TOPIC 4: RECEIVABLE FINANCING deducted in advance on the 3M value of the note.
The December collections of assigned accounts
 Receivable Financing is the financial flexibility or
capability of an entity to raise money out of its
receivables.
 When accounts are pledged, NO ENTRY would be
necessary. Disclosure is sufficient thereof in the
notes to FS
 In substance, assignment of AR means that a
borrower called the assignor transfer its rights in
some of its AR to a lender called the assignee. It is a
more formal form pf pledging.
 Pledging is general while assignment is specific
 Assignment may be done either on a nonnotification
or notification basis
 Equity in Assigned Accounts
(AR Assigned – Notes Payable)
 Factoring is a sale of AR on a without recourse
notification basis. A gain or loss is recognized for
the difference between the proceeds received and
the net carrying amount of the receivables factored.
 Factoring differs from an assignment in that an
entity actually transfers ownership of the AR to the
factor.
 In assignment, the assignor retains ownership of the
assigned accounts
 In assignment, No gain or loss is recognized
because it is a secured borrowing not a sale.
 Cost of Factoring (Factoring Fee plus interest)
ILLUSTRATIVE EXAMPLES
1. Blessed Company assigned 4M of accounts
receivable as collateral for a 2M 6% loan with a
bank. The entity also paid a finance fee of 5% on
the transaction upfront.
What amount should be recorded as a gain or
loss on the transfer of accounts receivable?
2. On December 21, 2015 Maharlika Company
assigned specific accounts receivable totaling 4M as
collateral on a 3M, 12% note from a certain bank.
The entity will continue to collect the assigned
accounts receivable. In addition to the interest on
the note, the bank also charged a 5% finance fee
receivable amounted to 2M less cash discounts of
100k. On December 31, 2015, the entity remitted
the collections to the bank in payment for the
interest accrued on December 31, 2015 and the note
payable. The entity accepted sales returns of 150k
on the assigned accounts and wrote off assigned
accounts of 200, 000.
a. What amount of cash was received from the
assignment of accounts receivable on December 1,
2015?
b. What is the carrying amount of note payable on
December 31, 2015?
c. What is the balance of accounts receivable-
assigned on December 31, 2015?
d. What amount should be disclosed as the equity of
Bamboo Company in assigned accounts on
December 31, 2015?
3. Digong Company factored 750, 000 of accounts
receivable at year-end. Control was surrendered.
The factor accepted the accounts receivable subject
to recourse for non-payment. The factor assessed a
fee of 2% and retained a holdback equal to 4% of
the accounts receivable.
In addition, the factor charged 12% interest
computed on a weighted-average time to maturity
of 51 days. The fair value of the recourse obligation
is 15, 000
a. What is the amount of cash initially received from
the factoring?
b. Assuming all the accounts receivable are collected,
what is the cost of factoring the accounts
receivable?
SIMULATED BOARD EXAM
THEORIES
1. Why would an entity sell accounts receivable to
another entity?
a. To improve the quality of credit granting process
b. To limit its legal liability
c. To accelerate access to amount collected
d. To comply with customer agreements
2. The practice of realizing cash from trade
receivables prior to maturity date is widespread.
Which term is not associated with this practice?
a. Hypothecation
b. Factoring
c. Defalcation
d. Pledging
3. It is a predetermined amount withheld by a factor
as a protection against customer returns,
allowances, and other special adjustments.
a. Equity in assigned accounts
b. Service charge
c. Factor’s Holdback
d. Loss on Factoring
4. When an entity factored accounts receivable
without recourse with a bank, the transaction is best
described as
a. Bank loan collateralized by the accounts
receivable
b. Bank loan to be repaid by the proceeds from the
accounts receivable
c. Sale of the accounts receivable to the bank, with
risk of uncollectible accounts retained by the entity.
d. Sale of the accounts receivable to the bank, with
the risk of uncollectible accounts transferred to the
bank.
5. All but one of the following are required before a
transfer of accounts receivable can be recorded as a
sale
a. The transferred accounts receivable are beyond
the reach of the transferor and the creditors
b. The transferor has not kept effective control over
the transferred AR through a repurchase agreement
c. The transferor maintains continuing involvement
d. The transferee can pledge or sell the transferred
AR
PROBLEMS
1. Baby Company factored 4M of accounts
receivable without guarantee for a finance charge of
5%. The finance entity retained an amount equal to
10% of the accounts receivable for possible
adjustments.
What amount should be recorded as gain or loss on
the transfer of accounts receivable?
a. 200, 000 loss
b. 200, 000 gain
c. 600, 000 loss
d. 600, 000 gain
2. Chismosa Company factored without recourse
2M of accounts receivable with a bank. The finance
charge is 3% and 5% was retained to cover sales
discounts, sales returns and sales allowances.
What amount of cash was received on the sale of
accounts receivable?
a. 1, 940, 000
b. 1, 900, 000
c. 1, 840, 000
d. 2, 000, 000
3-4. Disay Company sold accounts receivable
without recourse with face amount of 6M. 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 200, 000 for these accounts. By year-
end, the entity had collected the factor’s holdback
there being no customer returns and other
adjustments.
What amount of cash was initially received?
a. 4, 500, 000
b. 5, 400, 000
c. 5, 100, 000
d. 6, 000, 000
What is the loss on factoring?
a. 700, 000
b. 900, 000
c. 200, 000
d. 0
5. Carmela Company sold accounts receivable
without recourse for 5.3M. The entity received 5M
cash immediately from the factor. The remaining
300k will be received once the factor verifies that
none of the accounts receivable is in dispute. The
accounts receivable had a face amount of 6M. The
entity had previously established an allowance for
bad debts of 250, 000 in connection with such
accounts. What amount of loss on factoring?
(a) 700, 000 (b) 450, 000 (c) 750, 000 (d) 300, 000
 TOPIC 5: DISCOUNTING OF NOTE
RECEIVABLE
 asset
 If weighted average time, used 365 days
 Discounting specifically pertains to Notes
receivable
 Endorsement may be with recourse which means
that the endorser shall pay the endorsee if the
maker dishonors the note. This is the
contingent/secondary liability of the endorser
 In the absence of any evidence to the contrary,
endorsement is with recourse
 Net Proceeds= Maturity Value less Discount
 Maturity Value= Principal plus Interest
If Interest bearing, Principal (1 + Interest rate)
If non-interest bearing, the face value of the note
is already the maturity value
 Discount = Maturity Value * Discount Rate *
Discount period
 Gain/Loss on Discounting
Net Proceeds less the Carrying Amount of Note
-Such is recognize only if discounting is without
recourse and for conditional sale
 2 types of Discounting with Recourse
a. Conditional Sale- Note Receivable
Discounted
b. Secured Borrowing- Liability for Note
Receivable Discounted
 In discounting without recourse, the sale of Note
Receivable is absolute and therefore there is no
Contingent Liability
 Note Receivable Discounted (Conditional Sale)
is deducted from the total notes receivable when
preparing the statement of financial position and
disclosure of the contingent liability
 If the discounting is treated as 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
 There is no gain or loss on discounting, if the
note discounting is accounted for as a secured
borrowing.
 The entity shall derecognized an asset when:
a. The contractual rights to the cash flows have
expired
b. It has been transferred based on the extent of
transfer of risks and rewards of ownership
 Rule on the transfer of Risks and Rewards:
a. If the entity has transferred substantially,
derecognized
b. If retained, do not derecognized
If neither transferred nor retained, it depends on
whether the entity has retained control of the
 The carrying amount of the note receivable is
equal to the principal if the note is Non-interest
bearing
 The contingent liability for this note is equal to
the principal/face value of the note receivable
 Notes Receivable are claims supported by formal
promises to pay
 Conceptually, notes receivable is measured at
present value
 Short term receivables are measured at face
value
 Interest-bearing long term notes are measured at
face value which is actually the present value
upon the issuance
 Non-interest bearing long term notes are
measured at present value which is the
discounted value of the future cash flows using
the effective interest rate
 Subsequent measurement: Amortized cost using
the effective interest method
 If the interest is payable upon maturity together
with the principal payment, then consider it in
the computation for the present value
 If the note is made under customary trade terms
it is recorded at face value
ILLUSTRATIVE EXAMPLES
1. Apela Company accepted from a customer 1M
face amount 6-month 8% note dated April 15,
2018. On the same date, the entity discounted the
without recourse at a 10% discount rate.
a. What amount of cash was received from the
discounting?
b. What is the loss on note receivable
discounting?
2. On July 1, 2018, Daniel Company sold goods
in exchange for 2M, 8-month, non-interest
bearing note receivable. At the time of sale, the
market rate of interest was 12%. The entity
discounted the note at 10% on September 1,
2018.
a. What is the cash received from discounting?
b. What is the loss on note receivable
discounting?
3. Ronald Company accepted from a customer a
4M, 90-day, 12% interest-bearing note dated
August 31, 2018. On September 30, 2018, the
entity discounted the note with resource at the
Apex State Bank at 15%.
However, the proceeds were not received until
October 1, 2018. The discounting with recourse
is accounted for as a conditional sale with
recognition of a contingent liability.
a. What is the amount received from the
discounting of note receivable?
b. What is the loss on note receivable
discounting?
4. On August 31, 2015 Bagani Company
discounted with recourse a note at the bank at
discount rate of 15%. The note was received
from the customer on August 1, 2015, is for 90
days, has a face value of 5M and carries an
interest rate of 12%.
The discounting transaction is accounted for as a
secured borrowing.
The customer paid the note to the bank on
October 30, 2014, the date of maturity.
What is the interest expense to be recognized on
August 31, 2015?
5. On January 1, 2015, Cecilia Company sold
land with carrying amount of 1.5M in exchange
for a 9-month, 10% note with face value of 2M.
The 10% rate properly reflects the time value of
money for this type of note.
On April 1, 2015, the entity discounted the note
with recourse. The bank discounts the rate at
12%.
The discounting transaction is accounted for as a
secured borrowing.
On October 1, 2015, the maker dishonored the
note receivable. The entity paid the bank the
maturity value of the note plus protest fee of 10k.
On December 31, 2015, the entity collected the
dishonored note in full plus the 12% annual
interest on the total amount due.
a. What is the amount received from the
discounting of the note receivable?
b. What is the interest expense to be recognized
on April 1, 2015?
c. What is the amount collected from the
customer on December 31, 2015?
SIMULATED BOARD EXAM
THEORIES
1. On October 1 of the current year, an entity
received a one-year note receivable bearing
interest at the market rate. The face amount of
the note receivable and the entire amount of
the interest are due on September 30 of the
next year. The interest receivable on December
31 of the current year would consist of an
amount representing
a. 3 months of accrued interest income
b. 9 months of accrued interest income
c. 12 months of accrued interest income
d. The excess on October 1 of the present
value of the note receivable over its face
amount
2. Accounting for the interest in a non-interest
bearing note receivable is an example of what
aspect of accounting theory?
a. Matching
b. Verifiability
c. Substance over form
d. Form over substance
3. On July 1 of the current year, an entity
received a 1 year note receivable bearing
interest at the market rate. The face amount of
the note receivable and the entire amount of
the interest are due in 1 year. When the note
receivable was recorded on July 1, which of
the following was debited?
a. Interest receivable
b. Unearned discount on note receivable
c. Interest receivable and unearned discount on
note receivable
d. Neither interest receivable nor unearned
discount on note receivable
4. The note receivable discounted account is
reported as
a. Contra-asset account for the proceeds from
the discounting transaction
b. Contra-asset account for the face amount of
the note
c. Liability account for the proceeds from the
discounting
d. Liability account for the face amount of the
note
5. If a note receivable is discounted without
recourse
a. The contingent liability may be disclosed
b. Liability for note receivable discounted is
credited
c. Note receivable is credited
d. The transaction shall be accounted for as a
secured borrowing as opposed to sale
PROBLEMS
1. Rhea Company received from a customer
a one-year, 500,000 note bearing annual
interest of 8%. After holding the note for six
months, the entity discounted the note
without recourse at 10%.
What amount of cash was received from the
bank?
a. 540,000
b. 523, 810
c. 513, 000
d. 495, 238
2-3 On June 30, 2015 Reinald Company
discounted at the bank a customer 6M, 6-
month 10% note receivable dated April 30,
2015. The bank discounted the note at 12%
without recourse.
What is the amount received from the note
receivable discounting?
a. 5,640,000
b. 5,760,000
c. 6,048,000
d. 6,174,000
3. What is the loss on note receivable
discounting?
a. 252,000
b. 152, 000
c. 52, 000
d. 48,000
4. Broken Company discounted its own 5M,
one-year note at a discount rate of 12%,
when the prime rate was 10%.
In reporting the note prior to maturity, what
rate should be used for the recording of
interest expense?
a. 10.0%
b. 10.7%
c. 12.0%
d. 13.6%
5. Frame Company has an 8% note
receivable dated June 30, 2015 in the
original amount of 1,500,000. Payments of
500,000 in principal plus accrued interest
are due annually on July 1, 2016, 2017 and
2018.
What is the balance of note receivable on
July 1, 2016?
a. 1,500,000
b. 1,000,000
c. 500,000
d. 0
In the June 30, 2017 statement of financial
position, what amount should be reported as
a current asset for interest on the note
receivable?
a. 120,000
b. 40, 000
c. 80,000
d. 0
TOPIC 6: LOAN RECEIVABLE &
IMPAIRMENT
 A loan receivable is a financial asset arising
from a loan granted by a bank or other
financial institution to a borrower or a
client.
 Initial measurement:
Fair Value + Direct Origination Costs –
Direct Origination Fees
 Indirect origination costs are expensed
outright
 Subsequent measurement: Amortized Cost
using effective interest method
 Measurement of Impairment
The amount of the loss is measured as the
difference between the carrying amount of
the loan and the PV of estimated future
cash flows discounted at the original
effective rate of the loan.
 It is important to take note of the date of
assessment of impairment
ILLUSTRATIVE EXAMPLES
1. Almighty Bank granted a loan to a borrower on
January 1, 2015. The interest rate on the loan is
10% payable annually starting December 31, 2015.
The loan matures in 5 years on December 31, 2019.
Principal amount – 4M
Origination fee received from a borrower – 350,000
Direct origination cost incurred – 61, 500
The effective rate on the loan after considering the
direct origination cost incurred and the origination
fee received is 12%
a. What is the amount of the loan receivable on
January 1, 2015?
b. What is the interest income for 2015?
c. What is the carrying amount of the loan
receivable on December 31, 2015?
2. Malaysia Bank granted a loan to a borrower on
January 1, 2015. The interest on the loan is 8%
payable annually starting December 31, 2015. The
loan matures in 3 years on December 31, 2017.
Principal Amount – 3M
Origination Fee – 100, 000
Direct Origination Cost- 260, 300
After considering the origination fee charged to the
borrower and the direct origination cost incurred,
the effective rate on the loan is 6%.
a. What is the carrying amount of the loan
receivable on January 1, 2015?
b. What is the interest income for 2015?
c. What is the carrying amount of the loan
receivable on December 31, 2015?
d. What is the interest income for 2016?
3. Bayugan Bank loaned Boracay Company 7.5M
on January 1, 2013. The terms of the loan were
payment in full on January 1, 2017 plus annual
interest payment at 11%. The interest payment was
made as scheduled on January 1, 2014. However,
due to financial setbacks, Boracay Company was
unable to make the 2015 interest payment. Bayugan
Bank considered the loan impaired and projected
the cash flows from the loan on December 31, 2015.
The bank accrued the interest on December 31,
2014, but did not continue to accrue interest for
2015 due to the impairment of the loan. The
projected cash flows are:
Date of Cash Flow Amount Projected on
Dec. 31, 2015
12/31/2016 500, 000
12/31/2017 1, 000, 000
12/31/2018 2, 000, 000
12/31/2019 4, 000, 000
The PV of 1 at 11% is 0.9 for one period, 0.81 for 2
periods, 0.73 for 3 periods and 0.66 for 4 periods.
a. What is the loan impairment loss on December
31, 2015?
b. What is the interest income for 2016?
c. What is the carrying Amount of the loan
receivable on December 31, 2016?
Prepared By:
King Christopher R. Laganao, CPA
SIMULATED BOARD EXAM
1. National Bank granted a loan to a borrower on
January 1, 2015. The interest on the loan is 10%
payable annually starting December 31, 2017.
Principal Amount – 4M
Origination Fee – 342, 100
Direct Origination Cost – 150, 000
After considering the origination fee charged
against the borrower and the direct origination cost
incurred, the effective rate on the loan is 12%.
What is the carrying amount of the loan receivable
on January 1, 2015?
a. 4M
b. 3, 807, 900
c. 4, 150, 000
d. 3, 657, 900
2. What is the interest income for 2015?
a. 400, 000
b. 380, 900
c. 456, 948
d. 480, 000
3. What is the carrying amount of the loan
receivable on December 31, 2015?
a. 4M
b. 3, 807, 900
c. 3, 864, 848
d. 3, 750, 932
4. What is the interest income for 2016?
a. 480, 000
b. 400, 000
c. 386, 485
d. 463, 782
5. Kalibo Bank loaned 5M to Caticlan Company on
January 1, 2013. The terms of the loan require
principal payments of 1M each year for 5 years plus
interest at 8%.
The first principal and interest is due on January 1,
2014. Caticlan Company made the required
payments during 2014 and 2015.
However, during 2015 Caticlan Company began to
experience financial difficulties, requiring Kalibo
Bank to reassess the collectability of the loan.
On December 31, 2015, Kalibo Bank has
determined that the remaining principal payment
will be collected but the collection of the interest is
unlikely. Kalibo Bank did not accrue the interest on
December 31, 2015.
The present value of 1 at 8% is as follows:
For 1 period – 0. 926
For 2 periods- 0.857
For 3 periods- 0.794
What is the loan impairment loss on December 31,
2015?
a. 423, 000
b. 217, 000
c. 222, 000
d. 0

6. What is the interest income for 2016?

a. 126, 160
b. 142, 640
c. 240, 000
d. 0

7. What is the carrying amount of the loan

receivable on December 31, 2016?
a. 2M
b. 1, 925, 640
c. 1, 640, 360
d. 1, 783, 000

TRUE or FALSE
8. Direct Origination Costs are deducted in
determining the initial carrying amount of the loan
receivable

9. If the initial carrying amount of the loan is lower

than its face value then the effective rate is lower
than its nominal rate

10. If the initial carrying amount of the loan is

greater than its face value then the effective rate is
greater than its nominal rate