allowance
recoveries from the sale of collateral, is as follows: at an amount equal to lifetime expected credit
Probability of default in the next 12 months 2% losses.
Lifetime probability of default c. An entity shall only recognize the cumulative
Credit-impaired loans 100% changes in lifetime expected credit losses since
Not credit-impaired loans 5% initial recognition as a loss allowance.
Loss given default on all loans 25% d. An entity shall recognize a loss allowance if, and
only if, there is objective evidence of impairment.
QUESTIONS:
36. An entity is required to apply the ‘simplified approach’
28. The total loans classified under Stage 1 is for trade receivables or contract assets that result from
a. P1,670,000 c. P1,550,000 transactions within the scope of PFRS 15
b. P1,625,000 d. P1,400,000 a. That do not contain a significant financing
component in accordance with PFRS 15.
29. The total loans classified under Stage 2 is
b. When the entity applies the practical expedient for
a. P235,000 c. P100,000
contracts that have maturity of one year or less in
b. P175,000 d. P 75,000
accordance with PFRS 15.
30. The total loans classified under Stage 3 is c. Either a or b.
a. P595,000 c. P375,000 d. Neither a nor b.
b. P495,000 d. P325,000
37. Which statement is incorrect regarding purchased or
31. The total loss allowance to be recognized at December
originated credit-impaired financial assets?
31, 2020 is
a. An entity shall only recognize the cumulative
a. P73,438 c. P74,938
changes in lifetime expected credit losses since
b. P74,188 d. P75,688
initial recognition as a loss allowance for purchased
or originated credit-impaired financial assets.
b. At each reporting date, an entity shall recognize in
Use the following information for the next two questions.
profit or loss the amount of the change in lifetime
On December 31, 2017, Entity X acquired Ms. Leading expected credit losses as an impairment gain or
Corporation’s P1,000,000 notes for P927,880. The market loss.
interest rate at that time was 12%. The stated interest c. An entity shall recognize favorable changes in
rate was 10%, payable annually. The notes mature in five lifetime expected credit losses as an impairment
years and classified as financial asset at amortized cost. gain, even if the lifetime expected credit losses are
less than the amount of expected credit losses that
At December 31, 2019, the note is considered credit- were included in the estimated cash flows on initial
impaired. Entity X determined that it was probable that the recognition.
issuer would pay back only P600,000 of the principal at d. None of the above.
maturity.
- now do the DIY drill -

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EXCEL PROFESSIONAL SERVICES, INC.

DO-IT-YOURSELF (DIY) DRILL

1. On January 1, 2020, Boy Company sold a machine to 6. On January 1, 2020, Athens Company sold equipment
Bawang Company. Bawang signed a non-interest- with a carrying amount of P500,000 to Greece
bearing note requiring payment of P30,000 annually Company. As payment, Greece gave Athens Company
for seven years. The first payment was made on an P800,000 note. The note bears an interest rate of
January 1, 2020. The prevailing rate of interest for 6% and is to be repaid in four annual installments of
this type of note at date of issuance was 10%. P200,000 (plus interest on the outstanding balance).
Information on present value factors is as follows: The first payment was received on December 31,
Present value of 2020. The market price of the equipment is not
Present value of ordinary annuity of reliably determinable. The prevailing rate of interest
Periods 1 at 10% 1 at 10% for notes of this type is 12%. The total income to be
6 .56 4.36 recognized in 2020 profit or loss is
7 .51 4.87 a. P288,197 c. P203,747
b. P251,747 d. P348,000
Boy should record the sale in January 2020 at
a. P107,100 c. P130,800 7. Payla Company borrowed from Gold Bank under a 10-
b. P146,100 d. P160,800 year loan in the amount of P5,000,000 with interest
rate of 6%. Payments are due monthly and are
computed to be P55,500. Gold Bank incurs P200,000
Use the following information for the next two questions. of direct loan origination cost and P50,000 of indirect
loan origination cost. In addition, Gold Bank charges
On December 31, 2020, Wolfgang Corporation sold for
Payla a 5-point nonrefundable loan origination fee.
P50,000 an old machine having an original cost of P90,000
Gold Bank, the lender, has carrying amount of
and a carrying amount of P40,000. The terms of the sale
a. P5,200,000 c. P4,750,000
were as follows: 1) P10,000 down payment; and 2)
b. P5,000,000 d. P4,950,000
P20,000 payable on December 31 each of the next two
years.
8. On December 1, 2020, Money Co. gave Home Co. a
The agreement of sale made no mention of interest; P200,000, 11% loan. Money paid proceeds of
however, 9% would be a fair rate for this type of P194,000 after the deduction of a P6,000
transaction. nonrefundable loan origination fee. Principal and
interest are due in 60 monthly installments of P4,310,
2. How much should be recognized as gain on sale of
beginning January 1, 2021. The repayments yield an
machine?
effective interest rate of 11% at a present value of
a. P10,000 c. P5,182
P200,000 and 12.4% at a present value of P194,000.
b. P14,818 d. P 0
What amount of income from this loan should Money
report in its 2020 profit or loss?
3. How much should be recognized as interest income in
a. P 0 c. P2,005
2021 related to above transaction?
b. P1,833 d. P7,833
a. P3,166 c. P4,066
b. P2,415 d. P 0
9. On December 31, 2018, Quite Chubby borrowed from
Piggy Bank, signing a 5-year non-interest-bearing note
4. Boy Company sold a machine to Golden Corporation on
for P100,000. The note was issued to yield 10%
January 1, 2020, for which the cash sales price was
interest. Unfortunately, during 2020, Chubby began to
P379,100. Golden entered into an installment sales
experience financial difficulty. As a result, at
contract with Boy, calling for annual payments of
December 31, 2020, Piggy Bank determined that it
P100,000 for five years, including interest at 10%.
was probable that it would receive back only P75,000
The first payment was due on December 31, 2020.
at maturity. The market rate of interest on loans of
How much interest income should be recorded by Boy
this nature is now 11%. How much should be
in 2021?
recognized as impairment loss in 2020?
a. P27,910 c. P31,701
a. P11,952 c. P20,292
b. P37,910 d. P50,000
b. P18,782 d. P 5,743
5. On December 31, 2019, Bottle Company sold used
10. Which statement is correct regarding the general
equipment to Glass Corp. and received a noninterest-
approach of applying the impairment requirements of
bearing note requiring payment of P50,000 annually
PFRS 9?
for ten years. The first payment is due December 31,
a. When the entity has no reasonable expectations of
2020, and the prevailing rate of interest for this type of
recovering the financial asset, full lifetime expected
note at date of issuance is 12%. Present value factors
credit losses are recognized.
are as follows:
b. An entity shall always measure the loss allowance
PV of 1 at 12% for 10 periods 0.3220 at an amount equal to lifetime expected credit
PV of ordinary annuity of 1 at 12% for losses.
10 periods 5.6502 c. An entity shall only recognize the cumulative
PV of annuity due of 1 at 12% for 10 changes in lifetime expected credit losses since
periods 6.3282 initial recognition as a loss allowance.
d. Even if the credit risk increases significantly and
In its December 31, 2020 statement of financial
the resulting credit quality is not considered to be
position, Bottle should report the carrying amount of
low credit risk, interest revenue is still calculated
the note at
based on the gross carrying amount of the
a. P316,410 c. P282,510
financial asset.
b. P304,380 d. P266,410
J - end of FAR.2919 - J

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