Pamantasan ng Lungsod ng Valenzuela

College of Business and Accountancy

Department of Accountancy

INTERMEDIATE ACCOUNTING 1 (FAR 3)

Accounting for Trade and Other Receivables

RECEIVABLE FINANCING
o financial flexibility or capability of an entity to raise money out of its receivables.

Forms of receivable financing

a. Pledge of accounts receivable
b. Assignment of accounts receivable
c. Factoring of accounts receivable
d. Discounting of notes receivable

a. Pledge of accounts receivable

When loans are obtained from the bank or any lending institution, the accounts receivable may be pledged as collateral security
for the payment of the loan. With respect to the pledged accounts, no entry would be necessary. It is sufficient that disclosure thereof is
made in a note to financial statement.

Problem 1: Pledging of accounts receivable

Pittance Company provided the following information in connection with a bank loan.

March 1 Pittance Company borrowed P2,000,000 from bank on a six-month note carrying an interest of 12% per annum.
Accounts of P3,000,000 are pledged to secure the loan.
April 1 Pledged accounts of P1,000,000 are collected minus 2% discount.
June 1 The remaining pledged accounts are collected.
September 1 The bank loan is repaid plus interest.

Required:
Prepare journal entries to record the transactions.

Problem 2: Pledging of accounts receivable

Idealist Company secured a one-year bank loan of P4,000,000 on October 2021. The loan was discounted at 10%.

The entity signed a note for the loan and pledged P5,000,000 of its accounts receivable as collateral for the same. The accounting period
of the entity ends on December 31.

Required:
1. Prepare journal entries, including adjustment from the date of loan up to date of maturity.
2. Statement presentation of the bank loan with adequate disclosure on December 31, 2021.

b. Assignment of accounts receivable

o A borrower called the assignor transfers rights in some accounts receivable to a lender called the assignee in consideration for a
loan.
o It is a more formal type of pledging of accounts receivable. It is a secured borrowing evidenced by a financing agreement and a
promissory note both of which the assignor signs.
o Assignment is specific because specific accounts receivable serve as collateral security for the loan unlike pledging which is
general because it uses all accounts receivable.
o The assignee usually lends only a certain percentage of the face value of the accounts assigned because it may not be fully realized
by reason of such factors as sales discount, sales returns and allowances and uncollectible accounts.
o The assignee usually charges interest for the loan that it makes and requires a service or finance charge or commission for the
assignment agreement.
o Assignment may be done either on a nonnotification or notification basis.

Nonnotification Basis – customers are not informed that their accounts have been assigned so they will continue to make payments
to the assignor, who in turn remits the collections to the assignee.

Problem 3: Assignment – Nonnotification Basis

Elegant Company provided the following transactions:

May 1 Elegant Company assigned P800,000 of accounts receivable to a bank in consideration for a loan. A cash advance of
80% less service charge of P20,000 was made by the latter. It was agreed that interest of 2% per month is to be made
and that the assignor continues to make the collections. The entity signed a promissory note for the loan.
May 5 The entity issued a credit memo to a customer for returned merchandise, P30,000. The account is one of the assigned
accounts.
May 10 Collections of P500,000 of the assigned accounts were made, less 2% discount.
June 1 Remitted the collections to the bank plus 2% interest for one month.

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June 7 Assigned accounts of P10,000 proved to be worthless.

June 20 Collections of P200,000 for the accounts assigned were made.
July 1 Final settlement was made with the bank. Elegant Company accordingly remitted the total amount due to the bank to
pay off the loan plus interest charge.

Required:
Prepare journal entries to record the transactions.

Problem 4: Assignment – Nonnotification Basis

Bleak Company provided the following information:

December 1 Assigned P1,500,000 of accounts receivable to a bank on a nonnotification basis in consideration for a loan. The bank
advanced P1,300,000 less a service charge of P50,000. The entity signed a promissory note bearing interest of 1%
per month on the unpaid loan balance.
December 31 Collected assigned accounts of P1,000,000 less sales discount of P30,000.
December 31 Remitted the collection to the bank in payment first for the interest and the balance to the principal

Required:
a. Prepare journal entries to record the transactions.
b. Indicate the classification and disclosure of the accounts related to the assignment on December 31.

Notification Basis – customers are notified to make their payments directly to the assignee.

Problem 5: Assignment – Notification Basis

Docile Company assigned certain accounts receivable to a bank for a loan on the following basis: 75% cash advance, 4% service charge
on gross accounts assigned, 2% interest per month is to be charged, and the bank makes the collections. The entity signed a promissory
note for the loan.

July 1 Received remittance upon the specific assignment of P1,500,000 in accounts to the bank.
August 1 Received notice from bank that P800,000 of the assigned accounts were collected. A check was sent to the bank for
one month interest charge.
September 1 Received notice from bank that assigned accounts of P500,000 were collected in full and the remaining accounts were
being returned. Accordingly, a check was received from the bank in settlement of the assignment contract. In making
the settlement, the bank deducted the interest charge for the corresponding period.

Required:
Prepare journal entries on the books of the assignor.
1. Determine the carrying amount of the note receivable on December 31, 2022.
2. Determine the interest income for 2023.

Problem 6: Assignment – Notification Basis

Vain Company financed some of its current operations by assigning accounts receivable to a bank in consideration for a loan. On July 1,
the entity assigned accounts of P800,000 under a notification basis. The bank advanced 80% less a 3% service charge of the total accounts
assigned. The entity signed a promissory note bearing interest of 1% per month on the unpaid loan balance. On August 1, the entity
received a statement that the bank had collected P420,000 of the assigned accounts. On September 1, the entity received a second statement
from the bank, together with a check for the amount due. The statement indicated that the bank had collected P320,000 of the assigned
accounts.

Required:
Prepare journal entries on the books of the assignor to record the transactions.

c. Factoring
o A sale of accounts receivable on a without recourse, notification basis.
o In a factoring arrangement, an entity sells accounts receivable to a bank or finance entity called a factor.
o It differs from an assignment in that an entity actually transfers ownership of the accounts receivable to the factor.
o Because of the nature of the transaction, the customers whose accounts are factored are notified and required to pay directly to
the factor.
o Factoring may take the form of casual factoring or factoring as a continuing agreement.

Casual Factoring – factoring some or all of an entity’s accounts receivable at a substantial discount to a bank or a finance entity
to obtain much needed cash if an entity finds itself in a critical cash position.

Factoring as a continuing agreement

o It involves a continuing arrangement where a finance entity purchases all of the accounts receivable of a certain entity.
o In this setup, before a merchandise is shipped to a customer, the selling entity requests the factor’s credit approval. If it
is approved, the account is sold immediately to the factor after shipment of the goods. The factor then assumes the credit
function as well as the collection function.
o For compensation, the factor charges a commission or factoring for its services or it may withhold a predetermined
amount as a protection against customer returns and allowances and other special adjustments known as the “factor’s
holdback”.

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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. Generally, 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 pay the retailer the appropriate amount minus the credit service charge. Two entries are necessary,
one entry at the time of sale and another entry when payment is received from the card issuer.

Problem 7:
Dainty 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 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.

Required:
Prepare journal entries to record the factoring and the subsequent collection of the factor’s holdback.

Problem 8:
Generous Company provided the following information with respect to factoring of accounts receivable.

July 1 Factored P800,000 of accounts receivable without recourse with a bank on notification basis. The bank charged a
factoring fee of 5% of the amount of accounts receivable factored and withheld 10% of the accounts receivable
factored to cover sales return and allowances.
July 15 Received notice from the bank that factored accounts are fully collected less sales return and allowances of P20,000.
July 31 Received a check from the bank as a final settlement of the factoring contract.

Required:
Prepare journal entries to record the transactions.

Problem 9:
Lucid Company showed the following balances on December 31:
Accounts receivable – unassigned 1,000,000
Accounts receivable – assigned 300,000
Allowance for doubtful accounts – January 1 30,000
Receivable from factor 40,000
Note Payable – bank 240,000
During the current year, the entity found itself in financial distress and decided to resort to receivable financing. On June 30, the entity
factored P200,000 of accounts receivable to a finance entity. The finance entity charged a factoring fee of 5% of the accounts factored and
withheld 20% of the amount factored. On December 31, the entity assigned P300,000 of accounts receivable to a bank under a
nonnotification basis. The bank advanced 80% less a service fee of 5% of the accounts assigned. The entity signed a promissory note for
the loan. On December 31, it is estimated that 5% of the outstanding accounts receivable may prove uncollectible.

Required:
1. Prepare journal entry to record the factoring.
2. Prepare journal entry to record the assignment.
3. Prepare journal entry to adjust the allowance for doubtful accounts on December 31.
4. Indicate the classification, presentation and disclosure of the accounts receivable involved in receivable financing.

Problem 10:
Freeway Company provides financing to other entities by purchasing accounts receivable on a nonrecourse basis. Freeway Company
charges the clients a commission of 15% on all accounts receivable factored.

In addition, Freeway Company withholds 10% of accounts receivable factored as protection against sales returns or other adjustments.
Freeway Company credits the 10% withheld to Clients Retainer account and makes payments to clients at the end of each month so that
the balance in the retainer is equal to 10% of unpaid receivables at the end of the month.

Experience has led Freeway Company to establish an allowance for doubtful accounts of 4% of all unpaid accounts receivable purchased.
On December 1, Freeway Company purchased accounts receivable from Motorway Company totaling P3,000,000. Motorway Company
had previously established an allowance for doubtful accounts for the accounts receivable at P100,000. By December 31, Freeway
Company had collected P2,500,000 on the accounts receivable.

Required:
1. Prepare journal entries to record the transactions on the books of Motorway Company (seller of accounts receivable).
2. Prepare journal entries on the books of Freeway Company (factor or buyer of accounts receivable).

d. Discounting of note receivable

o When a note is negotiable, the payee (one entitled to payment on the date of maturity) 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.

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Endorsement
Endorsement is the transfer of right to a negotiable instrument by simply signing at the back of the instrument. Endorsement may
be with recourse or without recourse.

With Recourse – the endorser (payee) shall pay the endorsee (bank or other financial institution) if the maker dishonors the note.
In the legal parlance, this is the secondary liability of the endorser. In the accounting parlance, this is the contingent liability
of the endorser.

Without Recourse -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:

1. Net Proceeds – discounted value of the note received by the endorser from the endorse.
Net Proceeds = Maturity Value minus Discount
2. Maturity Value – amount due on the note at the date of maturity.
Maturity Value = Principal plus Interest
3. Maturity Date – date on which the note should be paid.
4. Principal – amount appearing on the face of the note. It is also referred to as face value.
5. Interest – the amount of interest for the full term of the note.
Interest = Principal x Rate x Time (I=Prt)
6. Interest Rate – the rate appearing on the face of the note.
7. Time – the period within which interest shall accrue. For discounting purposes, it is the period from date of note to
maturity date. In other words, the term “time” is the entire period of “full term” of the note.
8. Discount – the amount of interest deducted by the bank in advance.
Discount = Maturity Value x Discount Rate x Discount Period
9. Discount Rate – the rate used by the bank in computing the discount. The discount rate should not be confused with the
interest rate. The discount rate and interest rate are different from each other. If no discount rate is given, the interest rate
is safely assumed as the discount rate.
10. Discount Period – the period of time from date of discounting to maturity date. The discount period is the unexpired
portion of the note.
Discount Period = Term of the Note minus Expired Portion up to the date of Discounting

Problem 11: Discounting Without Recourse

Walleye Company provided the following transactions:

January 1 The entity sold merchandise for P500,000 accepting a note of P500,000 for six months with interest to be paid at
maturity at 12%.
March 1 The entity discounted the note without recourse at the local bank at 15%.
July 1 The customer paid the bank in full.

Required:
Prepare journal entries to record the transactions.

If the discounting is with recourse, the transaction is accounted for as either of the following:
a. Conditional sale of note receivable recognizing a contingent liability
If the discounting is treated as a conditional sale of note receivable, a contingent liability is recognized. The account note
receivable discounted representing the note receivable discounted is deducted from the total notes receivable when
preparing the statement of financial position with disclosure of the contingent liability.
b. Secured borrowing
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 receivable discounting is accounted for as secured borrowing.

PFRS 9, paragraph 3.2., 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.
The contractual rights to the cash flows of the note receivable discounted with recourse have not yet expired.
b. The financial asset has been transferred and the transfer qualifies for derecognition based on the extent of transfer
of risks and rewards of ownership.
The discounting transaction is a combination of the guidelines as follows: (a) The entity has substantially transferred
all “rewards”; (b) The entity has retained substantially all “risks”; and (c) The entity has lost control of the note
receivable.

“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 to a third party without attaching any restrictions to the transfer.” (Valix, Peralta,
& Valix, 2019)

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Problem 12:
Morale Company provided the following transactions:

March 14 Sale of merchandise, P2,050,000 to a customer, FOB destination 2/10, n/3.

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 the 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 conditional sale
with recognition of a contingent liability.

Problem 13:
Mythical Company provided the following transactions:

April 5 Received from A, a customer, P500,000, 60-day, 12% note, dated April 4, in payment of an account.
April 19 The note of A was discounted with the bank at 14%.
May 3 Received a P1,000,000, 30-day noninterest bearing note dated May 1 from B, in payment of an account.
May 16 The note of B was discounted with the bank at 12%.
May 25 Received from C, a customer, a P1,500,000, 60-day 12% note dated May 15 and made by Company X. Gave the
customer credit for the maturity value of the note less discount at 12%.
June 7 Received notice from the bank that the note of A was not paid on maturity. Paid bank the amount due plus protest fee
and other charges of P20,000.
June 15 Received a 60-day, 12% note, P800,000 dated June 15, from D, a customer for sale of merchandise.
June 18 Received full payment from A including interest of 12% on total amount due from maturity date of original note.

Required:
a. Prepare journal entries to record the transactions assuming any discounting of note receivable is accounted for as conditional
sale with recognition of a contingent liability.
b. Prepare the necessary adjustments on June 30.

Problem 14:
On August 31, 2021, Stable Company discounted with recourse a customer’s note at the bank at discount rate of 15%.

The note was received from the customer on August 1, 2021, term 90 days, had a face value of P5,000,000, and carried an interest rate of
12%. The customer paid the note to the bank on October 30, 2021, the date of maturity.

Required:
Prepare journal entries related to the discounting of note receivable, assuming the discounting is accounted for as a secured
borrowing.

Problem 15:
On January 1, 2021, Machete Company sold land with carrying amount of P1,500,000 in exchange for a 9-month, 10% note with face
value of P2,000,000. The 10% rate properly reflects the time value of money for this type of note.

On April 1, 2021, the entity discounted the note with recourse. The bank discount rate is 12%. The discounting transaction is accounted
for as a secured borrowing.

On October 1, 2021, the maker dishonored the note receivable. The entity paid the bank the maturity value of the note plus protest fee of
P10,000.

On December 31, 2021, the entity collected the dishonored note receivable in full plus 12% annual interest on the total amount due.

Required:
Prepare journal entries to record the transactions.

Problem 16:
Chameleon Company provided the following data for the current year.

June 1 Received from Aye Company a P5,000,000, 12% 90-day note for merchandise sold.
July 1 Received from Bee Company a P6,000,000, 10% 60-day note in full payment of an account. On the same day, Aye
Company note was discounted at the bank at 12%.
July 16 Discounted the Bee Company note at the bank at 12%.
August 30 The bank notified Chameleon Company that the Bee Company note was paid. On the same day, the bank notified the
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.
December 30 Received full payment from Aye Company for the dishonored note plus 12% annual interest on the total amount due
for four months.

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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 a conditional sale with recognition of contingent liability.

- END OF COURSE FILE -

References
Valix, C. T., Peralta, J. F., & Valix, C. A. (2019). Intermediate Accounting Volume One. GIC Enterprises & Co., Inc.