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Receivable Financing

Intermediate Accounting 1 (University of Mindanao)

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Part II. Problems

26. On July 1, 2019, Jon Snow Company sold equipment to Arya Stark Company for
P1,000,000. Jon Snow accepted a 10% note receivable for the entire sales price. This note
payable in two equal installments of P500,000 plus accrued interest on December 31, 2019 and
December 31, 2020. On July 1, 2020, the entity discounted the note at a bank at an interest rate
of 12%. What is the amount received from the discounting of note receivable?

A. 484,000 C. 503,500
B. 493,500 D. 517,000

Sol:

Principal 500,000
Add: Interest (500,000 x 10%) 50,000
Maturity Value 550,000
Less: Discount (550,000 x 12% x 6/12) 33,000
Net Proceeds 517,000

27. Pledge Company accepted from a customer P1,000,000 face amount, 6-month, 8% note dated
April 15, 2019. On the same date, the entity discounted the note without recourse at Union Bank
at a 10% discount rate. What amount of cash received from the discounting?

A. 1,040,000 C. 988,000

B. 990,000 D. 972,000

Sol:
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

23.Using the information in number 2, what is the loss on note receivable discounting?

A. 50,000 C. 52,000

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B. 40,000 D. 12,000

Sol:
Net Proceeds 988,000
Carrying amount of note receivable – equal to principal (1,000,000)
Loss on note receivable discounting ( 12,000 )

24. On June 30, 2019, Tyrion Company discounted at the bank a customer’s P6,000,000, 6-
month, 10% note receivable dated April 30, 2019.The bank discounted the note at 12% without
recourse. What is the loss on note receivable discounting?

A. 252,000 C. 52,000

B. 152,000 D. 48,000

Sol:
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

Principal 6,000,000
Accrued Interest (6,000,000 x 10% x 2/12) 100,000
Carrying amount of note receivable 6,100,000

Net Proceeds 6,048,000

CA of Note Receivable (6,100,000)
Loss on Note Receivable discounting ( 52,000

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25. Ingrid Company received from a customer a one-year, P500,000 note bearing annual
interest of 8%. After holding the note for 6 months, the entity discounted the note without
recourse at 10%. What amount of cash was received from the bank?
a. 540,000 c. 513,000
b. 523,810 d. 495,238
Sol:
Principal 500,000
Add: Interest (500,000 x 8%) 40,000
Maturity Value 540,000
Less: Discount (540,000 x 10% x 6/12) 27,000
Net Proceeds 513,000

26. Based on the information above, what is the loss on note receivable discounting?
A. 27,000 C. 12,000
B. 20,000 D. 7,000
Sol:
Principal 500,000
Accrued interest receivable (500,000 x 8% x 6/12) 20,000
Carrying amount of note receivable 520,000

Net Proceeds 513,000

Carrying amount of note receivable (520,000)
Loss on note receivable discounting ( 7,000 )

27. On July 1, 2019, Podrick Company sold goods in exchange for P2,000,000, 8-month,
noninterest-bearing note receivable. At the time of the sale, the market rate of interest was
12%. The entity discounted the note at 10% on September 1, 2019. What is the cash
received from discounting?
A. 1,940,000 C. 1,900,000
B. 1,938,000 D. 1,880,000
Sol:
Principal – Maturity Value 2,000,000
Less: Discount (2,000,000 x 10% x 6/12) 100,000
Net Proceeds 1,900,000

28. Sansa Stark Company discounted its own P5,000,000 one-year note at a discount rate
of 12%, when the prime rate was 10%. In reporting the note prior to maturity, what rate
should be used for the recording of interest expense?
A. 12.6% C. 12.0%
B. 10.7% D. 13.6%
Sol:
Note payable 5,000,0000
Discount (5,000,000 x 12%) ( 600,000 )
Net Proceeds 4,400,000
Effective Interest Rate = Discount / Net Proceeds

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= 600,000 / 4,400,000
= 13.6%

29. On August 31, 2019, Blackwater 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, 2019, 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, 2013, 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, 2019?
A. 50,000 C. 28,750
B. 21,250 D. 25,000
Sol:
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
Carrying amount of note receivable 5,050,000

Net Proceeds 5,021,250

Carrying amount of note receivable (5,050,000)
Interest Expense ( 28,750 )

30. On November 1, 2019, Cersei Company discounted with recourse at 10% a one-year,
noninterest bearing, P2,050,000 note receivable maturing on January 31, 2020. The
discounting of the note receivable is accounted for as a conditional sale with recognition
of a contingent liability. What is the amount of contingent liability for this note must be
disclosed in the financial statements for the year ended December 31, 2019?
A. 2,050,000 C. 2,033,333
B. 2,000,000 D. 0
The contingent liability is equal to the principal or face value of the note
receivable discounted.
31. On December 1, 2019, Hero Company assigned P4000,000 of accounts receivable to
Halo Company as a security for a loan of P335,000. Hero Company charged a 2%
commission on the amount of the loan; the interest rate on the note was 10%. During
December, Hero collected P110,000 on assigned accounts after deducting P380 of
discounts. Hero accepted returns worth P1,350 and wrote off assigned accounts totaling
P2,980. How much cash did Hero receive from Halo at the time of the transfer?
A. 301,500 C. 328,300
B. 327,000 D. 335,000

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Sol:
Loan Value 335,000
Less: Commission expense (335,000 x 2%) 6,700
Cash Received 328,300

32. Using the information on number 11, what is the carrying value of the accounts
receivable assigned as of December 31, 2019?
A. NONE C. 289,620
B. 285,290 D. 290,000
Sol:
Account Receivable Assigned P400,000
Less: Amount Collected (110,000 + 380) P 110,380
Sales Return 1,350
Write-off 2,980 114,710
Carrying value of account receivable assigned P285,290

33. On December 1, 2019, M2M Company assigned on a non-notification basis accounts

receivable of P3,000,000 to a bank in consideration for a loan of 80% of the receivables
less a 5% service fee on the accounts assigned. The interest rate of the loan is 12% per
annum. The company collected assigned accounts of P2,000,000 and remitted the
collections to the bank in partial payment for the loan. The bank applied first the
collection to the interest and the balance to the principal. The interest rate is 1% per
month on the outstanding balance of the loan. In its December 31, 2019 statement of
financial position, what amount of note payable should M2M report as current liability?
A. 400,000 C. 424,000
B. NONE D. 1,024,000
Sol:
Total loan (P3,000,000 x 80%) P2,400,000
Less: Principal Payment
Total Payment P2,000,000
Less: Payment for interest (P2,400,000 x 1%) 24,000 1,976,000
Note Payable Balance 424,000

34. On October 31, 2011, Yellow Company engaged to the following transactions:
 Obtained a P500,000, six-month loan from City Bank, discounted at 12%.
The company pledged P500,000 of accounts receivable as security for the
loan.
 Factored P1,000,000 of accounts receivable without recourse on a non-
notification basis with Crush Company. Crush charged a factoring fee of
2% of the amount of receivables factored and withheld 10% of the amount
factored.

What is the total cash received from the financing of receivables?

A. 1,320,000 C. 1,380,000
B. 1,350,000 D. 1,470,000

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Sol:
Pledging [500,000 – (500,000 x 12% x 6/12)] 470,000
Factoring [1,000,000(100% - 2% - 10%)] 880,000
Total Proceeds 1,350,000

35. On February 1, 2019, Lara Jean Corporation factored receivables with a carrying
amount of P2,000,000 to Peter Kavinsky Corporation. Lara Jean Corporation assesses a
finance charge of 3% of the receivables and retains 5% of the receivables. If the factoring
is treated as a sale, what amount of loss from sale should the company report in its 2019
Statement of Comprehensive Income for the year 2019?
A. none C. 100,000
B. 60,000 D. 160,000

Sol:
Amount factored P2,000,000
Less: Finance Charge (2,000,000 x 3%) P60,000
Holdback (2,000,000 x 5%) 100,000 160,000
Amount Received P1,840,000
Add: New asset received (holdback) 100,000
Total Consideration received P1,940,000
Less: Carrying Value of the receivable equal to the face 2,000,000
Loss on Factoring P 60,000

36. Dos Lang Po Company factored 750,000 of accounts receivable to Pasado Company
on December 1, 2019. Dos Lang Po Company retained significant amount risks and
rewards of ownership and continues to manage the financial asset.
Pasado Company accepted the receivable, assigned a fee of 2% and retains a
holdback equal to 4% of the accounts receivable. In addition, Pasado Company charged
12% interest on the amount advanced.
What amount of finance cost should Dos Lang Po Company report in its
December2019 Statement of Comprehensive Income related to the factoring of its
accounts receivable?
A. 22,220 C. 15,000
B. 7,200 D. 22,200
Sol:
Interest Cost (750,000 x 96% x 12% x 30/360) 7,200
Service Charge (750,000 x 2%) 15,000
Total Finance Cost 22,200

37. Road To Cut-off Company sold P5,800,000 in accounts receivable for cash of
P5,000,000. The factor withheld 10% of the cash proceeds to allow for possible customer
returns and other adjustments. An allowance for bad debts of 600,000 had previously
been established by the entity in relation to these accounts. What is the loss on factoring
that should be recognized?

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A. 200,000 C. 800,000
B. 500,000 D. 700,000
Sol:
Sales Price 5,000,000
Carrying amount of accounts receivable (5,800,000 – 600,000) 5,200,000
Loss on Factoring ( 200,000)

38. Marupok Company factored P4,000,000 of accounts receivable without guarantee for
a finance charge of 5%. The finance entity retained an amount equal to 10% of the
accounts receivable for possible adjustments. What amount should be recorded as gain or
loss on the transfer of accounts receivable?
A. 200,000 gain C. 600,000 loss
B. 200,000 loss D. 0
Sol:
Loss on Factoring – equal to finance fee (5% x 4,000,000) 200,000

39. Payaman Company factored without recourse P2,000,000 of accounts receivable with
a bank. The finance charged is 3% and 5% was retained to cover sales discounts, sales
returns and sales allowances. What amount of cash was received on the sale of accounts
receivable?
A. 1,940,000 C. 1,840,000
B. 1,900,000 D. 2,000,000
Sol:
Accounts Receivable 2,000,000
Finance Charge (3% x 2,000,000) ( 60,000)
Factor’s holdback (5% x 2,000,000) (100,000)
Cash Received from Factoring 1,840,000

40. Pikachu Company assigned P4,000,000 of accounts receivable as collateral for a

P2,000,000 6% loan with a bank. The entity also paid a finance fee of 5% on the
transaction upfront. What amount should be recorded as a gain or loss on the transfer of
accounts receivable?
A. 200,000 loss C. 240,000 gain
B. 200,000 gain D. 0
Sol:
No gain or loss is recognized because assignment of accounts receivable is a
secured borrowing and not a sale.

41. On December 1, 2019, Choi Company assigned specific accounts receivable totaling
P2,000,000 as collateral on a P1,500,000, 12% note from a certain bank. The entity will
continue to collect the assigned accounts receivable. In addition to the interest on the
note, the bank also charged a 5% finance fee deducted in advance on the P1,500,000
value of the note. The December collections of assigned accounts receivable amounted to

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P1,000,000 less cash discounts of P50,000. On December 31, 2019, the entity remitted
the collections to the bank in payment for the interest accrued on December 31, 2019 and
the note payable. What is the carrying amount of note payable on December 31, 2019?
A. 500,000 C. 565,000
B. 550,000 D. 730,000
Sol:
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

42. Using the information above, what amount should be disclosed as the equity of Choi
Company in assigned accounts on Dec. 31, 2019?
A. 500,000 C. 435,000
B. 450,000 D. 270,000
Sol:
Accounts Receivable – assigned (2,000,000 – 1,000,000) 1,000,000
Note Payable (565,000)
Equity of Choi Company in assigned accounts 435,000

43. ABA Co. factored P60,000 accounts receivable to CAB Financing Corp. on a without
recourse basis on January 1, 2020. CAB charged a 4% service fee and retained a 10%
holdback to cover expected sales returns. In addition, CAB charged a 12% interest
computed on a weighted average time to maturity of the receivables of 73 days based on
365 days. How much proceeds is received from the factoring on January 1, 2020?
A. 50,130 C. 50,160
B. 50,610 D.51,610
Sol:
Account Receivable factored 60,000
Service Charge (60,000 x 4%) (2,400)
Factor’s holdback (60,000 x 10%) (6,000)
Interest Charge (60,000 x 12% x 73/365) (1,440)
Proceeds from factoring 50,160

44. Based on the information in number 23, how much is the cost of factoring?
A. 4,830 C. 4,820
B. 3,040 D. 3,840
Sol:
Service Charge 2,400
Interest Expense 1,440
Cost of Factoring3,840

50. Miley Co. factored P5,000,000 of its accounts receivable. The transfer is recorded as

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a sale by Miley Co. The factor retained 8% for sales and adjustments and charged
P300,000 as a financing fee. For simplicity, the estimated and actual amounts of the
following items are equal:
Sales adjustments 250,000
Uncollectible Accounts 100,000
What is the loss or financing expense to be recognized on the transfer?
A. 300,000 C. 350,000
B. 650,000 D. 400,000
Sol:
Loss on Factoring – finance fee 300,000

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