RECEIVABLES

Financing &
Discounting
INTERMEDIATE ACCOUNTING I
CHAPTER 8 & 9
RECEIVABLE
FINANCING
CHAPTER 8
RECEIVABLE FINANCING
• the financial flexibility or capability of an entity to raise money out of
its receivables
• common forms:
1. Pledge of accounts receivable
2. Assignment of accounts receivable
3. Factoring of accounts receivable
4. Discounting of notes receivable
PLEDGE
Pledge of Accounts Receivable
• When loans are obtained from the bank or any lending institution, the
accounts receivable may be pledge as collateral security for the
payment of the loan.
• Normally, the borrowing entity makes the collections of the pledged
accounts but may be required to turn over the collection to the bank
in satisfaction for the loan.
Pledge of Accounts Receivable
• Accounting for LOAN (Liability)
• To Record the LOAN
• Debit cash and discount on note payable (if loan is discounted), and
Credit note payable
• To Record payment of the loan
• Debit note payable and credit cash.
• With respect to the PLEDGED ACCOUNTS, no entry would be necessary.
• It is sufficient that disclosure is made in the notes to financial
statement.
Pledge of Accounts
COMPUTATION
Receivable FACE VALUE 1,000,000
• On Nov 1, 2019, an entity
borrowed P1,000,000 from Less: Interest Deducted in Advance
1,000,000 * 12% 120,000
Philippine National Bank and
issued a promissory note for the NET PROCEEDS 880,000
same.
• The term of the loan is one year
and discounted at 12%. The DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT

entity pledged accounts

2019
receivable of P2,000,000 to 880,000
Nov 1 Cash
secure the loan. Discount on Note Payable 120,000
• If the loan is discounted, in the Note Payable - bank 1,000,000
banking parlance this means that To record loan from pledged accounts
the interest for the term of the
loan is deducted in advance.
Pledge of Accounts
Receivable DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
• On December 31, 2019, using the Dec 31 Interest Expense 20,000
straight line method, the discount Discount on Note Payable 20,000
on note payable is amortized as To record amortization of discount
interest expense for two months (120,000 * 2/12)
from November 1 to December 31.
• Presentation as current liabilities: 2020
Nov 1 Note Payable - Bank 1,000,000
NOTE PAYABLE – BANK 1,000,000
Cash 1,000,000
Less: Discount on Note Payable 100,000 To record payment of loan
Carrying Amount 900,000
Nov 1 Interest Expense 100,000
• Note to financial statement: Discount on Note Payable 100,000
“The Note Payable to bank To record amortization of discount
matures on November 1, 2020 and
is secured by accounts receivable
with face value of P2, 000, 000.”
 Problem 8 – 1 DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
• Pittance Company provided the Mar 1 Cash 2,000,000
following information in connection Note Payable - Bank 2,000,000
with a bank loan: To record borrowing with pledged
accounts of P3,000,000
March 1 Pittance Company borrowed
P2,000,000 from bank on a six-month Apr 1 Cash 980,000
note carrying an interest of 12% per Sales discounts 20,000
annum. Accounts of P3,000,000 are Accounts Receivable 1,000,000
pledged to secure the loan. To record collection
April 1Pledged accounts of P1,000,000
are collected minus 2% discount. Jun 1 Cash 2,000,000
Accounts Receivable 2,000,000
June 1 The remaining pledged To record collection
accounts are collected.
Sep 1 Note Payable - Bank 2,000,000
Sept 1 The bank loan is repaid plus Interest Expense 120,000
interest. (2,000,000 * 12% * 6/12) Cash 2,120,000
REQUIRED: Prepare journal entries To record payment of loan
to record the transactions. Problem 8 – 2
ASSIGNMENT
Assignment of Accounts
Receivable
• In substance, assignment of accounts receivable means that a
borrower called the assignor transfers rights in some accounts
receivable to a lender called assignee in consideration for a loan.
• a more formal type of pledging of accounts receivable.
• secured borrowing evidence by a financing agreement and a
promissory note both of which the assignor signs.
Pledging VS Assignment
• Pledging is general because all accounts receivable serve as security
for the loan.
• Assignment is specific because specific accounts receivable serve as
collateral security for a loan.
 Features of Assignment
1. Assignment may be done either on a nonnotification or notification
basis.
• When accounts are assigned on a nonnotification basis, customers
are not informed that their accounts have been assigned.
• customers continue to make payments to the assignor, who
remits the collections to the assignee.
• When accounts are assigned on a notification basis, customers are
notified to make their payments directly to the assignee.
Features of assignment
2. Before entering into an assignment, the assignee, usually a bank or
a finance entity, analyzes the borrower’s accounts receivable.
• The assignee lends only a certain percentage of the face value of
the accounts assigned because the assigned accounts may not be
fully realized by reason of such factors as sales discount, sales
return and allowances and uncollectible accounts.
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.
Illustration –
DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
nonnotification basis Apr 1 Accounts Receivable - assigned 700,000
April 1
Accounts Receivable 700,000
• An entity assigned P700, 000 of To separate assigned accounts
accounts receivable to a bank
under a nonnotification 1 Cash 555,000
Service Charge 5,000
arrangement.
Note Payable - Bank 560,000
• The bank advances 80% less a To record receipt from the loan
service charge of P5, 000. The 700,000 * 80%
entity signed a promissory note
5 Sales Return and Allowance 20,000
that provides for interest of 1%
Accounts Receivable - Assigned 20,000
per month on the unpaid loan To record return
balance.
• Apr 5 Issued a credit memo for
sales return to a customer whose
account was assigned, P20, 000.
Illustration –
DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
nonnotification basis 294,000
• Apr 10 Collected P300, 000 of the Apr 10 Cash
Sales Discount 6,000
assigned accounts less 2% Accounts Receivable - Assigned 300,000
discount. To record collection within the
discount period

• Apr 30 Remitted the total 30 Note Payable - Bank 294,000

collections to the bank plus Interest Expense 560,000 * 1% 5,600
interest for one month. Cash 299,600
To record remittance to bank

• May 7 Assigned accounts of May 7 Allowance for Doubtful Accounts 15,000

P15,000 proved worthless. Accounts Receivable - Assigned 15,000
To record write-off

20 Cash 300,000
• May 20 Collected P300, 000 of the Accounts Receivable - Assigned 300,000
assigned accounts. To record collection
Illustration –
DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
nonnotification basis
• May 30 Remitted the total May 30 Note Payable - Bank 266,000
Interest Expense 2,660
amount due the bank to pay off Cash 268,660
the loan balance plus interest for To record remittance to bank
one month.
30 Accounts Receivable 65,000
Note Payable - Bank 560,000 Accounts Receivable - Assigned 65,000
Less: Remittance Apr 30 294,000 To transfer the remaining balance
Balance – May 30 266,000 of assigned accounts
Multiply by Interest Rate 1%
Interest Expense
COMPUTATION
2,660 700,000
Total Accounts Receivable Assigned
LESS: Collection 594,000
Sales Discount 6,000
Sales Return 20,000
Write-Off 15,000 635,000
REMAINING BALANCE 65,000
PROBLEM 8 - 5 DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT

• REQUIRED: Prepare journal entries Jul 1 Accounts Receivable - assigned 500,000

Accounts Receivable 500,000
to record the transactions.
To separate assigned accounts
• Grateful Company provided the
following transactions: Jul 1 Cash 390,000
Service Charge 10,000
• July 1 The entity assigned P500,000
Note Payable - Bank 400,000
accounts receivable its bank on a
To record receipt from
nonnotification basis in assignment of accounts
consideration for a loan.
• The bank advanced P400, 000 less a A.R. - assigned 500,000
service charge of 2% of the total Multiply by S.C. Rate 2%
accounts assigned, and the entity Service Charge 10,000
signed a promissory note bearing
interest of 1% per month on the
unpaid loan balance at the beginning
of the month.
PROBLEM 8 - 5 DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT

• REQUIRED: Prepare journal Aug 1 Cash 330,000

Accounts Receivable - Assigned 330,000
entries to record the transactions. To record collection
• August 1 Collected P330,000 on
assigned accounts were collected. 1 Note Payable - Bank 326,000
Interest Expense 4,000
• The entity remitted this amount Cash 330,000
to the bank in payment first for To record payment to bank
interest and the balance to the
principal. N.P. - balance 400,000
Multiply by Interest Rate 1%
Service Charge 4,000
PROBLEM 8 - 5 DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT

• REQUIRED: Prepare journal Sep 1 Cash 170,000

Accounts Receivable - Assigned 170,000
entries to record the transactions. To record collection
• September 1 Collected the
remaining balance of assigned
accounts. 1 Note Payable - Bank 74,000
Interest Expense 740
Total AR - assigned 500,000 Cash 74,740
Less: Collected Aug 1 330,000 To record payment to bank
Balance – May 30 170,000
Note Payable - Bank 400,000
Less: Remittance Aug 1 326,000
• The entity paid off the remaining Balance – Sep 1 74,000
loan balance. Multiply by Interest Rate 1%
Interest Expense 740
Illustration –
DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
notification basis
• July 1 An entity assigned Jul 1 Accounts Receivable - assigned 1,000,000
P1,000,000 of accounts receivable Accounts Receivable 1,000,000
to a bank under a notification To separate assigned accounts
arrangement. 1 Cash 760,000
• The bank loans 80% less 4% service Service Charge 40,000
charge on the gross amount Note Payable - Bank 800,000
assigned. The entity signed a To record receipt from the loan
promissory note that provides for 1,000,000 * 4% 1,000,000 * 80%
1% interest per month on the 31 Note Payable - Bank 588,000
unpaid loan balance. Sales Discount 12,000
• July 31 Received notice from bank Accounts Receivable - Assigned 600,000
that P600, 000 of the assigned To record collection within the discount
period and was applied to loan
accounts were collected less 2%
discount. 31 Interest Expense 8,000
Cash 8,000
• A check was sent to the bank for the To record payment to bank
interest due. 800,000 * 1%
Illustration –
DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
notification basis
• August 31 Received notice from Aug 31 Cash 85,880
bank that P300, 000 of the Note Payable - Bank 212,000
Interest Expense 2,120
assigned accounts were collected. Accounts Receivable - Assigned 300,000
• Final settlement was made by the To record collection
bank for the excess collections
31 Accounts Receivable 100,000
together with the uncollected 100,000
Accounts Receivable - Assigned
assigned accounts of P100, 000. To transfer the remaining balance
Note Payable - Bank 800,000 of assigned accounts
Less: Collection applied Jul 31 588,000
Balance – Aug 31 212,000 COMPUTATION
Multiply by Interest Rate 1% Total Accounts Receivable Assigned 1,000,000
Interest Expense 2,120 LESS: Collected July 31 600,000
Collected Aug 31 300,000 900,000
REMAINING BALANCE 100,000
 STATEMENT
PRESENTATION
• The following accounts were gathered from the ledger of an entity:
Accounts receivable-unassigned 4,000,000
accounts receivable-assigned 1,000,000
allowance for doubtful accounts 100,000
note payable-bank (related to assignment) 400,000
DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
Accounts Receivable-unassigned 4,000,000 The net realizable value of
Accounts Receivable-assigned 1,000,000 P4,900,000 will be included in the
Gross Accounts Receivable 5,000,000 caption “trade and other
Less: Allowance for Doubtful Accounts 100,000
receivables” and classified as
NET REALIZABLE VALUE 4,900,000
current asset.
EQUITY IN ASSIGNED
ACCOUNTS
Accounts Receivable-assigned 1,000,000
REQUIRED DISCLOSURE on
Less: Note Payable - Bank 400,000
assigned accounts
Equity in Assigned Accounts 600,000

Problem 8 – 4
FACTORING
 Factoring
• a sale of accounts receivable on a without recourse, notification basis.
• In a factoring arrangement, an entity sells its 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 factored.
• Factoring differs from an assignment
• transfers ownership of its accounts receivable to the factor.
• the factor assumes responsibility for uncollectible factored accounts.
• In assignment, the assignor retains ownership of the accounts assigned.
• the customer whose accounts are factored are notified and required to pay
directly to the factor.
• The factor has then the responsibility of keeping the receivable records and
collecting the accounts.
Factoring
• 2 Forms:
• Casual Factoring
• If an entity finds itself in a critical cash position, it 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.
• Factoring as a Continuing Agreement
Casual Factoring
• For example, an entity factored P100, 000 of accounts receivable with
an allowance for doubtful accounts of P5, 000 for P80, 000.
• The entry to record the sale is:
Cash 80,000
Allowance for doubtful accounts 5,000
Loss on factoring 15,000
Accounts Receivable 100,000

LOSS ON FACTORING is the difference between the carrying amount

of receivables factored and the proceeds received.
Factoring as continuing
agreement
• where a finance entity purchases all of the accounts receivable of a certain
entity.
• selling entity requests factor’s credit approval before shipment of
merchandise to a customer
• If approved, the account is sold immediately to the factor after shipment
of the goods. The factor assumes the credit and the collection function.
• For compensation, (FACTOR)
• the factor charges a commission or factoring fee of 5% to 20% for its
services of credit approval, billing, and collecting
• Also, assumes uncollectible factored accounts
Factor’s Holdback
• Amount withheld by the factor as a protection against customer
returns and allowances and other special adjustments.
• Receivable from Factor (account)
• classified as current asset (TOR)
• Final settlement is made after the factored receivables have been
fully collected.
 ILLUSTRATION DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
• An entity factored accounts 1 Cash 365,000
receivables of P500, 000 with credit Sales Discounts 10,000
terms of 2/10, n/30 immediately Service Charge 25,000
after shipment of the goods to the Receivable from Factor 100,000
customer. Accounts Receivable 500,000
To record sale of accounts
• The factor charged a 5% commission
based on the gross amount of the COMPUTATION
receivables factored. GROSS AMOUNT 500,000
• In addition, the factor withheld 20% LESS: Sales Discounts (500,000*2%) 10,000
of the amount of the receivables COMMISSION (500,000*5%) 25,000
Factor’s holdback (500,000*20%) 100,000 135,000
factored to cover sales return and
CASH RECEIVED from FACTORING 365,000
allowances.
 ILLUSTRATION DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT

• If the customer is subsequently

2 Sales Returns & Allowance 50,000
allowed a credit of P50, 000 for Sales Discounts (50,000*2%) 1,000
damaged merchandise. Receivable from Factor 49,000
To record return

• When all the receivables factored

are collected by factor with no 3 Cash 51,000
further returns and allowances, Receivable from Factor 51,000
the final settlement with the To record receipt from
factor 100,000 – 49,000
factor is recorded.
 Problem 8 – 8 DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
• Dainty Company sold accounts Cash 4,500,000
receivable without recourse with face Allowance for Doubtful Accounts 200,000
amount of P6,000,000. The factor
charged 15% commission on all Receivable From Factor 600,000
accounts receivable factored and Loss on Factoring 700,000
withheld 10% of the accounts factored Accounts Receivable 6,000,000
as protection against customer returns To record factoring
and other adjustments.
• The entity had previously established an
allowance for doubtful accounts of
Cash 600,000
P200,000 for these accounts. Receivable From Factor 600,000
• By year-end the entity had collected the Gross amount 6,000, 000
factor’s holdback there being no Less: Commission (15% x 6,000, 000) 900, 000
customer returns and other adjustment. Factor’s holdback (10% x 6,000, 000) 600,000 1,500, 000
Cash received from factoring 4,500, 000
• REQUIRED: Prepare journal entries
to record the factoring and the Net Sale Price (6,000,000 – 900,000) 5,100, 000
Carrying Amount (6,000,000 – 200,000)5,800, 000
subsequent collection of the factor’s
LOSS ON FACTORING (700, 000)
holdback.
Problem 8 – 10
 Credit Card
• 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.
• The credit card has enabled retailers and other businesses to continue to sell
goods and services where the customers obtain possession of the goods
immediately but do not have to pay the goods for about one month.
• These issuers are generally responsible for approving the credit of customers
and collecting the receivables for a service fee from 1% to 5% of the credit
card sales.
• If a customer buys goods and uses a credit card, the credit card receipt must
be forwarded by the retailer to the card issuer who will then pay the retailer
the appropriate amount minus the credit service charge. 
• Two entries are necessary, one entry at the time of the sale and another
entry when payment is received from the card issuer.
 Illustration
• Credit card sales to customers using Diners Club amount to P200, 000 for
a certain period. The credit card receipts are forwarded to Diners Club
and payment is subsequently received from Diners Club minus a 3%
service charge.
•  To record the credit card sales:
 Accounts receivable-Diners Club 200, 000
Sales 200, 000

• To record the payment from diners Club:

Cash 194,000
Credit card service charge (200, 000 x 3%) 6,000
Accounts receivable- Diners Club 200, 000
 Another illustration: CREDIT CARD
• Some credit cards allow the retailer business to deposit the credit card receipts
directly to a current account.
• The bank accepts the credit card receipts and immediately increases the
current account of the retailer for the amount of credit card sales minus the
credit card service charge.
• This arrangement is in effect a form of factoring of accounts receivable because
the credit card sales are treated as cash sales by retailers. 
• For example, credit card sales amount to P200, 000 with 5% service charge or
P10, 000
• The entry to record the credit card sales under this form of arrangement:
Cash 190, 000
Credit card service charge 10, 000
Sales 200,000
 Problem 8 – 12
• Lucid Company showed the following balance on December 31:
Accounts Receivable – unassigned 1,000,000
Accounts Receivable – assigned 300,000
Allowance for doubtful accounts – Jan 1 30,000
Receivable from factor 40,000
Note Payable – bank 240,000
• REQUIRED:
1. Prepare journal entry to record the factoring.
2. Prepare journal entry to record the assignment.
3. Prepare journal entry to adjust allowance for doubtful accounts on
December 31.
4. Indicate the classification, presentation and disclosure of the
accounts receivable involved in receivable financing.
 DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
• During the current year, the entity
found itself in financial distress Jun 30 Cash 150,000
and decided to resort to Service Charge 10,000
receivable financing. Receivable from Factor 40,000
Accounts Receivable 200,000
• On June 30, the entity factored To record sale of accounts
P200,000 of accounts receivable
to a finance entity. COMPUTATION
• The finance entity charged a GROSS AMOUNT 200,000
factoring fee of 5% of the LESS: Fee (200,000*5%) 10,000
accounts factored and withheld Factor’s holdback (200,000*20%) 40,000 50,000
20% of the amount factored. CASH RECEIVED from FACTORING 150,000
 ILLUSTRATION DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
• During the current year, the entity Jun 30 Cash 150,000
found itself in financial distress Service Charge 10,000
and decided to resort to Receivable from Factor 40,000
Accounts Receivable 200,000
receivable financing. To record sale of accounts
• On December 31, the entity
assigned P300,000 of accounts Dec 31 Accounts Receivable - assigned 300,000
receivable to a bank under a Accounts Receivable 300,000
To separate assigned accounts
nonnotification basis.
• The bank advanced 80% less a 31 Cash 225,000
service fee of 5% of the accounts Service Charge 300,000 * 5% 15,000
assigned. The entity signed a Note Payable - Bank 240,000
promissory note for the loan. To record receipt from the loan
300,000 * 80%
 ILLUSTRATION DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
• During the current year, the entity Dec 31 Doubtful Accounts Expense 35,000
found itself in financial distress Allowance for Doubtful Accounts 35,000
and decided to resort to To record doubtful accounts
for the year
receivable financing.
• On December 31, it is estimated Accounts Receivable-unassigned 1,000,000
that 5% of the outstanding Accounts Receivable-assigned 300,000
accounts receivable may proved Gross Accounts Receivable 1,300,000
Multiply by Rate 5%
uncollectible. 65,000
Required Allowance
Less: Allowance – Jan 1 30,000
DOUBTFUL ACCOUNTS EXPENSE 35,000
 Indicate the classification, presentation and disclosure of the
accounts receivable involved in receivable financing.
• The net realizable value of the accounts receivable is included in trade and other
receivables and classified as current asset.
  Accounts receivable – unassigned 1,000,000
Accounts receivable – assigned 300,000
Gross Accounts Receivable 1,300,000
Less: Allowance for doubtful accounts 65,000
Net realizable value 1,235,000
• The receivable from factor of P40,000 is included in trade and other receivables and
classified as current asset.
• The note payable – bank of P240,000 is classified as current liability presented
separately or included in trade and other payables.
• Disclosure of the equity in assigned accounts
  Accounts receivable – assigned 300,000
Note payable – bank (240,000)
Equity in assigned accounts 60,000
Discounting
of
Note Receivable
Discounting of Note Receivable
• In a promissory note, the original parties are the maker and payee.
• The maker is the one liable and the payee is the one entitled to
payment on the date of maturity.
• When a note is negotiable the payee may obtain cash before maturity
date by discounting the note at a bank or other financing company.
• To discount the note, the payee must endorse it. Thus, legally the
payee becomes an endorser and the bank becomes endorsee.
ENDORSEMENT
• The transfer of right to a negotiable instrument by simply signing at
the back of the instrument.
• Endorsement may be with recourse which means that the endorser
shall pay the endorsee if the maker dishonours the note.
• contingent (accounting) or secondary (Legal) liability of the
endorser.
• Endorsement may be without recourse which means that the
endorser avoids future liability even if the maker refuses to pay the
endorsee on the date of maturity.
• In the absence of any evidence to the contrary, endorsement is
assumed to be with recourse.
Terms related to discounting of
note
• Net proceeds refer to the discounted value of the note received by
the endorser from the endorsee.
Net proceeds = Maturity Value - Discount
• Maturity value is the amount due on the note at the date of maturity.
Maturity Value = Principal + interest
• Maturity date is the date on which the note should be paid.
Terms related to discounting of note

• Principal (Face Value) is the amount appearing on the face of the

note.
• Interest is the amount of interest for the full term of the note.
Interest = Principal x rate x time.
• Interest rate is the rate appearing on the face of the note.
• Time is the period within which interest shall accrue.
• For discounting purposes, it is the period from date of note to
maturity date. (entire period of the note)
Terms related to discounting of note
• Discount is the amount of interest deducted by bank in advance.
Discount = maturity value * discount rate * discount period
• Discount rate is the rate used by the bank in computing the discount.
• If no discount rate is given, the interest rate is assumed
• Discount period is the period of time from date of discounting to
maturity date.
Discount period = term of the note - expired portion up to the date
of discounting
• The discount period is the unexpired term of the note.
DISCOUNTING WITHOUT RECOURSE COMPUTATION
PRINCIPAL 1,000,000
• A P1,000,000, 180-day, 12% Add: INTEREST * 12% * 180/360 60,000
note dated July 1 was received MATURITY VALUE 1,060,000
from a customer and discounted Less: DISCOUNT * 15% * 120/360
without recourse on August 30 53,000
at 15% discount rate.   NET PROCEEDS 1,017,000
Less: CARRYING AMOUNT of NR
• JOURNAL ENTRY 1,020,000
1,000,000 + (60,000 * 60/180)
GAIN / (LOSS) on NR DISCOUNTING ( 13,000)
Jul 1 Cash 1,017,000
Loss on NR discounting 13,000
Note Receivable 1,000,000
Interest Income 20,000
To record discounting without recourse
 Accounting for note receivable
discounting
• The accounting for note receivable discounting depends on
whether the discounting is with or without recourse.
• If the discounting is without recourse, the sale of the note
receivable is absolute and therefore there is no contingent
liability.
• The note receivable account is credited directly because the
sale of the note receivable is without recourse or absolute.
• The interest income is credited for the actual interest earned
on the date of discounting.

Problem 9 – 1
DISCOUNTING WITH RECOURSE COMPUTATION
PRINCIPAL 2,400,000
• A P2,400,000, 6-month, Add: INTEREST * 12% * 6/12 144,000
12% note dated February 1 MATURITY VALUE 2,544,000
of the current year is Less: DISCOUNT * 15% * 5/12 159,000
received from a customer NET PROCEEDS 2,385,000
by an entity and Less: CARRYING AMOUNT of NR
discounted by First Bank on 2,400,000 + (144,000 * 1/6) 2,424,000
March 1 at 15%. GAIN / (LOSS) on NR DISCOUNTING ( 39,000)
 Accounting for note receivable
discounting
• If the discounting is with recourse, the transaction is
accounted for as either of the following:
1. Conditional sale of note receivable recognizing a
contingent liability
2. Secured borrowing
 CONDITIONAL SALE SECURED BORROWING
The note receivable is not the note receivable is not derecognized,
derecognized, instead a “note instead an accounting liability is recorded at
receivable discounted” account is an amount equal to the face amount of the
recorded. (contra account) note.
DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT

Mar 1 Cash 2,385,000 Mar 1 Cash 2,385,000

Loss on NR discounting 39,000
Note Receivable - Discounted 2,400,000
Interest Income 24,000
To record discounting with
recourse as conditional sale
The note receivable discounted is
deducted from the total note
receivable when preparing the
statement of financial position with
disclosure of the contingent liability.
Interest Expense 39,000
Liability for Note
Receivable - Discounted 2,400,000
Interest Income 24,000
To record discounting with
recourse as secured borrowing
no gain or loss on discounting if the
note discounting is accounted for as
secured borrowing. (interest expense)
no objection if the interest expense is
“netted” against the interest income
 CONDITIONAL SALE SECURED BORROWING
Note is paid on maturity
DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
Aug 1 Note Receivable – Disc. 2,400,000 Aug 1 Liability for Note Rec. -
Note Receivable 2,400,000 Discounted 2,400,000
To record payment of the Note Receivable 2,400,000
maker of the discounted note To record payment of the
maker of the discounted note
The note is dishonored by the maker on
Note is dishonored byAugust
maker 1, and the
entity pays the First Bank the maturity value of the note,
P2,544,000 plus protest fee and other bank charges of
P6,000. Aug 1 Accounts Receivable 2,550,000
Aug 1 Accounts Receivable 2,550,000 Cash 2,550,000
Cash 2,550,000 To record payment to bank for
To record payment to bank for dishonored note
dishonored note Aug 1 Liability for Note Rec. -
Aug 1 Note Receivable – Disc. 2,400,000 Discounted 2,400,000
Note Receivable 2,400,000 Note Receivable 2,400,000
To cancel contingent liability To derecognize liability
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.
b. The financial asset has been transferred and the transfer qualifies
for derecognition based on the extent of transfer of risk and
rewards ownership.
Problem 9 – 2
• Morale Company provided the following transactions:
 March 14 Sale of merchandise, P2,050,000 to a customer, FOB Destination 2/10,
n/30.
 April 7 Receipt of a 60-day 12% note dated April 5 from the customer. The face
of the note was the amount of the invoice minus freight charge of P50,000 paid
by the customer in connection with March 14 sale.
 April 20 The note of the customer was discounted with the bank at 15%.
 June 4 Receipt of notification from bank that the customer dishonored the note.
Accordingly, the entity paid the bank the amount due including protest fee and
other charges of P10,000.
 July 4 receipt of cash from the customer for the full amount of indebtedness plus
interest on the original face value.
• REQUIRED: Prepare journal entries to record the transactions assuming
any discounting of note receivable is accounted for as a conditional sale
with recognition of a contingent liability.
 Problem 9-2 DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
• March 14 Sale of merchandise, Mar 14 Accounts Receivable 2,050,000
P2,050,000 to a customer, FOB Freight Out 50,000
Destination 2/10, n/30. Sales 2,050,000
Allowance for freight charge 50,000
• April 7 Receipt of a 60-day 12% To record sales 2/10, n/30
note dated April 5 from the
customer. The face of the note Apr 7 Note Receivable 2,000,000
Allowance for Freight Charge 50,000
was the amount of the invoice
Accounts Receivable 2,050,000
minus freight charge of P50,000 To record receipt of note
paid by the customer in
connection with March 14 sale.
 Problem 9-2 DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
• April 20 The note of the Apr 20 Cash 2,001,750
customer was discounted with the Loss on NR discounting 8,250
bank at 15%. Note Receivable - Discounted 2,000,000
Interest Income 10,000
COMPUTATION To record discounting with
PRINCIPAL 2,000,000 recourse as conditional sale
Add: INTEREST * 12% * 60/360 40,000
MATURITY VALUE 2,040,000 SECURED BORROWING
Less: DISCOUNT * 15% * 45/360 38,250 Cash 2,001,750
NET PROCEEDS 2,001,750 Interest Expense 8,250
Less: CARRYING AMOUNT of NR Liability for N.R. - Discounted 2,000,000
Interest Income 10,000
2,000,000 + (40,000 * 15/60) 2,010,000
GAIN / (LOSS) on NR DISCOUNTING ( 8,250) OR
Cash 2,001,750
Liability for N.R. - Discounted 2,000,000
Interest Income 1,750
 Problem 9-2 DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
• June 4 Receipt of notification Jun 4 Note Receivable - discounted 2,000,000
from bank that the customer Note Receivable 2,000,000
dishonored the note. Accordingly, To cancel contingent liability
the entity paid the bank the 4 Accounts Receivable 2,050,000
amount due including protest fee Cash 2,050,000
and other charges of P10,000. To record payment for dishonored note
• July 4 receipt of cash from the 2,040,000 (maturity value)
customer for the full amount of + 10,000 (protest fee)
indebtedness plus interest on the Jul 4 Cash 2,070,000
original face value. Accounts Receivable 2,050,000
Interest Income 20,000
To record collection
2,000,000 * 12% * 1/12
• Problem 9-7 (IAA)
• Chameleon Company
• Required:
• Prepare journal entries to record the transactions on the assumption:
• 1. The discounting of note receivable is accounted for as a secured
borrowing.
• 2. The discounting of note receivable is accounted for as conditional sale
with recognition of contingent liability.
• June 1 Received from Aye Company a P5,000,000, 12% 90-day
note for merchandise sold.
• July 1 Received from the Bee Company a P6,000,000, 10% 60-
days note in full payment of an account. 

SECURED BORROWING
Jun 1 Notes Receivable 5,000,000
Sales 5,000,000
To record sales to Aye Company (12% 90-day)

Jul 1 Notes Receivable 6,000,000

Accounts Receivale 6,000,000
To record Bee Company note (10% 60-day)
• June 1 Received from Aye Company a P5,000,000, 12% 90-day
note for merchandise sold.
• July 1 Received from the Bee Company a P6,000,000, 10% 60-
days note in full payment of an account. 
CONDITIONAL SALE
Jun 1 Notes Receivable 5,000,000
Sales 5,000,000
To record sales to Aye Company (12% 90-day)

Jul 1 Notes Receivable 65,000,000

Accounts Receivale 65,000,000
To record Bee Company note (10% 60-day)
• July 1 Discounted the Aye Company note at the bank at 12%.
(SECURED BORROWING)
Cash 5, 047,000
Interest Expense 3 ,000
Liability for Note Receivable - discounted 5, 000, 000
Interest income 50, 000

Principal 5,000, 000

Add: interest (5,000,000 x 12% x 90/360) 150, 000
Maturity value: 5,150, 000
Less: discount (5,150, 000 x 12% x 60/360) 103, 000
Net proceeds 5, 047, 000
Carrying amount of note receivable
5,000,000 + (150,000 * 30/90) 5, 050, 000
Loss on note receivable discounting (3,000)
( interest expense )
• July 1 Discounted the Aye Company note at the bank at 12%.
(CONDITIONAL SALE)
Cash 5, 047,000
Loss on Note Receivable discounting 3 ,000
Note Receivable - discounted 5, 000, 000
Interest income 50, 000

Principal 5,000, 000

Add: interest (5,000,000 x 12% x 90/360) 150, 000
Maturity value: 5,150, 000
Less: discount (5,150, 000 x 12% x 60/360) 103, 000
Net proceeds 5, 047, 000
Carrying amount of note receivable
5,000,000 + (150,000 * 30/90) 5, 050, 000
Loss on note receivable discounting (3,000)
( interest expense )
• July 16 Discounted the Bee Company note at the bank at 12%.
(SECURED BORROWING)
Cash 6,008,500
Interest Expense 16,500
Liability for note receivable discounted 6,000,000
Interest income 25,000

Principal 6,000, 000

Add: interest (6,000,000 x 10% x 60/360) 100, 000
Maturity value: 6,100, 000
Less: discount (6,100, 000 x 12% x 45/360) 91, 500
Net proceeds 6, 008, 500
Carrying amount of note receivable
6,000,000 + (100,000 * 15/60) 6, 025, 000
Loss on note receivable discounting (16,500)
( interest expense )
• July 16 Discounted the Bee Company note at the bank at 12%.
(CONDITIONAL SALE)
Cash 6,008,500
Loss on Note Receivable Discounting 16,500
Note Receivable - Discounted 6,000,000
Interest income 25,000

Principal 6,000, 000

Add: interest (6,000,000 x 10% x 60/360) 100, 000
Maturity value: 6,100, 000
Less: discount (6,100, 000 x 12% x 45/360) 91, 500
Net proceeds 6, 008, 500
Carrying amount of note receivable
6,000,000 + (100,000 * 15/60) 6, 025, 000
Loss on note receivable discounting (16,500)
( interest expense )
• August 30 The bank notified Chameleon Company that the
Bee Company note was paid.

CONDITIONAL SALE
Note Receivable – Discounted 6,000,000
Note Receivable 6,000,000

SECURED BORROWING
Liability for Note Receivable Discounted 6,000,000
Note Receivable 6,000,000
• August 30 The bank notified Chameleon Company that Aye
Company defaulted on the note and charged the amount of
principal, interest and a fee of P20,000 against Chameleon’s bank
account. (SECURED BORROWING)

Accounts Receivable 5,170,000

Cash 5,170,000
(5,150,000 + 20,000)

Liability for Note Receivable – Discounted 5,000,000

Note Receivable 5,000,000
• August 30 The bank notified Chameleon Company that Aye
Company defaulted on the note and charged the amount of
principal, interest and a fee of P20,000 against Chameleon’s bank
account. (CONDITIONAL SALE)

Accounts Receivable 5,170,000

Cash 5,170,000
(5,150,000 + 20,000)

Note Receivable – Discounted 5,000,000

Note Receivable 5,000,000
• December 30 Received full payment from Aye Company for the
dishonored note plus 12% annual interest on the total amount due
for four months.

Cash 5,376,800
Accounts Receivable 5,170,000
Interest Income 206,800

Amount Due 5,170, 000

Add: interest (5,170,000 x 12% x 4/12) 206, 800
Total 5,376, 800
 Conditional Sale or Secured Borrowing
• PFRS 9, paragraph 3.2.6, provides the following guidelines for derecognition
based on transfer of risks and rewards:
1. if the entity has transferred substantially all risks and rewards, the
financial asset shall be derecognized.
2. If the entity has retained substantially all risks and rewards, the financial
asset shall not be derecognized.
3. If the entity has neither transferred nor retained substantially all risks and
rewards, derecognition depends on whether the entity has retained
control of the asset.
a. If the entity has lost control of the asset, the financial asset is
derecognized in its entirety.
b. If the entity has retained control over the asset, the financial asset is not
derecognized.
 Evaluation
• Unquestionably, the contractual rights to the cash flows of the note
receivable discounted with recourse have not yet expired. Thus, this first
criterion does not apply.
• The discounting of note with recourse does not also fall squarely within a
single guideline in the second criterion of “transfer of risks and rewards
of ownership”.
• The discounting transaction is a combination of the guidelines in the
second criterion as follows:
a. The entity has substantially transferred all “rewards”.
b. The entity has retained substantially all “risks”.
c. The entity has lost control of the note receivable.
Conclusion
• Much debate on this accounting issue can go on among academicians and
theoreticians until a clear cut interpretation of the standard is made up by
the Financial Reporting Standards Council.
• Premises considered, it is believed that the discounting of note receivable
with recourse is to be accounted for as a conditional sale with
recognition of a contingent liability.
• The main justification is that upon discounting or endorsement of the
note receivable, whether with or without recourse, the transferor or
endorser has lost control over the note receivable.
• Accordingly, the transferee has complete control over the note receivable
because the transferee has the practical ability to sell the asset in its
entirety to a third party without attaching any restrictions to the transfer.
END…
Discounting own note
• In the previous discussion, the maker of note discounted is a
customer.
• In other words, the party discounting is the payee and a mere
endorser and therefore only a person secondarily liable. There is then
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.
• In effect, the party discounting is entering into a contract of loan with
the endorsee.
Discounting own note
• For example, an entity discounted at the bank its own note
of P500, 000 at 12% for one year on September 1, 2016.
Principal 500, 000
Less: discount (500, 000X 12%) 60, 000
Net Proceeds 440, 000

• The entry to record the discounting is:

Cash 440, 000
Discount on note payable 60, 000
Note Payable-bank 500, 000
Discounting own note
• On December 31, 2016, using the straight line method,
the discount on note payable is amortized as interest
expense for four months from September 1 to
December 31 as follows:
Interest Expense (60, 000 x 4/12) 20, 000
Discount on note payable 20, 000

• In the December 31, 2016 statement of financial

position, the note payable minus the discount on note
payable is presented as current liability as follows:
Note payable-bank500, 000
Discount on note payable ( 40, 000)
Carrying amount 460, 000