NOTES

MERCHANDISING Cash Discounts – deduction from invoice price

when payment is made within the discount
Who is the owner of the goods in transit? period
FOB Shipping Point/FOB Seller – Buyer - Purchase Discount in Buyer’s POV and
FOB Destination/FOB Buyer – Seller Sales Discount in Seller’s POV

*owner of the good must pay for freight Purpose: Prompt Payment

Freight Terms (Who actually paid) Methods of Recording Purchases

Freight Collect – Buyer Gross Method – cash discount is not deducted

Freight Prepaid – Seller
Consigned Goods
- Part of the inventory of the
CONSIGNOR, not CONSIGNEE
- Freight and other handling charges on
goods out on consignment are part of
the cost of goods assigned
How to Account for Inventories
at initial purchase
- Discount is deducted when paid within
the discount period
Net Method – cash discount is deducted at
initial purchase
- Purchase Discount Lost will have to be
debited when payment is made beyond
the discount period in this method

Periodic vs. Perpetual Inventory System

Periodic System – generally used when

inventories have small peso investment

- Calls for physical counting of goods on

hand at the end of the accounting
period

Perpetual System – used when the inventory

items represent a relatively large peso
investment

- Purchases are debited to Merchandise

Inventory
- Sale of goods require two entries: 1.
Record Sale 2. Record decrease in
Merchandise Inventory at cost

Trade Discounts vs. Cash Discounts

Trade Discounts – deduction from list or catalog

price to arrive at the invoice price

- Not recorded

Purpose: Encourage trading/Increase Sales

NOTES
NOTES RECEIVABLE DISCOUNTING
- a transfer or endorsement of
promissory note by the payee in favor
of another party, usually a bank.
2 Types of Discounting:
With Recourse – transferor recognizes an
accounting liability and pays the financial
institution the maturity value plus any amount
charged as protest fee. Accounted for as either
a conditional sale or secured borrowing.
Without Recourse - sale is absolute and no
contingent liability is recognized. The account
for Notes Receivable is credited.
Terms:
Net proceeds – refer to the discounted value of
the note received by the endorser from the
endorsee.
Net proceeds = maturity value – discount
Maturity value – amount due on the note at the
date of maturity.
Maturity value = principal + interest
Maturity date – the date on which the note
should be paid.
Principal – amount appearing on the face of the
note. Also referred to as
face value.
Interest – amount of interest for the full term of
the note
Interest = principal x rate x time
Interest rate – rate appearing on the face of the
note.
Time – period within which interest shall
accrue. For discounting purposes, it is the
period from the date of note to maturity date.
In other words, the term “time” is the entire
period or full term of the note.
Discount – amount of interest deducted by the
bank in advance.
Discount = maturity value x discount rate x
discount period
Discount rate – rate used by the bank in
computing the discount. If no discount rate is
given, the interest rate is safely assumed as the
discount rate.
Discount period – period of time from the date
of discounting to maturity date. It is the
unexpired term of the note.
Discount period - term of the note – the
expired portion up to the date of discounting.
PROBLEMS
1. Morningstar Company accepted from a
customer P1,000,000 face amount, 6-
month, 8% note dated April 15, 2016.
On the same date, the entity discounted
the note without recourse at 10%
discount rate. What is the loss on note
receivable discounting?
2. Tony Stark discounted his 120-day, 8 %,
P750,000 note to the bank for 15%
discount after holding it for 40 days.
How much cash did Tony received from
discounting the note? How much is the
loss from discounting the note?
3. On July 31, 2019 Chelor Co. discounted
with recourse a note at the bank at
discount rate of 15.12%. The note was
received from the customer on July 1,
2019, is for 120 days, has a face value of
P15,000,000 and carries an interest if
12.21%. The customer paid the note to
the bank on maturity date. If the
discounting is accounted for as secured
borrowing, how much should be
recognized as interest expense?