Page |1 Show Chapter 6 Receivables – Additional Concepts NAME: Professor: Section: Date: Score: LONG QUIZ: 1. An entity determines that the credit risk on a loan receivable has not increased significantly since initial recognition. The entity should recognize loss allowance equal to a. the 12-month expected credit losses on the instrument. b. the lifetime expected credit losses on the instrument. c. sum of a and b d. none; credit losses should be recognized only when there is objective evidence of a loss event. 2. According to PFRS 9, it refers to the expected credit losses that result from all possible default events over the expected life of a financial instrument. a. 12-month expected credit losses b. Lifetime expected credit losses c. Loss allowance d. Absolute loss 3. When the required balance of the loss allowance decreases, a. the entity recognizes gain. b. the entity recognizes loss. c. the entity recognizes unearned interest to be amortized over the remaining term of the instrument. d. the entity recognizes a deferred charge to be amortized over the remaining term of the instrument. 4. Interest income is computed on the net carrying amount (i.e., gross carrying amount less loss allowance) of an instrument that is under which stage of the ‘three-bucket’ approach of PFRS 9’s expected credit loss model? a. Stage 1 b. Stage 2 c. Stage 3 d. Stage 4 5. After impairment testing, interest income on a credit-impaired note receivable is computed by a. multiplying the present value of the note by the current market rate at year-end. b. multiplying the present value of the note by the rate used in impairment testing. c. multiplying the face value of the note by the rate used in impairment testing. d. no interest income will be recognized because the note is already impaired. 6. Which of the following most likely does not result to the derecognition of a financial asset? a. The contractual rights to the cash flows from the financial asset expire. b. The creditor cancels the financial asset. c. The cash flows from the financial asset become uncollectible because of loss events. Page |2 d. The entity transfers the contractual rights to receive the cash flows of the financial asset but retains the obligation to repurchase the financial asset at a future date. 7. On January 1, 20x1, ABC Bank extended a 12%, ₱1,000,000 loan to XYZ, Inc. Principal is due on January 1, 20x5 but interests are due annually every January 1. ABC Bank incurred direct loan origination costs of ₱88,394 and indirect loan origination costs of ₱18,000. In addition, ABC Bank charged XYZ a 2.5-point nonrefundable loan origination fee. How much is the interest income in 20x2? a. 104,973 b. 105,364 c. 106,339 d. 136,661 Use the following information for the next two questions: On January 1, 20x1, ABC Bank extended a ₱900,000 loan to XYZ, Inc. Principal is due on December 31, 20x5 but 12% interest is due annually every December 31. On December 31, 20x3, XYZ, Inc. was delinquent and it was ascertained that the loan is impaired. ABC Bank assessed that interests accruing on the loan will not be collected; however, the principal is expected to be received in three equal annual installments starting on December 31, 20x4. Accrued interest receivable on December 31, 20x3 amounted to ₱100,000. The current market rate on December 31, 20x3 is 14%. 8. How much is the balance of allowance for impairment loss on December 31, 20x3 immediately after impairment testing? a. 279,460 b. 303,510 c. 203,510 d. 179,460 9. How much is the interest income in 20x5? a. 86,465 b. 64,810 c. 60,841 d. 0 Use the following information for the next two questions: On January 1, 20x1, ABC Co. received a ₱1,000,000 note receivable from XYZ, Inc. Principal payments of ₱200,000 and interest at 12% are due annually at the end of each year for 5 years. The first payment starts on December 31, 20x1. XYZ, Inc. made the required payments during 20x1 and 20x2. However, during 20x3 XYZ, Inc. began to experience financial difficulties, requiring ABC Co. to reassess the collectability of the note on December 31, 20x3. Because of the loss event, ABC Co. did not accrue the interest on December 31, 20x3. The current rate of interest on December 31, 20x3 is 10%. ABC Co. made the following cash flow projections on December 31, 20x3: Page |3 Date of expected receipt January 1, 20x4 January 1, 20x5 January 1, 20x6 Amount of cash flow 200,000 150,000 150,000 10. How much is the impairment loss recognized in 20x3? a. 146,492 b. 195,082 c. 139,669 d. 181,518 11. How much is the interest income in 20x4? a. 54,421 b. 30,421 c. 16,071 d. 0 Use the following information for the next two questions: ABC Co. transfers loans receivable with a fair value of ₱500,000 and carrying amount of ₱420,000. ABC Co. obtains an option to purchase similar loans and assumes a recourse obligation to repurchase similar loans. ABC Co. also agrees to provide a floating rate of interest to the transferee company. The assets and liabilities received as consideration for the transfer are listed below: Assets received & liabilities assumed Cash proceeds Interest rate swap Call option Recourse obligation Fair values 250,000 120,000 60,000 120,000 12. How much is the gain (loss) on the derecognition of the financial asset? a. 30,000 b. 7,500 c. (110,000) d. (135,000) 13. Use the information in the immediately preceding problem above except that ABC Co. agreed to service the loans without explicitly stating the compensation. The fair value of the service is ₱25,000. How much is the gain (loss) on the derecognition of the financial asset? a. 30,000 b. 7,500 c. (110,000) d. (135,000) 14. On March 1, 20x1, ABC Co. assigned its ₱1,000,000 accounts receivable to Piggy Bank in exchange for a 2-month, 12% loan equal to 75% of the assigned receivables. ABC Co. received the loan proceeds after a 2% deduction for service fee based on the assigned notes. During March, ₱500,000 Page |4 were collected from the receivables. Sales returns and discounts amounted to ₱150,000. How much net cash is received from the assignment transaction on March 1, 20x1? a. 735,000 b. 730,000 c. 1,230,000 d. 1,235,000 Fact pattern for the next three questions: ABC Co. factored ₱100,000 accounts receivable to XYZ Financing Corp. on a without recourse basis on January 1, 20x1. XYZ charged a 4% service fee and retained a 10% holdback to cover expected sales returns. In addition, XYZ charged 12% interest computed on a weighted average time to maturity of the receivables of 73 days over 365 days. 15. How much net proceeds is received from the factoring on January 1, 20x1? a. 100,320 b. 85,600 c. 83,600 d. 88,300 16. How much is the cost of factoring assuming all of the receivables were collected? a. 6,400 b. 2,400 c. 16,400 d. 12,400 17. Use the ‘fact pattern’ above except that ABC Co. factored the receivables on a with recourse basis. ABC Co. determines that the recourse obligation has a fair value of ₱3,000. How much is the loss on sale of receivables recognized on January 1, 20x1 assuming the factoring was made on a casual basis? a. 3,000 b. 9,400 c. 19,400 d. 6,400 18. On October 1, 20x1, ABC Co. discounted a one-year, ₱600,000, 12% note, received from a customer on January 1, 20x1, with a bank at 14% on a without recourse basis. How much is the loss on discounting? a. 4,960 b. 5,250 c. 4,690 d. 5,520 19. On July 1, 20x1, ABC Co. discounted a 90-day, ₱800,000, 12% note, received from a customer on June 1, 20x1, with a bank at 16% on with recourse basis. The discounting is treated as conditional sale. The bank uses 365 days per year in computing for discounts. On August 30, 20x1 (maturity date), the maker of the note defaulted and the bank charged ABC Co. the maturity value of the note plus a ₱3,000 protest fee. How much is transferred to accounts receivable due to the dishonor? a. 826,671 Page |5 b. 823,671 c. 827,000 d. 862,671 20. On July 1, 20x1, Going Home Co. discounted its own note of ₱200,000 with a bank at 10% for one year. How net proceeds did Going Home Co. receive from the transaction? a. 180,000 b. 190,000 c. 200,000 d. 0 “Jesus replied: ‘Love the Lord your God with all your heart and with all your soul and with all your mind.’ This is the first and greatest commandment. And the second is like it: ‘Love your neighbor as yourself.’” (Matthew 22:37-39) - END - Page |6 ANSWERS: 1. 2. 3. 4. 5. 6. A B A C B D A Solution: The initial carrying amount of the loan is computed as follows: Principal amount Direct origination cost Origination fee (1,000,000 x 2.5%) Initial carrying amount of loan receivable 7. 1,000,000 88,394 (25,000) 1,063,394 The effective interest is computed as follows: We know that there is premium because the initial carrying amount of the financial instrument is more than the face amount. Accordingly, the effective interest rate must be less than the nominal rate of 12%. Using trial and error, let us try 10%. Future cash flows x PV factor @ x% = Present value of note First trial (using 10%): (1,000,000 X PV of 1 @10%, n=3) + (120,000 x PV of ordinary annuity @12%, n=3) = 1,063,394 (1,000,000 x 0.68301) + (120,000 x 3.16987) = 1,063,394 (683,010 + 380,384) = 1,063,394 equals 1,063,394 Conclusion: The effective interest rate is 10%. Amortization table: Date 1/1/x1 1/1/x2 1/1/x3 1/1/x4 1/1/x5 Collections Interest income Amortization Present value 120,000 120,000 120,000 120,000 106,339 104,973 103,471 101,818 13,661 15,027 16,529 18,182 1,063,394 1,049,733 1,034,707 1,018,177 999,995 D Solution: Estimated future cash flows (900K ÷ 3 equal annual installments) Multiplied by: PV of ordinary annuity at 12%, n= 3 Present value of estimated future cash flows 8. Present value of estimated future cash flows Carrying amount before impairment (900K + 100K) Impairment loss 300,000 2.4018 720,540 720,540 (1,000,000) (279,460) Page |7 Allowance Dec. 31, 20x3 Impairment loss 279,460 Interest receivable Allowance for impairment 9. C Solution: Date 12/31/x3 12/31/x4 12/31/x5 12/31/x6 100,000 179,460 Collections Interest income Amortization 300,000 300,000 300,000 86,465 60,841 32,141 213,535 239,159 267,859 Present value 720,540 507,005 267,845 (13) 10. A Solution: Date Amount of cash flow Jan. 1, 20x4 Jan. 1, 20x5 Jan. 1, 20x6 200,000 150,000 150,000 PV of 1 @12%, n=0, 1 and 2 Present value 1.00 0.89285714286 0.79719387755 200,000 133,929 119,579 453,508 Present value Carrying amount (1M - 200K - 200K) Impairment loss 453,508 (600,000) (146,492) 11. B Solution: Date 12/31/x3 Collections Interest income Amortization Present value 1/1/x4 1/1/x5 1/1/x6 200,000 150,000 150,000 30,421 16,071 200,000 119,579 133,929 453,508 253,508 133,929 - 12. C Solution: Date Cash 250,000 Interest rate swap 120,000 Call option Loss on transfer of loans (squeeze) 60,000 110,000 Loans receivable (carrying amount) 420,000 Recourse obligation 120,000 Page |8 13. D Solution: Date Cash on hand 250,000 Interest rate swap 120,000 Call option 60,000 Loss on transfer of loans (squeeze) 135,000 Loans receivable (carrying amount) 420,000 Recourse obligation 120,000 25,000 Liability on service obligation 14. B Solution: Assigned accounts receivable Multiply by: Principal amount of loan Service fee (2% x 1M) Net proceeds 1,000,000 75% 750,000 (20,000) 730,000 15. C Solution: Account receivable factored Service charge (100,000 x 4%) Factor’s holdback (100,000 x 10%) Interest charge (100,000 x 12% x 73/365) Proceeds from factoring 100,000 (4,000) (10,000) (2,400) 83,600 16. A Solution: Service charge (100,000 x 4%) Interest charge (100,000 x 12% x 73/365) Cost of factoring 4,000 2,400 6,400 17. B Solution: Jan. 1, 20x1 18. D Cash (see previous solution) Factor’s holdback Loss on factoring (squeeze) Account receivable Liability on recourse obligation 83,600 10,000 9,400 100,000 3,000 Page |9 Solution: Maturity value = 600,000 + (600,000 x 12%) Maturity value = 672,000 Discount period = full term – expired term Discount period = 12 months – 9 months (Jan. 1 to Oct. 1) Discount period = 3 months Discount = Maturity value x Discount rate x Discount period Discount = 672,000 x 14% x 3/12 Discount = 23,520 Net proceeds = Maturity value - Discount Net proceeds = 672,000 – 23,520 Net proceeds = 648,480 Interest income = accrued interest as of date of discounting Interest income = 600,000 x 12% x 9/12 Interest income = 54,000 Oct. 1, 20x1 Cash on hand (equal to net proceeds) Loss on discounting (squeeze) 648,480 5,520 Note receivable 600,000 Interest income 54,000 19. A Solution Maturity value [800K + (800K x 12% x 90/365)] Protest fees Amount transferred to accounts receivable 20. A (200,000 x 90%) = 180,000 823,671 3,000 826,671 How do you calculate receivable impairment?The impairment loss is calculated as the difference between the carrying value at reporting date less the present value of expected future cash flows.
Which of the following financial assets are assessed for impairment?Financial assets subject to impairment
lease receivables. contract assets. irrevocable loan commitments, and.
What is ECL and how it is calculated as per Ind AS?The 12-month or lifetime Expected Credit Loss (ECL) is computed and accounted for based on whether the financial instrument is classified as Stage 1 or 2/3. The components that are crucial to calculate ECL include - Exposure at Default (EAD), Probability of Default (PD), Loss Given Default (LGD), and discount rate.
How do you calculate expected credit loss rate for trade receivables?The expected credit loss of each sub-group determined in Step 1 should be calculated by multiplying the current gross receivable balance by the loss rate. For example, the specific adjusted loss rate should be applied to the balance of each age-band for the receivables in each group.
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