ANGELES UNIVERSITY FOUNDATION

ANGELES CITY
COLLEGE OF BUSINESS AND ACCOUNTANCY

REVIEW NOTES:
ACCOUNTS/NOTES RECEIVABLE
RECEIVABLE FINANCING
LOAN RECEIVABLE

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

CLASSIFICATION OF RECEIVABLES:

 Trade receivables
 refer to claims arising from sale of merchandise or services in the ordinary course of business.
 if expected to be realized in cash within the normal operating cycle or one year, whichever is longer,
are classified as current assets.

 Non-trade receivables
 represent claims arising from sources other than the sale of merchandise or services in the ordinary
course of business
 if expected to be realized in cash within one year – classified as current assets.
 If collectible beyond one year - classified as noncurrent assets.

Normal Operating Cycle

Time period between the acquisition of assets for processing and their
realization in cash or cash equivalent. Thus, the normal operating cycle
is the period required for cash to be converted into inventories through
purchase and production, inventories into receivables through sale, and
receivables back into cash or cash equivalents through collection

Note: where the normal operating cycle of the business extend beyond 12 months because of long credit terms, as in the
case of installment receivables, are classified also as current assets.

PRESENATATION ON THE FACE OF THE STATEMENT OF FINANCIAL POSITION

In accordance with PAS 1, 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.
RECEIVABLES

Did they arise from sale of

goods and services in the
normal course of business?

Trade Receivables YES NO Non-Trade Receivables

Are they collectible

within 12 months from
the end of the
reporting period?

YES NO
Current asset
Non-current asset

Example of Non-Trade Receivables

 Claims receivable (claim for rebates and tax refund, claims against common carriers for losses or damages, claims
from insurance) – current assets.
 Accrued income (accrued rent income, accrued interest income, dividend receivable, accrued royalties income) –
current assets.
 Advances to suppliers – current assets.
 Creditors accounts’ with debit balances (AP debit balance) – current asset

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 – if the amount is immaterial an offset may be made with
credit balances and net accounts payable may be presented
 Advances to or receivable from shareholders, directors, officers or employees – current asset, if collectible
within one year, otherwise, are classified as non-current asset
 Subscription receivable – current asset, if collectible within one year
– deduction from related subscribed share capital, if collection beyond one year
 Advances to affiliates – non-current assets, classified as long term investment
 Special deposits on contract bids – normally classified as non-current assets
– current assets, if collectible currently

ILLUSTRATIVE PROBLEM:

1. When examining the accounts of Brute Company, it is ascertained that balances relating to both receivables and
payables are included in a single controlling account called “receivables control” with a debit balance of
P4,850,000.

An analysis of the make-up of this account revealed the following:

DEBIT CREDIT
Accounts receivable – customers 7,800,000
Accounts receivable – officers 500,000
Debit balances – creditors 300,000
Postdated checks from customers 400,000
Subscriptions receivable 800,000
Accounts payable for merchandise 4,500,000
Credit balances in customers’ account 200,000
Cash received in advance from customers
for goods not yet shipped 100,000
Expected bad debts 150,000

After further analysis of the aged accounts receivable, it is determined that the allowance for doubtful accounts
should be P200,000.

What amount should be reported as “trade and other receivables” under current assets?
a. 8,950,000 b. P8,800,000 c. 8,600,000 d. 8,850,000

2. On December 31, 2014, the “Receivables” account of Corny Company shows an amortized cost of P1,950,000.
Subsidiary details show the following:

Trade accounts receivable – P775,000; Trade notes receivable – P100,000; installments receivable, normally due one
year to two years – P300,000; Customers’ accounts reporting credit balances arising from sales returns – P30,000;
Advance payments for purchase merchandise – P150,000; Customers’ accounts reporting credit balances arising from
advance payments – P20,000; Cash advance to subsidiary – P400,000; Claims from insurance company – P15,000;
Subscriptions receivable due in 60 days – P300,000; Accrued interest receivable – P10,000.

How much should be presented as “Trade and Other Receivables” under current assets?
a. 725,000 b. 1,125,000 c. 1,290,000 d. P1,650,000

TRADE DISCOUNTS VS. CASH DISCOUNTS

Trade discounts – this also known as volume discount or quantity discount. It is a means of adjusting the list
price for different buyers or varying quantities. Accounts receivables should be recorded net of trade discounts.

Cash discounts – this is a reduction from the invoice price by reason or prompt payment.

ILLUSTRATIVE PROBLEM:

1. On May 9, 2015, Paul Company sold merchandise with a list price of P150,000 to Camry on account. Paul allowed
trade discounts of 30% and 20%. Credit terms were 2/15, n/40 and the sale was made FOB shipping point. Paul
prepaid P6,000 of delivery costs for Camry as an accommodation.

What amount should Camry remit to Paul as full payment on May 24, 2015?
a. 82,320 b. 88,200 c. P88,320 d. 94,200

2. On June 1, 2015, Ton-Ton Company sold merchandise with a list price of P300,000 to Pan Company on account.
Pan was given the following trade discounts of 30% and 20%. Credit terms were 2/15, n/40 and the sale was
made FOB destination. On June 10, 2015, when the merchandise were delivered, Pan Company paid P5,000 of
delivery costs for Ton-Ton as an accommodation.

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 What amount should Pan Company remit to Ton-Ton Company as full payment on June 14, 2015?
a. 168,000 b. 164,640 c. 159,740 d. P159,640

Customer’s credit balances - credit balances in Accounts receivables resulting from overpayments, returns and
allowances and advance payments from customer. This account should be classified as current liabilities and must not be
offset against the debit balances in other customers’ account.

INITIAL MEASUREMENT

PFRS 9, states: provides that a financial asset shall be recognized initially at FAIR VALUE plus TRANSACTION COSTS that
are directly attributable to the acquisition.

The fair value of financial asset - fair value of consideration given, usually the transaction price

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

RECEIVABLES INITIAL MEASUREMENT (FAIR VALUE)

Short- term receivables Face value or original invoice amount
Long-term receivables, interest bearing Face value, which is actually PV upon issuance
Long-term receivables, noninterest bearing Present value, discounted using effective interest rate

SUBSEQUENT MEASUREMENT

Accounts receivable shall be subsequently measured at NET REALIZABLE VALUE, meaning the amount of cash expected
to be collected or the estimated recoverable amount.

This is based on the established basic principle that “assets shall not be carried at above their recoverable amount”

RECEIVABLES SUBSEQUENT MEASUREMENT

Short- term receivables Net Realizable Value
Long-term receivables, interest bearing Amortized cost, using effective interest method
Long-term receivables, noninterest bearing Amortized cost, using effective interest method

Note: In estimating the net realizable value of trade accounts receivable, the following deductions are made:
 Allowance for freight charge
 Allowance for sales return
 Allowance for sales discount
 Allowance for doubtful accounts

ACCOUNTING FOR BAD DEBTS EXPENSE

a. Allowance method – this requires the recognition of bad debt loss if the accounts are doubtful of collection.
b. Direct write off method – this requires the recognition of bad debt loss only when the account proved to be
worthless or uncollectible.

ALLOWANCE METHOD DIRECT WRITE-OFF METHOD

Accounts are considered doubtful Doubtful accounts XX No entry
of collection Allowance for doubtful accounts XX
Accounts proved to be worthless Allowance for doubtful accounts XX Bad debts XX
Accounts receivable XX Accounts receivable XX
Accounts that are previously Accounts receivable XX Accounts receivable XX
written off as worthless are Allowance for doubtful accounts XX Bad debts XX
recovered or collected
Cash XX Cash XX
Accounts receivable XX Accounts receivable XX

ILLUSTRATIVE PROBLEM:
1. Iron Company provided the following data for the current year:

Sales on account P3,600,000

Notes received to settle accounts 400,000
Provision for doubtful accounts 90,000
Accounts receivable determined to be worthless 20,000
Merchandise returned by customer 15,000

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 Collections received to settle accounts 2,450,000
Discounts permitted to be taken by customers 45,000
Collections received in settlement of notes 150,000

Required:
Prepare journal entries to record the transactions and compute the net realizable value of accounts receivable
ANS:
A.
1. Accounts receivable 3,600,000
Sales 3,600,000

2. Notes receivable 400,000

Accounts receivable 400,000

3. Doubtful accounts 90,000

Allowance for doubtful accounts 90,000

4. Allowance for doubtful accounts 20,000

Accounts receivable 20,000

5. Sales return 15,000

Accounts receivable 15,000

6. Cash 2,450,000
Accounts receivable 2,450,000

7. Sales discount 45,000

Accounts receivable 45,000

8. Cash 150,000
Notes receivable 150,000
B.
Accounts receivable 670,000
Less: Allowance for doubtful accounts 70,000
Net realizable value 600,000

2. Kimberly Company provided the following information for the current year:
JANUARY 1 DECEMBER 31
Accounts receivable 1,200,000
Allowance for doubtful 60,000
accounts
Sales 8,000,000
Cash collected from 7,000,000
customers

The cash collections included a recovery of P10,000 from a customer whose account had been written off as worthless in
prior year. During the year, it was necessary to recognize doubtful accounts expense of P100,000 and write off worthless
customers’ accounts of P30,000. At year-end, a customer settled an account by issuing a 12%, six-month note for
P400,000.
What is the net realizable value of accounts receivable on December 31?
a. P1,640,000 b. 1,670,000 c. 1,780,000 d. 1,630,000

3. When a specific customer’s account receivable is written off as uncollectible, what will be the effect on net
income under the allowance and direct write-off method?
a. No effect under both allowance method and direct write off method
b. Decrease under both allowance method and direct write off method
c. No effect under allowance method and decrease under direct write off method.
d. Decrease under allowance method and no effect under direct write off method
SOL.
ALLOWANCE METHOD DIRECT WRITE-OFF METHOD
Accounts proved to be worthless Allowance for doubtful accounts XX Bad debts XX
Accounts receivable XX Accounts receivable XX

4. When an entity uses the allowance method for recognizing uncollectible accounts, the entry to record the write-
off of a specific uncollectible account

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 a. Affects neither net income nor working capital.
b. Affects neither net income nor accounts receivable
c. Decrease both net income and accounts receivable
d. Decrease both net income and working capital
SOL.
ALLOWANCE METHOD
Accounts proved to be worthless Allowance for doubtful accounts XX
Accounts receivable XX

WORKING CAPITAL = CURRENT ASSET – CURRENT LIABILITIES

Before: 205,000 = 305,000 – 100,000 After : 205,000 = 305,000 – 100,000
E.G. P35,OOO proved to be worthless
Accounts Receivable 400,000 Allowance for doubtful accounts 35,000
Allowance for Doubtful accounts 95,000 Accounts receivable 35,000
Net Realizable Value 305,000

Accounts Receivable 365,000

Allowance for Doubtful accounts 60,000
Net Realizable Value 305,000

The ending balance of accounts receivable are remain the same notwithstanding the allowance for doubtful accounts are proved to be
worthless. Hence working capital balances stay the same also.

TERMS RELATED TO FREIGHT CHARGES

a. FOB Destination – means that ownership to the merchandise is transferred to the buyer only upon reaching the
point of destination or upon the buyer’s receipt of merchandise.
b. FOB Shipping point – means that ownership to the merchandise is transferred to the buyer upon shipment
thereof.
c. Freight collect – means that the freight charges on the merchandise shipped is to be paid by the buyer.
d. Freight prepaid – means that the freight charges on the merchandise shipped was already paid by the seller.

ILLUSTRATION
FOB Shipping Point

Seller places goods Free Buyer shoulder all the shipping cost
on Board the carrier

SELLER BUYER

Ownership
passes to
buyer here
Note:
 Buyer pays the shipping costs because ownership “title” transfer to buyer at the point of shipment

FOB Destination
Seller places goods Free on Board to the buyer’s place of
business and the seller shoulder all the freight cost

SELLER BUYER

Ownership
passes to
buyer here
Note:
 Seller pays the shipping costs because ownership “title” transfers to buyer upon the receipt thereof.

Receivables are recognized simultaneously when title to the goods passes to the buyer or when transfer of resources takes place.

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The point at which title passes may vary with the terms of the sales

ILLUSTRATIVE PROBLEM:

Aftershock Company sold merchandise on account for P500,000. The terms are 3/10, n/30.
The related freight charge amounted to P10,000. The account was collected within the discount period.

Required:

Prepare journal entries to record the transactions under the following freight terms:
1. FOB destination and freight collect
2. FOB destination and freight prepaid
3. FOB shipping point and freight collect
4. FOB shipping point and freight prepaid

SOL.
FOB destination and freight collect

1. Accounts receivable 500,000

Freight out 10,000
Sales 500,000
Allowance for freight charge 10,000

2. Cash 475,000
Sales discount 15,000
Allowance for freight charge 10,000
Accounts receivable 500,000

FOB destination and freight prepaid

1. Accounts receivable 500,000

Freight out 10,000
Sales 500,000
Cash 10,000

2. Cash 485,000
Sales discount 15,000
Accounts receivable 500,000

FOB shipping point and freight collect

1. Accounts receivable 500,000

Sales 500,000

2. Cash 485,000
Sales discount 15,000
Accounts receivable 500,000

FOB shipping point and freight prepaid

1. Accounts receivable 510,000

Sales 500,000
Cash 10,000

METHODS OF RECORDING CREDIT SALES

1. Gross method – the accounts receivable and sales are recorded at gross amount of the invoice.
2. Net method – the accounts receivable and sale are recorded at net amount of the invoice, meaning the invoice
price minus the cash discount.

METHODS OF ESTIMATING BAD DEBTS EXPENSE

a. Percentage of sales (Income statement approach) - bad debts expense is calculated by applying a
percentage to credit sales for the period. This process results in an adjusting entry that debits bad debts expense
and credits allowance for doubtful accounts without regard to the existing balance in the allowance account. A

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 proper matching of cost and revenue is achieved because bad debt loss is directly related to sales and reported in
the year of sales

b. Percentage of Receivables (Balance sheet approach) - results in a more accurate valuation of

receivables on the balance sheet since this method attempts to value accounts receivables at their future
collectible amounts.
a. Composite percentage - a single rate is applied to Accounts receivable at the end of the
period to obtain the required ending balance of the allowance. The amount of bad debts expenses recognized is the
difference between the existing balance in the allowance account and the desired ending balance.
b. Aging - accounts receivable are classified by age and a different percentage is applied to each
age group. The allowance is then determined by multiplying the total of each classification by the rate or percent of loss
depending on the experience of the company for each category to obtain the required ending balance of the allowance at
the end of the period.

ACCOUNTS RECEIVABLE ALLOWANCE FOR DOUBTFUL ACCOUNTS

Beginning Balance
Sales on Account
Recoveries
Ending Balance
Beginning Balance
Sales returns and allowance Accounts written off Doubtful accounts expense
Sales discounts Recoveries
Collections including Ending Balance
recoveries
Accounts written-off

ILLUSTRATIVE PROBLEM:

1. Lady Company provided the following data for the current year:

Allowance for doubtful accounts – January 1 P180,000

Sales 9,500,000
Sales returns and allowances 800,000
Sales discounts 200,000
Accounts written off as uncollectible 200,000

The entity provided for doubtful accounts expense at the ratio of 3% of net sales.
What is the allowance for doubtful accounts at year – end?
a. 435,000 b. 265,000 c. P235,000 d. 241,000

2. Monster Company provided the following accounts abstracted from the unadjusted trial balance at year end:

DEBIT CREDIT
Accounts receivable 5,000,000
Allowance for doubtful 40,000
accounts
Net credit sales 20,000,000

The entity estimated that 3% of the gross account receivable will become uncollectible
What amount should be recognized as doubtful accounts expense for the current year?
a. 110,000 b. 150,000 c. P190,000 d. 600,000

3. Yhan Company used the allowance method of accounting for bad debts. The following summary schedule was
prepared from an aging of accounts receivable outstanding on December 31:

Number of days Amount Probability of

Outstanding collection
0 – 30 days 5,000,000 98%
31 – 60 days 2,000,000 90%
Over 60 days 1,000,000 80%

The following additional information is available for the current year:

Net credit sales for the year 40,000,0000

Allowance for doubtful accounts:
Balance, January 1 450,000 (cr)
Balance before adjustment, December 31 20,000(dr)

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 The entity based the estimate of doubtful accounts on the aging of accounts receivable.
What amount should be recognized as doubtful accounts expense for the current year?
a. 470,000 b. 480,000 c. 500,000 d. 520,000

ISSUES FOR SALES OF GOODS

 Bill and Hold Sales – is a form of sales arrangement in which a seller of a good bills a customer for products
but does not ship the product until a later date. The delivery is delayed at the buyer’s request but the buyer
takes title and accepts billing.

Revenue is recognized when the buyer takes title, provided:

1. It is probable that delivery will be made
2. The item is on hand, identified and ready for delivery to the buyer at the time the sale is recognized
3. The buyer specifically acknowledges the deferred delivery instructions
4. The usual payment terms apply

 Layaway Sales – are sales where the goods are delivered only when the buyer has paid a final installment
in a series of payments.

Revenue from such sales is recognized when the goods are delivered. However, when experience indicates that
most such sales are consummated, revenue may be recognized when a significant deposit is received provided
the goods are on hand, identified and ready for delivery to the buyer.

 On approval when the buyer has negotiated a limited right of return

If there is uncertainty about the possibility of return, revenue is recognized when the shipment has been formally
accepted by the buyer or the goods have been delivered and the time period for rejection has expired.

 Consignment – is a method of marketing goods in which the owner called the consignor transfer physical
possession of certain goods to an agent called consignee who sells them on the owner’s behalf. Consigned goods
shall be included in the consignor’s inventory until such goods sold to other parties by consignee.

 Installment sales – despite retention of title by the seller, the substance of the transaction is that control over
the goods has already passed to the buyer, assuming a reasonable expectation of collection in the normal course
of business. The goods are considered as sold when delivered and therefore, excluded from the seller’s inventory.

NOTES RECEIVABLES

a. Definition – these are claims supported by formal promises to pay, which are in the form of notes.
b. Recognition
1. Short term notes are generally recorded at face value because the interest implicit in the maturity value is
immaterial.
2. Long term notes should be recorded at present value.
a. Interest bearing notes – the PV of the note is the same as the face amount of the note.
b. Non-interest bearing notes

Present Value
note exchanged solely for cash equal to the amount of cash proceeds
note exchanged for property, goods Present value is according to the
ff. order of priority:
1. FMV of the property, goods or services
2. FMV of the note received
3. Discounted amount of note using appropriate rate of
interest.

*The difference between the face amount of the note and its PV is recorded as discount or premium
and amortized to interest income account over the life of the note using the effective interest method.

c. Valuation and reporting

1. Short term notes are reported at their net realizable value.
2. Long term notes are reported at present value or amortized cost discounted using
effective interest rate.
The amortized cost of a financial asset is the amount at which the financial asset is measured at initial recognition
minus principal repayments, plus or minus the cumulative amortization using the effective interest method and
minus any reduction directly or through the use of an allowance account for impairment or uncollectibility

ILLUSTRATIVE PROBLEM:

STATED INTEREST RATE APPROXIMATES MARKET INTEREST RATE

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When the note bears an interest rate that approximates the current market rate for similar for similar instrument, the
present value of the note is equal to its face value. Subsequent to the date of the note, its carrying amount is the sum of
the principal or face value and any accrued interest.

1. On October 1, 2015, Picco Company received a 12%, 2 year note for P500,000 from customer in settlement of its
account and the interest of the note is payable annually starting October 1, 2016. The prevailing market rate for
similar instrument is 12%.

a. Initial recognition, the note is recorded at its present value which is equal to face value:
Note receivable 100,000
Account receivable 100,000

b. At the end of the reporting period, an adjusting is made to record any accrued interest, as follows:
Interest receivable 3,000
Interest revenue 3,000

c. The entity should record the carrying amount of the note on December 31 2015 amounting to:

UNREALISTIC STATED INTEREST RATE

When the note received bears an interest rate that is unrealistic and significantly different from the prevailing market
interest rate for similar notes, the market value of the note is equal to the present value of the principal and interest
payments discounted at an imputed interest rate, which should approximate the market rate at that time.

1. On December 31, 2015, Picca Company sold a piece of land costing P800,000 and received a three-year, 3%,
P1,200,000 note as payment. The interest on the note is payable annually every December 31. The principal
amount of the note is payable on December 31, 2018. The prevailing interest rate for similar instrument at
December 31, 2015 is 10%. There is no available fair value for the land on the date of sale.

a. The present value of the note is computed as follows:

Principal: P1,200,000 x 0.7513 P901,560

Interest: 1,200,000 x 3% x 2.4869 89,528
Present value P991,088

b. What amount should be reported as gain or loss on sale of land? ANS.

c. To record the sale of land:

Notes receivable 1,200,000
Discount on Notes receivable 208,912
Land 800,000
Gain on sale of land 191,088

d. To record the interest income for 2016:

Cash 36,000
Discount on Notes receivable 63,109
Interest income 99,109

e. To record the interest income for 2017:

Cash 36,000
Discount on Notes receivable 69,420
Interest income 105,420

f. To record the last settlement for 2018:

Cash 1,236,000
Discount on Notes receivable 76,384
Interest income 112,384
Notes receivable 1,200,000

2. On December 31, 2012, an entity sold a piece of land costing P800,000 and received P1,200,000 note as
payment. The note is payable in three annual installments of P400,000 beginning December 31, 2013 plus
interest at 3% based on outstanding balance. The prevailing interest rate for similar obligation at December 31,
2012 is 10%. There is no available fair value for the land on the date of sale.
a. Determine the present value of the note at the time of sale transaction: P1,056,298
b. Determine the gain on sale of land on December 31, 2012: P256,298
c. Prepare journal entries for 2012, 2013, 2014 and 2015:

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PRACTICE PROBLEM:

1. On December 31, 2015, Poppy Co. sold a machine to Santa Company in exchange for a non-interest bearing note
requiring ten annual payments of P50,000. Santa made the first payment on December 30, 2015. The market
interest rate for similar notes at date of issuance was 8%. Information on present value factors is as follows:

Period Present Value of 1 at 8% Present Value of Ordinary Annuity at 8%

9 0.50 6.25
10 0.46 6.71

In its December 31, 2015 statement of Financial Position, what amount should Poppy report the note receivable?
a. 225,000 b. 230,000 c. P312,500 d. 335,500

2. On March 1, 2015, Cura Company sold an old equipment to Matthew Company having an original cost of
P450,000 and accumulated depreciation of P150,000. Matthew signed a non-interest bearing note requiring
payment of P60,000 annually for seven years. The first payment was made on March 31, 2015. The prevailing
rate of interest for this type of note at the date of issuance was 10%. Information on present value factors is as
follows:

Period Present Value of 1 at 8% Present Value of Ordinary Annuity at 8%

6 0.56 4.36
7 0.51 4.87

How much should Cura Company report as sales revenue in March 2015?
a. 214,200 b. 261,600 c. 292,200 d. P321,600

What amount should be reported as gain or loss on sale of equipment?

KEY NOTES:
 When a non-interest bearing note is exchanged solely for cash and no other rights or privileges are exchanged the
present value of the note on the date it is received is equal to the cash proceeds exchanged.
 When the non-interest bearing note is exchanged for property, goods or services, the present value of the note on
the date it is received is the fair market value of the property, goods or services or the fair market value of the note,
whichever is more clearly determinable. Otherwise, an imputed rate is used to determine its present value.

IMPAIRMENT OF RECEIVABLES

 An entity shall assess at the end of each reporting period whether there is any objective evidence that its
receivable or group of receivables is impaired.
 An entity first assesses whether objective evidence of impairment exists individually for receivables that are
individually significant and individually or collectively for receivables that are not individually significant.
 The impairment loss is computed as follows:

Carrying amount of the Receivable

– PV of the estimated future cash flows discounted at
the effective interest rate
Impairment loss

ILLUSTRATIVE PROBLEM:

At December 31, 2012, one of Archer Company’s credit customers, Breach Trading, is experiencing financial difficulties.
As a result, Breach Trading has missed the payment of the principal amount of its notes payable of P3,000,000 and
accrued interest of P300,000, the stated rate is 10%. A restructuring arrangement was approved by the management of
Archer Company, as follows: the principal was reduced to P2,000,000 and will be due on December 31, 2013; accrued
interest of P300,000 is condoned; and interest rate is reduced to 8% payable on December 31, 2013 and December 31,
2014. The prevailing market interest rate for similar instrument at the time of restructuring – December 31, 2012 is 9%.
Compute the impairment loss to be recognized by Archer Company on December 31, 2012: ANS: P1,369,520

The market rate used in determining the present value of future cash flows from the restructured note is the historical
rate or the original effective rate of interest of the note.

ACCOUNTS AND NOTES RECEIVABLE FINANCING

a. Pledging/Hypothecation

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 – refers to the use of receivables as collateral for a loan.
– The only entry required in the books would record the loan obtained from the finance company or
bank.
– The accounts receivable, in any manner, is not affected by the pledging, meaning there is no
reduction in the accounts receivable balance. However, disclosures should be made in the notes to
financial statements.

b. Assignment
– A more formal borrowing arrangement in which the receivables are used as security. Assignment is
specific because specific accounts receivable serve as collateral security for the loan.
– Sale of accounts receivable with recourse.
– The assignor or borrower transfers its rights in some of its accounts receivables to a lender or
assignee in consideration for a loan
– Assigned accounts are segregated from unassigned accounts. The Notes payable/liability relating
to the assigned accounts should be deducted from the balance of A/R assigned to determine the
equity of the assignor in assigned accounts receivable.
– Assigned account receivables are reported on the statement of financial position together with
unassigned accounts receivable at their net realizable value.
– The loan is at a specified percentage of the face value of the collateral and interest and service fees
are charged to the assignor (borrower).
– The debtors are occasionally notified to make payments to the assignee (lender) but most
assignments are not on a notification basis.

c. Factoring
– It is similar to a sale of receivables because it is generally on a without recourse-notification
basis. The factor or buyer assumes the risk of collectivity and generally handles the billing and
collection function. A gain or loss is recognized for the difference between the proceeds received and
the net carrying amount of the receivables factored.
– Accounts receivable factored should be cancelled from the accounts because factoring differs from
an assignment in that an entity actually transfers ownership of the accounts receivable to the
factor.
– Factor assumes responsibility: for keeping the receivable records, collecting the accounts and for
uncollectible records.
– The factor of a company’s receivables withholds a certain portion of the accounts as a protection
against customer returns and allowances and other special adjustment, the portion retained should be
included in receivables presented as current assets (receivable from factor)

PRACTICE PROBLEM:

Dairy Company sold accounts receivable without recourse with face amount of P6,000,000. The factor charged 15%
commission on all accounts receivable factored and withheld 10% of the accounts factored as protection against
customer returns and other adjustments.
The entity had previously established an allowance for doubtful accounts of P200,000 for these accounts. By year-
end, the entity had collected the factor’s holdback there being no customer returns and other adjustments.

1. What amount of cash was initially received from factoring?

a. P4,500,000 b. 5,400,000 c. 5,100,000 d. 6,000,000

2. What is the loss on factoring?

a. P700,000 b. 900,000 c. 200,000 d. 0

d. Discounting
– Discounting of note receivable without recourse is deemed a sale and therefore there is no
contingent liability, meaning the endorser avoids future liability even if the maker refuses to pay
the endorsee on the date of maturity.
– The asset(notes receivable) is derecognized in the accounts and a gain or loss is recognized for the
difference between the proceeds and the carrying amount of the note, including any accrued interest.

– If discounting of note receivable is with recourse, which means that upon the default of the
debtor (maker), the seller (endorser) of the note becomes liable for its maturity value (contingent
liability of the endorser), the transaction is accounted for as either of the following:
 Conditional sale of note receivable recognizing a contingent liability – the note receivable
discount is deducted from the total note receivable with disclosure of the contingent liability
when preparing the statement of financial position.
 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.
No recognition of gain or loss in discounting.

11 CPA Consistency, Preparation and Attitude | RMV

A proceeds from discounting is computed as follows:

Maturity Value
– Discount
Net Proceeds

1. Interest to maturity (P x R x T)
2. Maturity value (P + I)
3. Discount (MV x DR x DP)
4. Net Proceeds (MV - Discount)

If the face value of the note is > proceeds, the difference is interest expense.
If the face value of the note is < proceeds, the difference is interest income.

12 CPA Consistency, Preparation and Attitude | RMV