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Ateneo de Naga University College of Business and Accountancy Accountancy Department Summary of the Account

Ateneo de Naga University College of Business and Accountancy Accountancy Department

Summary of the Account titles

In Partial Fulfillment of the Requirements in Auditing and Assurance Services II

(ACCM451)

Submitted by:

Jaenelle T. Saldivar

Submitted to:

Dr. Marcial C. Paglinawan, CPA

March 15,2019

Cash and Cash Equivalent

CASH

 

Definition of Cash

 

Money

The standard medium of exchange in business transactions. It refers to the currency and coins which are in circulation and legal tender.

 

Accounting

 

Money and any other negotiable instrument that is payable in money and acceptable by the bank for deposit and immediate credit.

PAS 1, paragraph 66: “an entity shall classify an asset as current

when

the

asset

is cash

or a

cash equivalent unless it is

restricted from being exchanged or used to settle a liability for at least twelve months after the end of the reporting period.”

An item must be restricted in use.

 

Cash must be readily available in the payment of current obligations and not be subject to any restrictions, contractual or otherwise.

Composition of Cash

Composition of Cash

Cash on hand

Cash in bank

Cash fund

Undeposited currency and coins

Petty cash fund

Includes undeposited cash collections and other awaiting deposit such as customer’s checks, cashier’s or manager’s checks, traveler’s checks, bank overdrafts and money orders.

Includes demand deposit or checking account and saving deposit which are unrestricted as to withdrawal.

Set aside for current purposes such as petty cash fund, payroll fund and dividend fund, travel fund, interest fund.

fund, payroll fund and dividend fund, travel fund, interest fund. Cash items kept on hand to

Cash items kept on hand to pay for minor expenditures.

 

Amounts on deposit in checking

 

Demand deposits

 

and

savings

account,

 

respectively.

 
 

Are checks

payable

to

the

Undeposited negotiable checks

 

company or bearer but not yet

presented

to

the

bank

for

 

payment.

Foreign currencies

 

Converted to their peso values are also included in the cash.

 

Bank drafts

Are commitments by banking institutions to advance funds on demand by the party to whom the draft was directed.

 

Are

similar

financial

instruments to bank drafts but

 

Money orders

 

are drawn generally

from

 

authorized post

offices

or

other financial institutions.

Other

short-term

funds

for

 

current operations.

 

CASH EQUIVALENTS

Definition of Cash Equivalents

PAS 7, paragraph 6: as 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.

PAS 7 : “only highly liquid investments that are acquired three months before maturity can qualify as cash equivalents”

Examples of cash equivalents

Three-month BSP treasury bill

Three-year BSP treasury bill purchased three months before date of maturity

Three-month time deposit

Three-month money market instrument

Preference shares with specified redemption date and acquired three months before redemption date. *date of purchases : should be three months or less before maturity

Equity securities or trading securities: cannot qualify as cash equivalents because shares do not have a maturity date.

 

Face amount

Cash in foreign currency is measured at the current exchange rate.

Valuation of cash in the balance sheet

Cash in bank or financial institutions having financial difficulty or in bankruptcy should be shown at its estimated realizable or recoverable value.

Items that are not included in cash and cash equivalents

Reason

Foreign bank account (restricted)

Other noncurrent assets

Postage stamps

- Other current assets (supplies) - Prepaid expenses

Employee’s postdated check

Trade and other receivables

I.O.U from controller’s sister/ a company officer

Trade and other receivables

Credit memo from a vendor for a purchase return

Deduction from accounts payable and included in the computation of cost of sales.

Not-sufficient-funds check

Trade and other receivables

NSF check drawn by the manager

Nontrade receivables

Petty cash fund (expense)

Operating expense

Travel advances

Trade and other receivables, but if not reimbursed, this should be charged to “prepaid expense”

Cash fund for retirement of long term debt

Noncurrent investments

Bank overdraft

Current liabilities (short term borrowings) , however, a bank overdraft that is repayable on demand that forms part of an entity’s cash management should

 

be included as a component of cash and cash equivalent

 

If

the

maturity

of

the

instrument is three months or

Certificates of deposit

less at the time of purchase,

this will

be

shown as

cash

 

equivalents. Otherwise, it will

be

shown

as

short-term

investments.

 

Customer’s note receivable

 

Notes receivable

 

Reconciled balance (negative)

 

Current liabilities

 

Bond sinking fund

Long term investments, (as fund set aside for non-current purposes)

 

Temporary investments

 
 

o Time

deposit :

may

only be included as

cash

item

if

the

original

term

is

Treasury bills; commercial papers and money market funds is more than three months

three months or less.

o Bad

debts

and

depreciation expenses : are non-

 

cash

transactions;

therefore, the cash

account

 

is

not

affected

by

the

amount of bad debts

and depreciation.

 

FINANCIAL STATEMENT PRESENTATION

Shown as the first item among the current assets, as one-line item but the details should be disclosed in the notes to financial statements.

INVESTMENT OF EXCESS CASH

If the term is three months or less, it is classified as cash equivalents and therefore included in the caption “cash and cash equivalents”

If the term is more than three months but within one year, it is classified as short-term financial assets or temporary investments and presented separately as current assets.

If the term is more than one year, such investments are classified as noncurrent or long-term investments

o However, if such investments become due within one year

reporting period, they are

from

the

end

of

the

reclassified as current or temporary investments.

FOREIGN CURRENCY

Cash in foreign currency should be translated to Philippine pesos using the current exchange rate.

If not restricted : “cash”

If restricted:

o If material noncurrent asset and the restriction clearly indicated.

CASH FUND FOR A CERTAIN PURPOSE

If the cash fund is set aside for use in current operations or for the payment of current obligation : current asset and part of cash and cash equivalents

o Example:

Petty cash fund

Payroll fund

Travel fund

Interest fund

Dividend fund

Tax fund

If the cash fund is set aside for noncurrent purpose or payment of noncurrent obligations : Long term investment

o Example:

Sinking fund

Preference share redemption fund

Contingent fund

Insurance fund

Fund for acquisition or construction of property, plant and equipment.

BANK OVERDRAFT

When the cash in bank account has a credit balance, it is said to be an overdraft

o The credit balance in the cash in bank account results from the issuance of checks in excess of the deposits.

A bank overdraft is classified as a current liability and should not be offset against other bank accounts with debit balances

However, when the entity maintains two or more accounts in one bank and one account results in overdraft, such overdraft may be offset against the other bank account with a debit balance.

COMPENSATING BALANCE

The minimum checking or demand deposit account balance that must be maintained in connection with a borrowing arrangement with a bank.

Legally restricted because of a formal:

o

Short-term : current asset, and should be included in the caption on “cash and cash equivalents”

o

Long-term : noncurrent asset either in the investments or other assets sections of the balance sheet

Not legally restricted because of an informal:

o Should be included as part of the cash items on deposit.

In the absence of any information, compensating balance is always considered not available for an unrestricted use.

PETTY CASH FUND

1. Money set aside to pay small expenses which cannot be paid conveniently by means of check.

2 METHODS OF HANDLING THE PETTY CASH

 

o

Imprest System is a system of control of cash which

requires

that

all

cash

receipts should

be

deposited intact and all cash disbursement should be made by means of check.

o

Major purpose:

to

effectively control cash

disbursement

o

Debited : when the fund is created and when the size of the fund is increased.

Imprest fund system

o

are petty cash account only to increase or decrease the size of the fund or to adjust the balance if not replenished at year end.

Entries

to the

made

o

The

internal control

features specific to petty

cash.

o

The reimbursement of the

petty cash fund should be

credited to

the

cash

account.

 

o

The checks

drawn

to

Fluctuating Fund System

replenish the fund does not necessarily equal the petty cash disbursement.

2. Each disbursement from petty cash should be supported by a petty cash voucher.

3. Cash over and short account is debited : when the petty cash

fund proves out short.

Bank Reconciliation

3 Kinds of Bank Deposits

 
 

- Current

account

or

checking account

or

Demand Deposit

commercial deposit where deposits are covered by deposit slips and where funds are withdrawable on demand by drawing checks against the bank. - Non-interest bearing

Saving Deposit

- Interest bearing

 
 

- Interest bearing

 

- Evidenced

by

a

formal

Time Deposit

agreement embodied in an instrument : “certificate of deposit”

Bank reconciliation

- A statement which brings into agreement the cash balance per book and cash balance per bank.

- It is usually prepared monthly because the bank provides the depositor with the bank statement at the end of every month.

RECONCILING ITEMS

 

Book Reconciling Items

 

- Refer to items not representing deposits credited by the bank to the account of the depositor but not yet recorded by the depositor as cash receipts.

- Effect : “increase in the bank balance”

- Examples:

Notes receivable

collected by bank in
collected by bank in

collected by bank in

Credit Memos   favor of the depositor

Credit Memos

Credit Memos
 

favor of the depositor

 

and credited to the account of the depositor.

Proceeds of bank loan credited to the account of the depositor.

Matured time deposits transferred by the bank to the current account of the depositor.

 

- Refer to items not representing 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.

 

Debit Memos

- Effect : “decreasing the bank balance”

 

- Examples:

NSF or No Sufficient Fund Checks

Checks deposited but returned by the bank balance because of insufficiency of fund.

Also known as DAIF or drawn against insufficient fund

Defective Checks

known as DAIF or drawn against insufficient fund  Defective Checks Commented [Es1]: Lahat lang ‘to

Commented [Es1]: Lahat lang ‘to kay valix

   

Checks deposited but returned by the bank because of technical defects such as absence of signature or countersignature, erasures not countersigned, mutilated checks, conflicts between amount in words and amount in figures.

 

Bank Service Charge

 

Bank charges for:

 

- Interest

- Collection

- Checkbook

- penalty

 

Reduction of Loan

 

Pertains to amount deducted from the current account of the depositor in payment for loan which the depositor owes to the bank and which has already matured.

 

Deposit in Transit

-

Collections already recorded by the depositor as cash

receipts but not yet reflected on the bank statement.

-

Example:

 
 

Collections already forwarded to the bank for deposit but too late to appear in the bank statement.

Undeposited collections or those still in the hands of the depositor. In effect, these are cash on hand awaiting delivery to the bank for deposit.

-

Outstanding Checks

-

Checks already recorded by the depositor as cash disbursement but not yet reflected on the bank statement.

-

Example:

Checks drawn and already given to payees but not yet presented for payment.

Certified Checks

Is one where the bank has stamped on its face the word ”accepted” or ”certified” indicating sufficiency of fund.

It should be deducted from the total outstanding checks (if included therein) - Reason: No longer outstanding for bank reconciliation purposes.

-

Proforma Reconciliation

Adjusted Balance Method

 
 

Bank balance Add: Deposit in transit

XX

Book balance Add: Credit Memos Total Less: Debit Memos Error (add/deduct)

XX

XX

XX

XX

Total Less: Outstanding Checks Error (add/deduct)

XX

XX

XX

XX

Adjusted book balance XX

XX

Adjusted bank balance XX

Under this method:

Credit Memos are always added to the book balance.

Debit Memos are always deducted from the book balance.

Deposit in Transit are always added to the book balance.

Outstanding Checks are always deducted from the book balance.

Explanation:

Credit Memos already increased the bank balance but have no effect on the book balance because the credit memos are not yet recorded by the depositor.

Debit Memos already decreased the bank balance but have no effect on the book balance because the debit memos are not yet recorded by the depositor.

Deposit in Transit already increased the book balance but have no effect on the bank balance because the deposits are not yet recorded by the bank.

Outstanding Checks already decreased the book balance but have no effect on the bank balance because the checks are not yet paid by the bank.

Proof of Cash

BOOK BALANCE

BANK BALANCE

Book balance,beg Add: Book debits During the month

Total Less: Book Credits During the month Balance per book, end

XX

Bank balance,beg Add: Bank Credits During the month

Total Less: Bank Debits During the month Balance per bank, end

XX

XX

XX

XX

XX

XX

XX

XX

XX

T-ACCOUNT:

Cash In Bank

Balance-Beg

XX

Book Credits

XX

Book Debits

XX

Balance- End

XX

Company Book

Bank Debits

XX

Balance- Beg

XX

Balance-End

XX

Bank Credits

XX

Definition:

Book Debits refer to cash receipts or all items debited to the cash in bank account.

Book Credits refer to cash disbursement or all items credited to the cash in bank account.

Bank Credits refer to all items credited to the account of

the depositor which include deposits acknowledged by bank and credit memos.

o Bank credits are assumed to be deposits acknowledged by bank.

Bank Debits refer to all items debited to the account of the

depositor which include checks paid by bank and debit memos.

o Bank debits are assumed to be checks paid by bank.

COMPUTATION OF:

DEPOSIT IN TRANSIT

OUTSTANDING CHECKS

DIT,beg Add: Cash Receipts Deposited during the month Total deposits to be acknowledged by bank Less: Deposits acknowledged by bank during the month DIT, end

XX

OC,beg Add: Checks drawn by depositor during the month Total checks to be paid by bank Less: Checks paid By bank during the month OC, end

XX

XX

XX

XX

XX

XX

XX

XX

XX

 

Trade and Other Receivables

Definition:

A financial assets that represent a contractual right to receive cash or another financial asset from another entity.

Classification:

It is accordance with PAS 1, Presentation of Financial Statements, paragraph 66, which states:

“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 twelve months after the reporting period.”

Trade Receivables

 

Non-trade Receivables

Refer to claims arising

Represent claims arising from sources other than the sale of merchandise or services in the ordinary course of business.

from sale

of

merchandise or services

in the ordinary course of business.

It includes:

 

- Accounts Receivable

Classification:

- Notes Receivable

 

“Are expected to be realized in cash within

one year,

Classification:

“Are

expected to

be

realized

in

 

the

length of

the

cash

within the

operating

cycle

normal

operating

notwithstanding, current asset.

cycle or one year,

whichever

is

If collectible beyond one year, as noncurrent assets

longer,

current

asset.

   

(more

than

one

year).

Examples:

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, such advances or receivables are classified as noncurrent assets.

Advances to affiliates are usually treated as long-term investment.

Advances to supplier for the acquisition of merchandise are current assets.

Subscription receivable are current assets if collectible within one year. Otherwise, subscription receivable should be shown preferably as a deduction from subscribed share capital.

Creditor’s accounts may have debit balances as a result of overpayment or returns and allowances. These are classified as current assets. o If the debit balances are not material, an offset

may be made against the creditors’ accounts with credit balances and only the net accounts payable may be presented.

Special deposits on contract bids normally are classified as noncurrent assets because such deposits are likely to remain outstanding for a considerable long period of time. o The deposits that are collectible currently should be classified as current assets.

Accrued income such dividends receivable, accrued rent income, accrued royalties income and accrued interest on bond investment are usually classified as current asset.

Claims receivable such as claims against common

carriers for losses or damages, claim for rebates and tax refunds, claims from insurance entities,

carriers for losses or damages, claim for rebates and tax refunds, claims from insurance entities, are normally classified as current asset.

The details of the total trade and other receivables will be disclosed in the notes to financial statements.

Initial measurement of receivables

PFRS 9, paragraph 5.1.1, Recognition : Initially at fair value plus transaction costs that are directly attributable to the acquisition

The fair value of a financial asset is usually the transaction price, meaning, and the fair value of the consideration given.

Short-term receivables : Fair value = Face Value or original invoice amount

o Cash flow relating to short-term receivables are not discounted because the effect of discounting is usually immaterial.

Long-term Receivables

o

“interest bearing” : Fair Value = Face Value (recorded)

o

Non-interest bearing”: Fair Value = Present Value (recorded) of all future cash flows discounted using the prevailing market rate of interest for similar receivables.

ACCOUNTS RECEIVABLE

Accounts Receivable open accounts arising from the sale of goods and services in the ordinary course of business and not supported by promissory notes.

Other names:

o

Customers’ accounts

o

Trade debtors

o

Trade Accounts Receivable

Measurement of Accounts Receivable:

o

Initially : Face Value or Original invoice Amount

o

Subsequently: Net Realizable Value

The amount of cash expected to be collected or the estimated recoverable amount.

An amortized cost

Customers’ credit balances

- Are credit balances in accounts receivable resulting from overpayments, returns and allowances, and 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 in which case only the net accounts receivable may be presented.

Net Realizable Value

- 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.

- Based from a principle: Assets shall not be carried at above their recoverable amount.”

- Deductions when estimating the net receivable value of trade accounts receivable

o Allowance for freight charge

Terms:

a. FOB Destination FOB up to the point of destination. The seller will pay for the freight charges up to the buyer’s destination.

In general: shouldered by Seller

o

Prepaid – “seller ang nagbayad”

o

Collect – “ibawas sa payable”

b. FOB Shipping Point

FOB up to the point of shipping point. It will be shouldered by the seller up to the shipping point before loading to a common carrier. Once the goods are loaded, the buyer will pay for the freight charges.

In general: shouldered by Buyer

c. Freight Collect

o

Prepaid – “seller ang nagbayad”

o

Collect – “ibawas sa payable”

The buyer is to pay the freight when the merchandise arrives.

FOB Destination: the buyer can deduct the cost of the freight when paying the invoice.

d. Freight Prepaid

The seller has paid the freight on the goods at the time of shipment.

FOB Shipping Point: the seller can collect

the cost of the freight from the buyer.

Accounting:

Record the Sale

Record the collection within the discount period

Accounts Receivable Freight Out Sales Allowance for Freight charge

XX

XX

 

Cash Sales Discount Allowance for freight charge Accounts Receivable

XX

XX

XX

XX

XX

 

XX

o

Allowance for Sales Return

 

The measurement of accounts receivable 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.

 

Recognize the Probable Return

 

Sales Return Allowance for sales return

XX

XX

o

Allowance for Sales Discount

 

Record the expected sales discount

 

Sales Discount Allowance for sales discount

XX

XX

Sales Discount

A reduction from an invoice price by reason of prompt payment.

Cash Discount or Sales Discount : part of the seller

Purchase Discount : part of the buyer

 

Methods of Recording Credit Sales:

GROSS METHOD

 

NET METHOD

- Record

the

full

- Deduct

the

amount even if it has a discount

discount.

Journal Entry

 

GROSS METHOD

Sale

Accounts Receivable Sales

XX

XX

Collection made within discount period

Cash

XX

Sales Discount

XX

Accounts Receivable

XX

Collection made beyond discount period

Cash

XX

Accounts Receivable

XX

 

NET METHOD

Sale

Accounts Receivable Sales

XX

XX

Collection made within discount period

Cash

XX

Accounts Receivable

XX

Collection made beyond discount period

Cash

XX

Accounts Receivable Sales Discount forfeited

 

XX

XX

*Sales Discount forfeited account is classified as other income

o Allowance for Doubtful Accounts

Accounting for bad debts

2 methods:

Allowance Method

Direct write-off method

Allowance Method

- Requires recognition of a bad debt loss if the accounts are doubtful of collection.

Recognize the doubtful account Doubtful Accounts Allowance for doubtful account

XX

XX

Allowance for doubtful account

- A deduction from accounts receivable

If it is worthless or uncollectible

Allowance for Doubtful Accounts Accounts Receivable

XX

XX

Entries for Allowance Method

 

Accounts are

 

considered

Doubtful Accounts Allowance for

XX

doubtful of

 

XX

collection

Doubtful accounts

Accounts are subsequently discovered to be worthless or uncollectible

Allowance for doubtful accounts Accounts Receivable

XX

XX

Same accounts previously written off are unexpectedly recovered or collected

Accounts Receivable Allowance for DA ***

XX

XX

Cash

XX

Accounts Receivable

XX

Direct Write-off Method

- Requires recognition of a bad debt loss only when the accounts proved to be worthless or uncollectible

- Worthless Accounts are recorded by debiting bad debts and crediting accounts receivable. If the accounts are only doubtful of collection, no adjustment is necessary.

Entries for Allowance Method

Accounts are

considered

doubtful of

collection

No entry is necessary

Accounts proved to be worthless

Bad Debts Accounts Receivable

XX

XX

Same accounts previously written off as worthless are recovered or collected

Accounts Receivable Bad debts

Cash

***

Accounts Receivable

XX

XX

XX

XX

- Treatment of doubtful accounts in the income statement. o Distribution Cost If the granting of credit and collection of accounts are under the charge of the sales

manager, doubtful accounts shall be considered as distribution cost.

o

Administrative Expense If the granting of credit and collection of accounts are under the charge of an officer other than sales manager, doubtful accounts shall be considered as administrative expense.

o

Silent : Administrative Expense

Methods of Estimating Doubtful Accounts:

1. Aging the accounts receivable or “statement of financial position”

- Balance method

- Consider the age of the past due of accounts receivable

- The aging of accounts receivable involves an analysis where the accounts are classified into not due or past due

a. Not due

b. 1 to 30 days past due

c. 31 to 60 days past due

d. 61 to 90 days past due

e. 91 to 120 days past due

f. 121 to 180 days past due

g. 181 to 365 days past due

h. More than 1 year past due

- It is determined by multiplying the total of each

classification by the rate or percent of loss experienced by the

entity for each category.

- The accounts receivable are fairly presented in the

statement of financial position at net realizable value.

-

 

Required Balance Less: Allowance balance Before adjustments Doubtful accounts expense

XX

XX

XX

-

Journal Entry

 

Doubtful Accounts Allowance for doubtful Accounts

XX

XX

- Account past due: “Refers to the period beyond the maximum credit term.

2. Percent of accounts receivable or also statement of financial position approach

- Balance Statement Method

- “you can get the required balance of doubtful accounts (percentage of Accounts Receivable)

- To get the required allowance balance : “A certain rate is multiplied by the open accounts at the end of the period.”

-

 

Required Balance Less: Credit balance in allowance Doubtful accounts expense

XX

XX

XX

-

Journal Entry

 

Doubtful Accounts Allowance for doubtful Accounts

XX

XX

3. Percent of accounts receivable or income statement approach

- To get the doubtful accounts expense: Amount of sales for the year is multiplied by a certain rate.”

May be applied on credit sales or total sales.

Theoretically: the rate to be used is computed by dividing the bad debt losses in prior years by the charge sales of prior years.

It can be multiplied by the current year’s charge sales to arrive at the doubtful accounts expense

-

The correction in allowance for doubtful accounts is to be reported in the income statement either as an addition to or subtraction from doubtful accounts expense.

-

 

ADJUSTMENT FOR INADEQUATE ALLOWANCE

 

Doubtful Accounts Allowance for doubtful accounts

XX

XX

-

 

JOURNAL ENTRY FOR EXCESSIVE ALLOWANCE

 

Allowance for Doubtful Accounts Doubtful accounts

XX

XX

-

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.

-

Debit balance in allowance account:

 

o

Normal balance of allowance for doubtful account is a credit balance

o

It will have a debit balance “to adjust the allowance at the end of the period and record accounts written off during the year.

o

Journal Entry:

Allowance for doubtful accounts Accounts Receivable

XX

XX

Impairment of accounts receivable

o

PFRS 9, paragraph 5.5.1 : provides that an entity shall recognize a loss allowance for expected credit losses on financial asset measured at amortized cost

o

Paragraph 5.5.3 provides that an entity shall measure the loss allowance for a financial instrument at an amount equal to the lifetime expected credit losses is

the credit risk on that financial instrument has increased significantly since initial recognition.

o

Credit losses: are the present value of all cash

shortfalls.

o

Expected credit losses: an estimate of credit losses over the lifetime of the financial instrument.

o

Consideration of measuring expected credit losses:

Probability-weighted outcome -Estimate should reflect the possibility that a credit loss occurs and the possibility that no credit loss occurs.

Time Value of Money -Expected credit losses should be discounted

Reasonable and Supportable Information -Available without undue cost or effort

o

PFRS 9 does not prescribed particular method of measuring expected credit losses.

Impairment assessment

o

Consideration:

Individually significant accounts receivable should be considered for impairment separately and if impaired, the impairment loss is recognized.

Accounts receivable not individually significant should be collectively assessed for impairment

Accounts receivable not considered impaired should be included with other account receivable with similar credit-risk characteristics and collectively assessed for impairment.

o

All of the accounts receivable are individually significant, except the other customers’ accounts receivable.

o

Journal Entry:

Doubtful Accounts Allowance for doubtful accounts

XX

XX

o

“Not considered impaired should be included in the collective assessment of all other accounts

receivable.

o

The rationale for including the unimpaired accounts receivable in the collective assessment: an entity does not have all the necessary information to make an informed decision for individual assessment.

o

Measurement of impairment:

Percentage of accounts receivable and percentage of sales method : “collective assessment approach”

Aging method : individual assessment approach”

NOTES RECEIVABLE

Those supported by formal promises to pay in the form of notes.

May be payable on demand or at a definite future date.

Represents only claims arising from sale of merchandise or service in the ordinary course of business.

Dishonored Notes

- A promissory note matures and is not paid.

- Shall be removed from the notes receivable account and transferred to accounts receivable at an amount to include, if any, interest and other charges.

- Recorded as:

Accounts Receivable

XX

Notes Receivable

XX

Interest Income

XX

Initial Measurement

o

Conceptually “initially at present value”

Present value sum of all future cash flows discounted using the prevailing market rate of interest for similar notes.

Prevailing market rate of interest The effective interest rate.

o

Short-term “face value”

o

Long-term

Interest bearing “face value which actually the present value upon issuance”

Non-interest bearing

“present value which is the discounted

value of the future cash flows using the effective interest rate” Interest being included in the face value

Subsequent Measurement

o

Long-term Notes Receivable: “amortized cost using the effective interest method”

Amortized cost The amount at which the note receivable is measured initially:

 

- Minus principal repayment

- Plus or minus cumulative amortization of any difference between the initial carrying amount and the principal maturity amount.

- Minus reduction for impairment or uncollectibility

o

Long-term Noninterest-bearing notes

The amortized cost is the present value plus amortization of the discount, or the face value minus the unamortized unearned interest income

o

Only long term notes receivable will be discussed in conjunction with the present value concept under the following situations:

Interest-bearing note

Noninterest bearing note

o

Computations

Initial Amount-FV Less:

XX

Principal Payment

XX

Unearned Interest Income

XX

Impairment Loss

XX

Carrying Amount

XX

Present Value Less:

XX

Principal Payment Interest Income Impairment Loss Carrying Amount

XX

XX

XX

XX

Future Amount Less:

XX

Unearned Interest Income Carrying Amount or Present Value

XX

XX

LOAN RECEIVABLE

A financial asset arising from a loan granted by a bank or other financial institution to a borrower or client.

Initial Measurement

- Initial Recognition: at fair value plus transaction cost that are directly attributable to the acquisition of the financial asset.

- The fair value of the loan receivable at initial recognition is normally the transaction price: the amount of the loan granted.

- Transaction costs that are directly attributable to the loan receivable include : direct origination costs (included in loan receivable)

- Direct organization costs should be included in the initial measurement of the loan receivable.

- However, indirect organization costs should be treated as outright expense.

Subsequent Measurement

- PFRS 9, paragraph 4.1.2, provides that if the business model in managing asset is to collect contractual cash flows on specified dates and the contractual cash flows are solely payments of principal and interest, the financial asset shall be measured at amortized cost.

- A loan receivable is measured at amortized cost using the effective interest method.

- The “amortized cost” : the amount at which the loan receivable is measured initially

a. Minus principal repayment

b. Plus or minus cumulative amortization of any difference between the initial carrying amount and the principal maturity amount.

c. Minus reduction for impairment or uncollectibility.

- If the initial amount recognized is lower than the principal amount, the amortization of the difference is added to the carrying amount.

- If the initial amount recognized is higher than the principal amount, the amortization of the difference is deducted to the carrying amount.

Origination Fees

- Fees charged by the bank against the borrower for the

creation of the loan.

- It includes compensation for activities such as evaluating the borrower’s financial condition, evaluating guarantees, collateral and other security, negotiating the terms of the loan, preparing and processing documents and closing the loan transactions

- Accounting:

a. Received from borrower : “recognized as unearned interest income and amortized over the term of the loan”

b. Not chargeable against the borrower : “known as direct

organization costs

Deferred and also amortized over the term of the loan.

Offset directly against any unearned origination fees received.

- If the origination received exceed the direct organization costs, the difference is unearned interest income and the amortization will increase interest income.

- If the direct organization costs exceed the origination fees received, the difference is charged to “direct origination costs” and the amortization will decrease interest income.

- The origination fees received and direct organization costs are included in the measurement of the loan receivable

-

Principal Amount Origination Fees Received Direct Organization Costs Incurred Initial Carrying Amount of loan

Principal Amount Origination Fees Received Direct Organization Costs Incurred Initial Carrying Amount of loan
Principal Amount Origination Fees Received Direct Organization Costs Incurred Initial Carrying Amount of loan
Principal Amount Origination Fees Received Direct Organization Costs Incurred Initial Carrying Amount of loan

XX

(XX)

XX

XX

Effective Interest Method

Interest Received = (Principal X Nominal Rate) or (Face Amount X Stated Rate)

Interest Income = (Carrying Amount X Effective Rate) or (Carrying Amount X Effective Rate)

Impairment of Loan

- PFRS 9, paragraph 5.5.1, provides that an entity shall recognize a loss allowance for collected credit losses on financial asset measured at amortized cost.

- Paragraph 5.5.3 provides that an entity shall measure the loss allowance for a financial instrument at an amount equal to the lifetime expected credit losses if the credit risk that financial instrument has increased significantly since initial recognition.

- Credit losses a. Present value of all cash shortfalls b. Expected credit losses are an estimate of credit losses over the life of the financial instrument.

Measurement of Impairment

- Considerations:

a. The probability-weighted outcome

The estimate should reflect the possibility that a credit loss occurs and the possibility that no credit loss occurs.

b. The time value of money

The expected credit losses should be discounted.

c. Reasonable and supportable that is available without undue cost or effort

- PFRS 9 does not prescribe particular method of measuring expected credit losses.

- The amount of impairment loss may be measured as the difference between the carrying amount and the present value of estimated future cash flows discounted at the original effective rate.

- The carrying amount of the loan receivable shall be reduced either directly or through the use of an allowance account.

- Computation of impairment loss

Carrying amount of loan

XX

Present value of cash flows

(XX)

Impairment loss

XX

Credit Risk

- Risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.

RECEIVABLE FINANCING

The financial flexibility or capability of an entity to raise money out of its receivable.

Common forms of receivable financing

a. Pledge of Accounts Receivable Journal Entry:

RECORDED

Cash Discount on Note Payable Note Payable

XX

XX

XX

 

SUBSEQUENT PAYMENT

Note Payable

XX

Cash

XX

WITH RESPECT TO THE PLEDGED ACCOUNTS

No Entry

If the loan is discounted

Face Value of loan

XX

Less: Interest deducted in advance

XX

Net proceeds

XX

b. Assignment of Accounts Receivable

A borrower (assignor) transfers its rights in some of its accounts receivable to a lender (assignee) in consideration for a loan.

More formal type of pledging of accounts receivable

A secured borrowing evidenced by a financing agreement and a promissory note both of which the assignor signs i. Pledging is general all accounts receivable serve as collateral security for the loan. ii. Assignment is specific specific accounts receivable serve as collateral security for the

loan.

Features of assignment

1. Assignment may be done either on a non-notification or

notification basis

Non-notification- “customers are not informed that their accounts have been assigned.”

- Result: “the customers continue to make payments to the assignor, who in turn remits the collections to the assignee.

Notification- “customers are not notified to make their payments directly to the assignee.”

2. Before entering into an assignment, the assignee,

usually a bank or a finance entity, analyzes the borrower’s accounts receivable.

3. The assignee usually charges interest for the loan that

it makes and required a service or financing charge or commission for the assignment agreement.

c. Factoring of Accounts Receivable

A sale of accounts receivable on a without recourse, notification basis.

Factoring arrangement: an entity sells accounts receivable to a bank or finance entity called a factor.

A gain or loss is recognized for the difference between the proceeds received and the net carrying amount of the receivables.

Factor : assumes responsibility for uncollectible factored accounts

Assignment: assignor retains ownership of the accounts assigned.

Forms of Factoring:

i. Casual Factoring Critical cash position: May be forced to factor some or all of its accounts receivable at a substantial discount to a bank or a finance entity to obtain the much needed cash.

JOURNAL ENTRY TO RECORD SALE

 

Cash Allowance for doubtful accounts Loss on factoring Accounts Receivable

XX

XX

XX

 

XX

ii. Factoring as a continuing agreement.

May involve a continuing agreement where a finance entity purchases all of the accounts receivable of a certain entity.

Factor’s holdback – “A receivable from factor and classified as current asset.”

Final settlement of the factor’s holdback is made after the factored receivables have been fully collected.

JOURNAL ENTRY TO RECORD THE FACTORING

Cash Sales Discount Commission Receivable from factor Accounts Receivable

XX

XX

XX

XX

 

XX

Credit Card

COMPUTATION

Gross Amount Less: Sales Discount Commission Factor’s Holdback Cash received from factoring

XX

XX

XX

XX

XX

XX

- A Plastic card which enables the holder to obtain credit up to a predetermined limit from the issuer of the card for the purchase of goods and services

d. Discounting of Notes Receivable

Discounting of Notes Receivable

- Concept:

a. Endorsement

With recourse : the endorser shall pay the endorsee if the maker dishonors the note. A contingent or secondary liability of the endorser.

Without recourse : the endorser avoids future liability even if the maker refuses to pay the endorsee on the date of maturity

In the absence: assumed to be with recourse

Interests = (Principal X Interest Rate X Period

Discount = (Maturity Value X Discount Rate X Discount Period

*Discount period should be the unexpired term

Terms related to discounting of note

a. Net proceeds refer to the discounted value of the note received by the endorser from the endorsee.

Maturity Value

XX

Less: Discount

XX

Net proceeds

XX

b. Maturity Value is the amount due on the note at the date of maturity.

Principal

XX

Add: Interest

XX

Maturity Value

XX

c. Maturity Date is the date on which the note should be paid.

d. Principal is the amount appearing on the face value of the note. It also referred to as face value.

e. Interest is the amount of interest for the full term of the note.

Interest = Principal X Rate X Time

f. Interest Rate is the rate appearing on the face of the note.

g. Time is the period within which interest shall accrue. For discounting purposes, it is the period from date of note to maturity date. Or The entire period of “full term” of the note.

h. Discount is the amount of interest deducted by the bank in advance.

Discount = Maturity Value X Discount Rate X Discount Period

i. Discount Rate is the rate used by the bank in computing the discount. The discount rate should not be confused with the interest rate. The discount rate and interest rate are different from each other. If no discount rate is given, the interest rate is assumed as the discount rate.

j. Discount Period is the period of time of discounting to maturity date.

Term of the note

XX

Less: Expired option up to the date of discounting

XX

Discount Period

XX

** The unexpired term of the note

** In counting : exclude the first day but include the last day

GAIN OR LOSS ON NOTE DISCOUNTING

Net Proceeds Less: Carrying Amount on Note Receivable Loss on discounting

XX

XX

XX

If the discounting is with recourse, the transactions is accounted for as either:

1. Conditional Sale of note receivable recognizing a contingent liability.

JOURNAL ENTRY

Loss on Note Receivable Note Receivable Discounted Interest Income

XX

XX

XX

** Note Receivable discounted account is deducted from the total notes receivable when preparing the statement of financial position with disclosure of the contingent liability.

Note is paid by maker on maturity

JOURNAL ENTRY Note Receivable Discounted Note Receivable

XX

XX

Note is dishonored by maker

RECORD THE PAYMENT

Accounts Receivable Cash

XX

XX

CANCEL THE CONTINGENT LIABILITY

Note Receivable Discounted Note Receivable

XX

XX

2. Secured Borrowing

If the discounting is treated as a secured borrowing, the note receivable is not derecognized but instead an accounting liability is recorded at an amount equal to the face amount of the note receivable discounted.

JOURNAL ENTRY

Cash Interest Expense Liability for note Receivable Discounted Interest Income

XX

XX

XX

XX

** There is no gain or loss on discounting if the note discounting is accounted for as secured borrowing.

Note is paid by maker on maturity

JOURNAL ENTRY Liability for Note Receivable Discounted Note Receivable

XX

XX

Note is dishonored by maker

RECORD THE PAYMENT

Accounts Receivable Cash

XX

XX

DERECOGNIZE THE LIABILITY FOR NOTE RECEIVABLE DISCOUNTED AND NOTE RECEIVABLE

Liability for Note Receivable Discounted Note Receivable

XX

XX

Conditional Sale or Secured Borrowing

PFRS 9, paragraph 3.2.3, provides that an entity shall derecognize a financial asset when either one of the following criteria is met:

a. The contractual rights to the cash flows of the financial asset have expired

Easy to apply

The contractual rights to the cash flows may expire.

b. The financial asset has been transferred and the transfer qualifies for de-recognition based on the extent of transfer of risks and rewards of ownership.

Complex

PFRS 9, paragraph 3.2.6, provides the following guidelines for de-recognition based on transfer of risks and rewards:

a. If the entity has transferred substantially all risks and rewards, the financial asset shall de-recognized. b. If the entity has retained substantially all risks and rewards, the financial asset shall not be de-recognized.

c. If the entity has neither transferred nor retained substantially all risks and rewards, de-recognition depends on whether the entity has retained control of the asset.

If the entity has lost control of the asset, the financial asset is derecognized in its entirety.

If the entity has retained control over the asset, the financial asset is not derecognized.

The discounting transaction is a combination of the guidel ines in the second criterion as follows:

The entity has substantially transferred all “rewards”.

The entity has retained substantially all “risks”.

The entity has lost control of the note receivable.

** Discounting with recourse is to be accounted for as conditional sale with recognition of a contingent liability.

** Upon discounting or endorsement of the note receivable, whether with or without recourse, the transferor or endorser has lost control over the note receivable.

**The transferee has complete control over the note receivable because the transferee has the practical ability to sell the asset to a third party without attaching any restrictions to the transfer.

Discounting own note

- The party discounting is the payee and a mere endorser and therefore only a person secondarily liable. There is a contingent liability on the note discounted.

- Where the note discounted is made by the party discounting, a primary liability, not a contingent liability, exists.

- Effect: “the party discounting is entering into a contract of loan with the endorsee”

Inventories

Assets held for sale in the ordinary course of business, in the process of production for such sale or in the form of materials or supplies to be consumed in the production process or in the rendering of services.

Classified as current asset.

It encompass:

Goods purchased and held for resale

Finished goods produced, goods in process and materials and supplies awaiting use in the production process.

Classes of inventories:

Trading concern

One that buys and sells goods in the same form purchased.

Manufacturing Concern

One that buys goods which are altered or converted into another form before they are made available for sale.

Finished goods

Completed products which are ready for sale

Goods in process or work in process

Partially completed products which require further process or work before they can be sold.

Raw materials

Goods that are to be used in the production.

No work or process has been on them as yet by the entity inventorying them.

Restricted to materials that will be physically incorporated in the production of other goods and which can be traced directly to the end product of the production process.

Factory or manufacturing supplies

May be referred to as indirect materials. It is indirect because they are not physically incorporated in the products being manufactured.

Owner of goods in transit

FOB Destination

FOB up to the point of destination. The seller will pay for the freight charges up to the buyer’s destination.

In general: shouldered by Seller

o

Prepaid – “seller ang nagbayad”

o

Collect – “ibawas sa payable”

FOB Shipping Point

FOB up to the point of shipping point. It will be shouldered by the seller up to the shipping point before loading to a common carrier. Once the goods are loaded, the buyer will pay for the freight charges.

In general: shouldered by Buyer

Freight terms

Freight Collect

o

Prepaid – “seller ang nagbayad”

o

Collect – “ibawas sa payable”

The buyer is to pay the freight when the merchandise arrives.

FOB Destination: the buyer can deduct the cost of the freight when paying the invoice.

Freight Prepaid

The seller has paid the freight on the goods at the time of shipment.

FOB Shipping Point: the seller can collect the cost of the freight from the buyer.

Maritime Shipping Terms

a. FAS or free alongside

- A seller who ships FAS must bear all expenses and

risk involved in delivering the goods to the dock next to or alongside the vessel on which the goods are to be shipped. - The buyer bears the cost of loading and shipment and

thus, title passes to the buyer when the carrier takes possession of the goods.

b. CIF or Cost, Insurance and freight

- The buyer agrees to pay in a lump sum the cost of

the goods, insurance cost and freight charge.

- The shipping contract may be modified as CF which

means that the buyer agrees to pay in a lump sum the cost of goods and freight charge only.

- The seller must pay for the cost of loading. The

title and risk of loss shall pass to the buyer upon

delivery of the goods to the carrier.

d. Ex-ship - A seller who delivers the goods ex-ship bears all expenses and risk of loss until the goods are unloaded at which time title and risk of loss shall pass to the buyer.

Consignment goods

Consignment A method of marketing goods in which the owner called the consigner who sells them on the owner’s behalf.

Consigned goods shall be included in the consignor’s inventory and excluded from the consignee’s inventory.

Freight and other Handling charges on goods out on consignment are part of the cost of goods consigned.

When consigned goods are sold

Accounting for Inventories (System)

Periodic System

- Calls for the physical counting of goods on hand at the end of the accounting period to determine quantities.

- The quantities are then multiplied by the

corresponding unit costs to get the inventory value for the balance sheet purposes. This approach gives actual or physical inventories.

Perpetual System

- Requires the maintenance of records called stock

cards that usually offer a running summary of the inventory inflow and outflow.

- A physical count of the units on hand should at least be made once a year or at frequent intervals to confirm the balances appearing on the stock cards.

Inventory shortage or overage

- The inventory shortage is usually closed to cost of goods sold because this is often the result of normal shrinkage and breakage in inventory.

- Abnormal and material shortage shall be separately classified and presented as other expense.

Trade Discounts

- Deductions from the list or catalog price in order to arrive at the invoice price which is the amount actually charged to the buyer.

- Not recorded

Cash Discount

- Deductions from the invoice price when payments are made within the discount period.

- Recorded as purchase discount by the buyer and sales discount by the seller.

Purchase Discount

- Deducted from purchase to arrive at net purchases

Sales Discount

- Deducted from sales to arrive at net sales revenue.

Methods of Recording Purchases:

1. Gross Method Purchases and accounts payable are

recorded at gross.

2. Net Method Purchases and accounts payable are recorded

at net.

Cost of Inventories:

a. Cost of purchase

It comprises the purchase price, import duties and irrecoverable taxes, freight, handling and other costs directly attributable to the acquisition of finished goods, materials and services.

Trade discounts, rebates and other similar items are deducted in determining the cost of purchase.

The cost of purchase shall not include foreign exchange differences which arise directly from the

recent acquisition of inventories involving a foreign currency.

When inventories are purchased with deferred settlement terms, the difference between the purchase price for normal credit terms and the amount paid is recognized as interest expense over the period of financing.

b. Cost of conversion

Includes cost directly related to the units of production such as indirect labor

It also includes a systematic allocation of fixed and variable production overhead that is incurred in converting into finished goods.

Fixed Production Overhead

- The indirect cost of production that remains

relatively constant regardless of the volume of the production

- Examples

Depreciation and maintenance of factory building and equipment

Cost of factory management and administration

- Allocation of fixed production overhead

Allocation of fixed production overhead to the cost of conversion is based on the normal capacity of the production facilities. o Normal capacity is the production expected to be achieved on average over a number of periods or seasons under normal circumstances taking into account the loss of capacity resulting from planned maintenance.

The amount of fixed overhead allocated to each unit of production is not increased as consequence of low production or idle plant.

Unallocated fixed overhead is recognized as expense in the period in which it is incurred.

Variable production Overhead

- The indirect cost of production that varies directly with the volume of production.

- Examples

Indirect Labor

Indirect Materials

- Allocation of variable production overhead

Allocated to each unit of production on the basis of the actual use of the production facilities.

When the costs of conversion are not separately identifiable, they are allocated between the products on a rational and consistent basis.

Most by-products by their nature are not material. o By-products measured at net realizable value and this value is deducted from the cost of the main product.

c. Other cost incurred in bringing the inventories to their present location and condition.

Included in the cost of inventories only to the

extent that it is incurred in bringing the inventories to their present location and condition.

The following costs are excluded from the cost of inventories and recognized as expenses in the period when incurred:

i. Abnormal amounts of wasted materials, labor and other production costs.

ii. Storage costs, unless these costs are necessary

in the production process prior to a further production stage. - Storage costs on goods in process are capitalized but storage costs on finished goods are expensed. iii. Administrative overheads that do not contribute

to bringing inventories to their present location and condition.

iv. Distribution or selling costs

Cost of inventories

- Consists primarily of the labor and other costs of

personnel directly engaged in providing the service, including supervisory personnel and attributable overhead.

- Simply described as work in process

- Labor and Other costs relating to sales and general administrative personnel are not included but are recognized as expenses in the period in which they incurred.

Inventory Cost Flow

- Comprises all cost of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

- When inventories are sold, the carrying amount of the inventories shall be recognized as expense in the period in which the related revenue is recognized.

- PAS 2, paragraph 25, expressly provides that the cost of inventories shall be determined by using either:

a. First In, First Out (FIFO)

Assumes that the “goods first purchased are first sold

The goods remaining in the inventory at the end of the period are those most recently purchased or produced.

Rule : “FIRST COME, FIRST SOLD”

Expressed in terms of recent or new prices while the cost of goods sold is representative of earlier or old prices.

FIFO periodic and FIFO perpetual : inventory costs are the same

b. Weighted Average

Weighted Average (Perpetual) known as the moving average method

- The standard does not permit anymore the use of the last in, first out (LIFO) as an alternative formula in measuring cost of inventories.

Last In, First Out (LIFO)

- Assumes that the goods last purchased are first sold” and consequently the goods remaining in the inventory at the end of the period are those first purchased or produced.

- Expressed in terms a. inventory : of earlier or old prices b. cost of goods sold : of recent or new prices

Specific Identification

-

-

Means that specific costs are attributable to identified items of inventory.

Cost of inventory = Units on hand X Actual Unit Cost

 

-

PAS 2, paragraph 23, provides that this method is appropriate for inventories that are segregated for a specific project and inventories that are not ordinarily interchangeable.

-

May be used in either periodic or perpetual inventory system

Standard Costs

- “Predetermined product costs established on the basis of normal levels of materials and supplies, labor, efficiency, and capacity utilization.

- PAS 2, paragraph 21, states that the standard cost method may be used for convenience if the results approximate cost.

Lower of cost and net realizable value

- Carrying amount of asset should not be greater than to the recoverable amount (NRV)

- Also known as LCNRV : “measurement of inventory at the lower cost and net realizable value”

- Measurement of inventory a. PAS 2, paragraph 9, provides that “inventories shall be measured at the lower of cost and net realizable value”.

Net realizable value (NRV)

- The estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated cost of disposal.

- Cost of inventories:

a. May not be recoverable if the inventories are damaged, if they have become wholly or partially obsolete, or if their selling prices have declined. b. May be recoverable if the estimated cost of completion or the estimated cost of disposal has increased.

- The practice of writing down below cost to net realizable value is consistent with the view that asset shall not be carried in excess of amounts expected to be realized from their sale or use.

Determination of Net realizable value (NRV)

- Inventories are usually written down to net realizable value on an item by item or individual basis.

- It is not appropriate to write down inventories based on a classification of inventory.

- Materials and other supplies held for use in production are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost.

- When a decline in the price of materials indicates that the cost of the finished products exceed net realizable value, the materials are written down to net realizable value.

Accounting for inventory write-down

- If the cost is lower than net realizable value, there is no accounting problem because the inventory is stated at cost and the increase in value is not recognized.

- If the net realizable value is lower than cost, the inventory is measured at net realizable value.

2 methods of accounting for the inventory write-down:

- Direct Method or Cost of goods sold method

a. The inventory is recorded at the lower of cost or net realizable value.

b. Also known as, “cost of goods sold method” because any loss on inventory write-down is not accounted for separately but “in the cost of goods sold”

** The inventory is simply recorded at the lower amount.

- Allowance method or loss method

a. The inventory is recorded at cost and any loss on inventory write-down is accounted for separately.

b. Also known as “loss method” because a loss account loss on inventory write-down” is debited and a valuation account “allowance for inventory write-down” is credited.

c. If the required allowance increases, an additional loss is recognized.

d. If the required allowance decreases, a gain on

reversal of inventory write-down is recorded.

e. The gain is limited only to the extent of the allowance balance.

f. PAS 2, paragraph 36, requires disclosure of the account of any inventory write-down and the amount of any reversal of inventory write-down.

** The measure of inventory at LCNRV is applied in an item by item or individual basis.

** If the LCNRV is applied by total, the measurement of the inventory is the total cost which is lower than the total NRV.

** The loss on inventory write-down is not accounted for separately. The entry will have the effect of increasing cost of goods sold because the NRV is lower than cost

** The loss on inventory write-down is included in the computation of cost of goods sold.

** The gain on reversal of inventory write-down is presented as a deduction from cost of goods sold.

** PAS 2,paragraph 34, provides that the “amount of any reversal of any write-down of inventory arising from an increase in net realizable value shall be recognized as a reduction in the

amount of inventory as an expense of the period in which the reversal occurs.”

** The amount of inventory recognized as expense of the period is actually the cost of goods sold during the period.

** The increase is recorded by debiting “loss on inventory write-down” and crediting “allowance for inventory write-down”

** The decrease is recorded by debiting “allowance for inventory write-down” and crediting “gain on reversal of inventory write- down”

*** Direct or allowance method, the cost of goods sold must be the same.

Purchase Commitments

- Obligations of the entity to acquire certain goods sometimes in the future at a fixed price and fixed quantity.

- Any losses which are expected to arise from firm and non- cancelable commitments shall be recognized.

- If there is a decline in purchase price after a purchase commitment has been made, a loss is recorded in the period of the price decline.

- It must be non-cancelable in order that a loss purchase commitment can be recognized.

- The recognition of a loss purchase commitment is an adaptation of the measurement at the lower of cost or net realizable value.

- If the market price rises by the time the entity makes the purchase, a gain on purchase commitment would be recorded.

- The amount of gain to be recognize is limited to the loss on purchase commitment previously recorded.

- The gain on purchase commitment is classified as other income.

Disclosure

a. The accounting policies adopted in measuring inventories, including the cost formula used.

b. The total carrying amount of inventories and the carrying amount in classifications appropriate to the entity.

Commo