RECEIVABLE FINANCING

1. Raffy Corporation factored, with recourse, P300,000 of accounts receivable

with Huskie Financing. The finance charge is 3%, and 5% was retained to cover
sales discounts, sales returns, and sales allowances. Raffy estimates the
recourse obligation at P7,200. What amount should Raffy report as a loss on
sale of receivables?

a. 16,200
b. 0
c. 31,200
d. 9,000

SOLUTION:

(P300,000 × .03) + P7,200 = P16,200

2. Carrie Company accepted from a customer P1,000,000 face amount, 6-month,

8% note dated April 15, 2014. On the same date Carrie discounted the note
without recourse at Brass Bank at a 10% discount rate.

How much cash was received by Carrie from the discounting?

a. 972,000
b. 1,040,000
c. 990,000
d. 988,000

SOLUTION:

Principal 1,000,000
Add: Interest (1,000,000 x 8% x 6/12) 40,000
Maturity value 1,040,000
Less: Discount (1,040,000 x 10% x 6/12) 52,000
Net proceeds 988,000

3. Carrie Company accepted from a customer P1,000,000 face amount, 6-month,

8% note dated April 15, 2014. On the same date Carrie discounted the note
without recourse at Brass Bank at a 10% discount rate.

What is the loss on note receivable discounting?

a. 40,000
b. 12,000
c. 52,000
d. 50,000

SOLUTION:

Net proceeds 988,000

 Book value of note receivable - equal to principal 1,000,000
Loss on note receivable discounting ( 12,000)

4. Equity in assigned accounts of an entity is the difference between

a. Accounts receivable - unassigned and outstanding principal of bank loan.

b. Accounts receivable - assigned and outstanding principal of bank loan.
c. Accounts receivable - assigned and accounts receivable pledged.
d. Accounts receivable- unassigned and accounts receivable-assigned.

5. Josh Corporation factored, with recourse, P100,000 of accounts receivable with

Huskie Financing. The finance charge is 3%, and 5% was retained to cover
sales discounts, sales returns, and sales allowances. Josh estimates the
recourse obligation at P2,400. What amount should Josh report as a loss on sale
of receivables?

a. 10,400
b. 0
c. 5,400
d. 3,000

SOLUTION:

(P100,000 × .03) + P2,400 = P5,400.

6. On February 1, 2013, Michael Company factored receivables with a carrying

amount of P300,000 to Agee Company. Agee Company assesses a finance
charge of 3% of the receivables and retains 5% of the receivables. Relative to
this transaction, you are to determine the amount of loss on sale to be reported
in the income statement of Michael Company for February.

Assume that Michael factors the receivables on a without recourse basis. The
loss to be reported is

a. 9,000
b. 15,000
c. 0
d. 24,000

SOLUTION:

P300,000 × .03 = P9,000

7. Which of the following is a method to generate cash from accounts receivable?

a. Both assignment and factoring

b. Assignment only
c. Factoring only
d. Neither assignment nor factoring
8. Which of the following is true?

a. Accounts receivable hypothecated will decrease total current assets

b. Factor's holdback should be included in the seller's total receivables.
c. Notes receivable discounted with recourse will increase total current assets.
d. Accounts receivable assigned will increase total current assets

9. When accounts receivable are factored without recourse, what accounts does
the transferor credit?

a. Accounts receivable assigned

b. Accounts receivable
c. Sales
d. Liability

10.Paul Co. assigned P400,000 of accounts receivable to Peter Finance Co. as

security for a loan of P335,000. Peter charged a 2% commission on the amount
of the loan; the interest rate on the note was 10%. During the first month, Paul
collected P110,000 on assigned accounts after deducting P380 of discounts.
Paul accepted returns worth P1,350 and wrote off assigned accounts totaling
P2,980.

The amount of cash Paul received from Peter at the time of the transfer was

a. 327,000
b. 328,300
c. 301,500
d. 335,000

SOLUTION:

P335,000 - P6,700 = P328,300

11.On February 1, 2013, Gabriel Company factored receivables with a carrying

amount of P300,000 to Agee Company. Agee Company assesses a finance
charge of 3% of the receivables and retains 5% of the receivables. Relative to
this transaction, you are to determine the amount of loss on sale to be reported
in the income statement of Gabriel Company for February.

Assume that Gabriel factors the receivables on a with recourse basis. The
recourse obligation has a fair value of P1,500. The loss to be reported is

a. 10,500
b. 15,000
c. 9,000
d. 25,500

SOLUTION:

(P300,000 × .03) + P1,500 = P10,500

12.On June 30, 2014, Nori Company discounted at the bank a customer's
P6,000,000, 6-month, 10% note receivable dated April 30, 2014. The bank
discounted the note at 12% without recourse.

The proceeds from the note receivable discounting amounted to

a. 5,760,000
b. 6,174,000
c. 6,048,000
d. 5,640,000

SOLUTION:

Principal 6,000,000
Add: Interest (6,000,000 x 10% x 6/12) 300,000
Maturity value 6,300,000
Less: Discount (6,300,000 x 12% x 4/12) 252,000
Net proceeds 6,048,000

The note is dated April 30, 2014 and it was discounted June 30, 2014.
Therefore, two months already expired. The original term is 6 months and
accordingly, the unexpired term is 4 months

Average:

13.Katsushi Company factored P750,000 of accounts receivable. Control was

surrendered by Katsushi Company. The factor accepted the receivables subject
to recourse for nonpayment and assessed a fee of 2% and retains a holdback
equal to 10% of the accounts receivable. In addition, the factor charged 12%
interest computed on a weighted-average time to maturity of the receivables of
51 days. The fair value of the recourse obligation is P15,000. If all receivables
are collected, what is the cost of factoring?

a. 12,575
b. 42,575
c. 27,575
d. 15,000

14.On August 31, 2014, Rognak Company discounted with recourse a customer's
note at its bank at discount rate of 15%. The note was received from the
customer on August 1, is for 90 days, has a face value of P5,000,000, and
carries an interest rate of 12%. The customer paid the note to the bank on
October 30, 2014, the date, of maturity.

If the discounting is accounted for as a secured borrowing, what is the interest

expense to be recognized on August 31, 2014?

a. 50,000
 b. 25,000
c. 21,250
d. 28,750

SOLUTION:

Principal 5,000,000
Interest (5,000,000 x 12% x 90/360) 150,000
Maturity value 5,150,000
Discount (5,150,000 x 15% x 60/360) 128,750
Net proceeds 5,021,250
Principal 5,000,000
Accrued interest receivable (5,000,000 x 12% x 30/360) 50,000
Book value of note receivable 5,050,000
Net proceeds 5,021,250
Less: Book value of note receivable 5,050,000
Interest expense 28,750

15.On December 1, 2014, Doo Company assigned specific accounts receivable

totaling P2,000,000 as collateral on a P 1,500,000, 12% note from a certain
bank. Doo Company will continue to collect the assigned accounts receivable. In
addition to the interest on the note, the bank also charged a 5% finance fee
deducted in advance on the P 1,500,000 value of the note. The December
collections of assigned accounts receivable amounted to P 1,000,000 less cash
discounts of P50,000. On December 31, Doo Company remitted the collections
to the bank in payment for the interest accrued on December 31 and the note
payable.

How much cash was received from the assignment of accounts receivable on
December 1?

a. 2,000,000
b. 1,425,000
c. 1,500,000
d. 1,900,000

SOLUTION:

Note payable 1,500,000

Finance fee (5% x 1,500,000) ( 75,000)
Cash received on December 1 1,425,000

16.Joshua 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. Joshua Company 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.
 How much cash was initially received from factoring?

a. 6,000,000
b. 5,100,000
c. 5,400,000
d. 4,500,000

SOLUTION:

Accounts receivable 6,000,000

Factor's holdback (10% x 6,000,000) ( 600,000)
Commission (15% x 6,000,000) ( 900,000)
Cash received 4,500,000

17.Garry Co. assigned P400,000 of accounts receivable to Victor Co. as security for
a loan of P335,000. Victor charged a 2% commission on the amount of the loan;
the interest rate on the note was 10%. During the first month, Garry collected
P110,000 on assigned accounts after deducting P380 of discounts. Garry
accepted returns worth P1,350 and wrote off assigned accounts totaling
P2,980.

Entries during the first month would include a

a. debit to Allowance for Doubtful Accounts of P2,980

b. debit to Accounts Receivable of P114,710.
c. debit to Bad Debt Expense of P2,980
d. debit to Cash of P110,380

18.If accounts receivable are pledge against borrowings, the amount of accounts
receivable pledge shall be

a. Excluded from total receivable without disclosure

b. Included in total receivables with disclosure
c. Included in total receivables without disclosure
d. Excluded from total receivable with disclosure

19.If a note receivable is discounted without recourse

a. The contingent liability may be disclosed in either contra receivable or a

note to the FS
b. Note receivable should be credited
c. Liability for note receivable discounted should be credited
d. The transaction should be accounted for as a borrowing as opposed to a sale

20.Julie Inc. factors P2,000,000 of its accounts receivables with recourse for a
finance charge of 3%. The finance company retains an amount equal to 10% of
the accounts receivable for possible adjustments. Julie estimates the fair value
of the recourse liability at P100,000. What would be recorded as a gain (loss) on
the transfer of receivables?
 a. Gain of P360,000
b. Loss of P160,000
c. Loss of P100,000
d. Gain of P60,000

21.When accounts receivable are factored,

a. The factoring is accounted for as a borrowing

b. Payable to factor is credited
c. Accounts receivable should be credited
d. A contingent liability is ordinary created

22.If receivables are hypothecated against borrowings, the amount of receivables

involved should be

a. Excluded from the total receivables, with no disclosure

b. Disclosed in the notes
c. Excluded from the total receivables and a gain or loss is recognized between
the face value and the amount of borrowings
d. Excluded from the total receivables, with disclosure

23.When the accounts receivable of an entity are sold outright to a bank which
normally buys accounts receivable, the accounts receivable have been

a. Factored
b. Assigned
c. Collateralized
d. Pledge

24.Which of the following transfers of financial assets would qualify for

derecognition?

a. A sale of a financial asset where the entity agrees to repurchase the asset in
one year for a fixed price plus interest
b. A sale of a financial asset where the entity retains an option to buy the asset
back at its current fair value on repurchase date
c. A loan of a security to another entity
d. A sale of a portfolio of current accounts receivable where the entity
guarantees to compensate the buyer for any losses in the portfolio

25.On June 30, 2014, Nori Company discounted at the bank a customer's
P6,000,000, 6-month, 10% note receivable dated April 30, 2014. The bank
discounted the note at 12% without recourse.

What is the loss on note receivable discounting?

a. 152,000
b. 48,000
c. 252,000
d. 52,000
 SOLUTION:

Principal 6,000,000
Accrued interest receivable (6,000,000 x 10% x 2/12) 100,000
Book value of note receivable 6,100,000
Net proceeds 6,048,000
Book value of note receivable 6,100,000
Loss on note receivable discounting ( 52,000)

26.Julie Company sold accounts receivable without recourse for P5,300,000. Julie
received P5,000,000 cash immediately from the factor. The remaining P300,000
will be received once the factor verifies that none of the accounts receivable is
in dispute. The accounts receivable had a face amount of P6,000,000. Julie had
previously established an allowance for bad debts of P250,000 in connection
with these accounts. What is the loss on factoring that will be recognized by
Julie Company?

a. 700,000
b. 450,000
c. 750,000
d. 300,000

SOLUTION:

Sales price 5,300,000

Carrying value of accounts receivable (6,000,000 - 250,000) 5,750,000
Loss on factoring ( 450,000)

27.It is a predetermined amount withheld by a factor as a protection against

customer returns, allowances and other special adjustments.

a. Factor’s holdback
b. Equity in assigned accounts
c. Service charge
d. Loss on factoring

28.It is a financing arrangement that is usually done on a “without recourse,

notification basis”

a. Pledge
b. Discounting
c. Factoring
d. Assignment

29.JP Company received from a customer a one-year, P500,000 note bearing

annual interest of 8%. After holding the note for six months, JP discounted the
note without recourse at Libra Bank at an effective interest rate of 10%.

What is the loss on note receivable discounting?

 a. 20,000
b. 12,000
c. 27,000
d. 7,000

SOLUTION:

Principal 500,000
Accrued interest receivable (500,000 x 8% x 6/12) 20,000
Book value of note receivable 520,000
Net proceeds 513,000
Book value of note receivable 520,000
Loss on note receivable discounting ( 7,000)

Maturity value = Principal plus interest for the "full" term of the note. Interest
= Principal times interest rate times the full term of the note. Discount =
Maturity value times discount rate x discount period

30.The amount of accounts receivable is included in total receivable with

appropriate disclosures when

a. Pledged (Yes); Assigned (Yes); Factored (Yes)

b. Pledged (Yes); Assigned (Yes); Factored (No)
c. Pledged (No); Assigned (No); Factored (No)
d. Pledged (Yes); Assigned (No); Factored (No)

31.On July 1, 2014, Henry Company sold goods in exchange for P2,000,000, 8-
month, noninterest-bearing note receivable. At the time of the sale, the note's
market rate of interest was 12%. What amount did Henry receive when it
discounted the note at 10% on September 1, 2014?

a. 1,940,000
b. 1,880,000
c. 1,938,000
d. 1,900,000

SOLUTION:

Principal 2,000,000
Less: Discount (2,000,000 x 10% x 6/12) 100,000
Net proceeds 1,900,000

The note is noninterest-bearing. Therefore, the maturity value is equal to the

principal or face value of the note. The note is dated July 1, 2014 and it was
discounted on September 1, 2014 and therefore, 2 months already expired.
Since the term of the note is 8 months, the unexpired term is 6 months.

32.Allan Company factored its receivables without recourse with Metro Bank.
Allan received cash as a result of this transaction which is best described as a
 a. Loan from Metro Bank collaterized by ABC’s accounts receivable
b. Sale of Allan’s accounts receivable to Metro bank, with the risk of
uncollectible accounts retained by Allan
c. Loan from Metro Bank to be repaid by the proceeds from Allan’s accounts
receivable
d. Sale of Allan’s accounts receivable to Metro Bank, with the risk of
uncollectible accounts transferred to Metro bank

33.Gar Company factored receivables without recourse with Ross Bank. Gar
received cash as a result of this transaction which is best described as a

a. Loan from Ross to be repaid by the proceeds from Gar’s accounts receivable
b. Sale of Gar’s accounts receivable to Ross, with the risk of uncollectible
accounts retained by Gar
c. Loan from Ross collateralized by Gar’s accounts receivable
d. Sale of Gar’s accounts receivable to Ross, with the risk of uncollectible
accounts transferred to Ross

34.Which of the following is used to account for probable sales discounts, sales
returns and sales allowances?

a. Due from factor only

b. Both due from factor and recourse liability
c. Neither due from factor nor recourse liability
d. Recourse liability only

35.Pamela Company accepted from a customer a P4,000,000, 90-day, 12% interest-

bearing note dated August 31, 2014. On September 30, 2014, Pamela
discounted the note with recourse at the Carrie State Bank at 15%. However,
the proceeds were not received until October 1, 2014.

The discounting with recourse is accounted for as a conditional sale with

recognition of a contingent liability.

What is the loss on note receivable discounting?

a. 23,000
b. 20,000
c. 40,000
d. 17,000

SOLUTION:

Principal 4,000,000
Accrued interest receivable (4,000,000 x 40,000
12% x 30/360)
Book value of note receivable 4,040,000
Net proceeds 4,017,000
Book value of note receivable 4,040,000
 Loss on note receivable discounting ( 23,000)

36.Joanne Roads sold P50,000 of goods and accepted the customer's P50,000 10%
1-year note receivable in exchange. Assuming 10% approximates the market
rate of return, what would be the debit in this journal entry to record the sale?

a. No journal entry until cash is collected

b. Debit Notes Receivable for P45,000
c. Debit Accounts Receivable for P50,000
d. Debit Notes Receivable for P50,000

37.A financing agreement whereby one party formally transfers its rights to
accounts receivable to another party in consideration for a loan

a. Pledge
b. Discounting
c. Factoring
d. Assignment

38.Maan Company sells loans with a P2,200 fair value and a carrying amount of
P2,000. The entity obtains an option to purchase similar loans and assumes a
recourse obligation to repurchase loans. The entity also agrees to provide a
floating rate of interest to the transferee entity. The fair values are listed.

Cash proceeds 2,100

Interest rate swap 140
Call option 80
Recourse obligation (120)

Assume that Maan Company agreed to service the loans without explicitly
stating the compensation. The fair value of the service is P50. What are the net
proceeds?

a. 2,200
b. 2,100
c. 2,250
d. 2,150

39.Maan Company sells loans with a P2,200 fair value and a carrying amount of
P2,000. The entity obtains an option to purchase similar loans and assumes a
recourse obligation to repurchase loans. The entity also agrees to provide a
floating rate of interest to the transferee entity. The fair values are listed.

Cash proceeds 2,100

Interest rate swap 140
Call option 80
Recourse obligation (120)

The journal entry to record the transfer on the books of Maan Company
includes
 a. a debit to loans
b. a credit to cash
c. a credit to interest rate swap
d. a debit to call option

40.Total receivables will remain unchanged for which of the following?

a. Factoring of receivables
b. Pledging of receivables
c. Collection of receivables
d. Note Discounting without recourse

41.Maan Company sells loans with a P2,200 fair value and a carrying amount of
P2,000. The entity obtains an option to purchase similar loans and assumes a
recourse obligation to repurchase loans. The entity also agrees to provide a
floating rate of interest to the transferee entity. The fair values are listed.

Cash proceeds 2,100

Interest rate swap 140
Call option 80
Recourse obligation (120)

Assume that Maan Company agreed to service the loans without explicitly
stating the compensation. The fair value of the service is P50. What are the gain
(loss) on the sale?

a. 250
b. (250)
c. 200
d. 150

42.On December 1, 2014, Doo Company assigned specific accounts receivable

totaling P2,000,000 as collateral on a P 1,500,000, 12% note from a certain
bank. Doo Company will continue to collect the assigned accounts receivable. In
addition to the interest on the note, the bank also charged a 5% finance fee
deducted in advance on the P 1,500,000 value of the note. The December
collections of assigned accounts receivable amounted to P 1,000,000 less cash
discounts of P50,000. On December 31, Doo Company remitted the collections
to the bank in payment for the interest accrued on December 31 and the note
payable.

How much is the equity of Doo Company in assigned accounts on December 31?

e. 500,000
f. 435,000
g. 270,000
h. 450,000

SOLUTION:
 Accounts receivable - assigned (2,000,000 - 1,000,000) 1,000,000
Note payable ( 565,000)
Equity of Doo Company in assigned accounts 435,000

43.Min Company factored P6,000,000 of accounts receivable to Jin Company on

October 1. Control was surrendered by Min. Jin assessed a fee of 3% and
retains a holdback equal to 5% of the accounts receivable. In addition, Jin
charged 15% interest computed on a weighted average time to maturity of the
accounts receivable of 54 days.

Assuming all receivables are collected, Min Company's cost of factoring the
receivables would be

a. 613,150
b. 180,000
c. 433,150
d. 313,150

SOLUTION:

Factoring fee 180,000

Interest 133,150
Total cost of factoring 313,150

44.When accounts receivable are factored without recourse, what account does the
transferor credit?

a. Sales
b. Accounts receivable
c. Liability
d. Accounts receivable assigned

45.On December 1, 2014, Doo Company assigned specific accounts receivable

totaling P2,000,000 as collateral on a P 1,500,000, 12% note from a certain
bank. Doo Company will continue to collect the assigned accounts receivable. In
addition to the interest on the note, the bank also charged a 5% finance fee
deducted in advance on the P 1,500,000 value of the note. The December
collections of assigned accounts receivable amounted to P 1,000,000 less cash
discounts of P50,000. On December 31, Doo Company remitted the collections
to the bank in payment for the interest accrued on December 31 and the note
payable.

What should be reported as note payable on December 31 ?

a. 500,000
b. 565,000
c. 730,000
d. 550,000
 SOLUTION:

Note payable 1,500,000

Principal payment:
Remittance 950,000
Interest (1,500,000 x 12% x 1/12) ( 15,000) 935,000
Note payable - December 31 565,000

46.ABC Company factored its receivables without recourse with XYZ Bank. ABC
received cash as a result of this transaction which is best described as a

a. Sale of ABC’s accounts receivable to XYZ, with the risk of uncollectible

accounts transferred to XYZ
b. Loan from XYZ collateralized by ABC’s accounts receivables
c. Loan from XYZ to be repaid by the proceeds from ABC’s accounts receivable
d. Sale of ABC’s accounts receivable to XYZ, with the risk of uncollectible
accounts retained by ABC

47.Min Company factored P6,000,000 of accounts receivable to Jin Company on

October 1. Control was surrendered by Min. Jin assessed a fee of 3% and
retains a holdback equal to 5% of the accounts receivable. In addition, Jin
charged 15% interest computed on a weighted average time to maturity of the
accounts receivable of 54 days.

Min will receive and record cash of

a. 5,386,850
b. 5,556,850
c. 5,476,850
d. 5,296,850

SOLUTION:

Accounts receivable 6,000,000

Factor's holdback (6,000,000 x 5%) ( 300,000)
Factoring fee (6,000,000 x 3%) ( 180,000)
Interest (6,000,000 x 15% x 54/365) ( 133,150)
Cash received from factoring 5,386,850

Difficult:

48.Amel Company provides financing to other entities by purchasing their

accounts receivable on a non-recourse basis. Amel charges its clients a
commission of 15% on all receivables factored. In addition, Amel withholds 10%
of receivables factored as protection against sales returns and other
adjustments. Amel 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 Amel to establish an allowance for doubtful accounts of 4%
of all unpaid receivables purchased.
On December 1, Amel purchased receivables from Motorway Company totaling
P3,000,000. Motorway had previously established an allowance for doubtful
accounts for these receivables at P 100,000. By December 31, Amel had
collected P2,500,000 on these receivables.

What is the loss on factoring to be recognized by Motorway Company?

a. 750,000
b. 650,000
c. 450,000
d. 350,000

SOLUTION:

Accounts receivable 3,000,000

Commission ( 450,000)
Net sales price 2,550,000
Carrying value of accounts receivable (3,000,000- 100,000) 2,900,000

Loss on factoring ( 350,000)

Actually, the entry on the books of Motorway Company on the dale of factoring
is:

Cash 2,250,000
Allowance for doubtful accounts 100,000
Loss on factoring 350,000
Due from factor 300,000
Accounts receivable 3,000,000

The entry on the books of the factor, Amel Company, is:

Accounts receivable 3,000,000

Cash 2,250,000
Commission income 350,000 450,000
Clients retainer 300,000

49.All but one of the following are required before a transfer of receivables can be
recorded as a sale?

a. The transferred receivables are beyond the reach of the transferor and its
creditors.
b. The transferee can pledge or sell the transferred receivables.
c. The transferor has not kept effective control over the transferred receivables
through a repurchase agreement.
d. The transferor maintains continuing involvement
50.During its second year of operations, Karen Company found itself in financial
difficulties. Karen decided to use its accounts receivable as a means of
obtaining cash to continue operations. On July 1, 2014, Karen sold P1,500,000
of accounts receivable for cash proceeds of P1,390,000. No bad debt allowance
was associated with these accounts. On December 15, 2014, Karen assigned the
remainder of its accounts receivable, P5,000,000 as of that date, as collateral
on a P2,500,000,12% annual interest rate loan from Finance Company. Karen
received P2,500,000 less a 2% finance charge. Additional information is as
follows:

Allowance for bad debts before adjustment, 65,000

12/31/2014
Estimated uncollectible, 12/31/2014 3% of accounts
receivable
Accounts receivable excluding factored and
assigned accounts, 12/31 /2014 1,000,000

None of the assigned accounts had been collected by the end of the year. Karen
Company shall recognize bad debt expense for 2014 at

a. 95,000
b. 115,000
c. 180,000
d. 30,000

SOLUTION:

Accounts receivable - unassigned 1,000,000

Accounts receivable - assigned 5,000,000
Total accounts receivable 6,000,000
Required allowance - 12/31/2014 (3% x 6,000,000) 180,000
Allowance for bad debts before adjustment 65,000
Bad debt expense for 2014 115,000

51.Which of the following statements are correct?

1 Factoring with recourse provides insurance against bad debts

2 The expertise of a factor can increase the efficiency of trade receivables
management for a company

a. 2 only
b. 1 only
c. 1 and 2
d. Neither 1 nor 2

52.On January 1, 2014, Luther Company sold land with carrying amount of P
1,500,000 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, 2014, Luther Company discounted the note with recourse. The bank
discount rate is 12%. The discounting transaction is accounted for as a secured
borrowing.

On October 1, 2014, the maker dishonored the note receivable. Luther

Company paid the bank the maturity value of the note plus protest fee of P
10,000.

On December 31, 2014, Luther Company collected the dishonored note in full
plus 12% annual interest on the total amount due.

What is the interest expense to be recognized by Luther Company on April 1,

2014?

a. 29,000
b. 21,000
c. 50,000
d. 25,000

SOLUTION:

Principal 2,000,000
Interest (2,000,000 x 10% x 9/12) 150,000
Maturity value 2,150,000
Discount (2,150,000 x 12% x 6/12) 129,000
Net proceeds 2,021,000
Principal 2,000,000
Accrued interest receivable (2,000,000 x 10% x 3/12) 50,000
Book value of note receivable 2,050,000
Net proceeds 2,021,000
Less: Book value of note receivable 2,050,000
Interest expense ( 29,000)

53.An entity factored its accounts receivable without recourse with a bank. The
entity received cash as a result of the transaction which is best described as

a. Sale of the entity's accounts receivable to the bank with the risk of
uncollectible accounts transferred to the bank.
b. Loan from bank to be repaid by the proceeds from the entity's accounts
receivable
c. Sale of the entity's accounts receivable to the bank with the risk of
uncollectible accounts retained by the entity
d. Loan from bank collateralized by the entity's accounts receivable.

54.If financial assets are exchanged for cash and other consideration but the
transfer does not meet the criteria for a sale, the transferor and the transferee
should account for the transaction as

I. Secured borrowing and

II. Pledge of collateral
a. II only
b. I only
c. Both I and II
d. Neither I nor II