Chapter 8: RECEIVABLE FINANCING NP xx *To record PAYMENT of

Pledge, Assignment and Factoring Cash xx bank loan on maturity date.

Int Expense xx *Te record amortization of

Receivable Financing
DNP xx DNP on maturity date
= financial flexibility or Capability of an entity to RAISE
MONEY OUT OF ITS RECEIVABLES PLEDGING = ALL AR serve as collateral security for the
NOTE: POV is always on the Seller loan.

Context: an entity may find itself in tight cash position

because of SALES DECREASE and CUSTOMERS are
NOT PAYING their accounts ON TIME but on the side
of the entity, it also needs to Pay its Current ACCOUNTS
and NOTES PAYABLE to maintain its credit standing.
Under this circumstances, if the situation becomes very
critical, the entity may be forced to LOOK FOR CASH
by FINANCING ITS RECEIVABLES.
FORMS OF RECEIVABLE FINANCING (PAFD)
1. PLEDGE OF ACCOUNTS RECEIVABLE
2. ASSIGNMENT OF ACCOUNTS RECEIVABLE
3. FACTORING OF ACCOUNTS RECEIVABLE
4. DISCOUNTING OF NOTES RECEIVABLE
2. ASSIGNMENT OF ACCOUNTS RECEIVABLE
= a more formal type of pledging of AR
= ASSIGNOR (aka borrower) transfers RIGHTS in
some AR to an ASSIGNEE (lender) in consideration
for a loan.
= Assignor retains OWNERSHIP of AR assigned
*ASSIGNMENT = secured borrowing evidenced by a
FINANCING AGREEMENT and a PROMISSORY NOTE
both of which the assignor signs.
= it is SPECIFIC because only specific AR serve as
collateral for the loan.
ASSIGNMENT BASIS

1. PLEDGE OF ACCOUNTS RECEIVABLE

When Customers are NOT
*Pledging is aka Hypothecating aka General
INFORMED that their accounts
assignment NONNOTIFICATION
have been assigned
= in obtaining loans, AR, as a whole, may be pledged BASIS
*this means that the customer
as COLLATERAL SECURITY for the payment of the
will continue to make payments
loan.
to the assignor, who in turn
= Entity will still make the COLLECTION OF AR but
REMITS the collection to the
may be required to turn over the collections to the
assignee.
bank in satisfaction for the loan.
NOTIFICATION Customers are NOTIFIED to
=NO ENTRY REQUIRED for PLEDGE, only disclosure
BASIS make their payments DIRECTLY
to the assignee.
PERTINENT JOURNAL ENTRIES
*To record LOAN
Discount On NP = if the NONNOTIFICATION BASIS NOTIFICATION BASIS
Cash xx
loan is discounted, which
DNP xx TO SEPARATE ASSIGNED ACCOUNTS
means that interest for
NP xx Illustration: Entity assigned 700T of AR to a bank
the term of the loan is
AR – Assigned 700T AR – Assigned 700T
DEDUCTED IN ADVANCE.
AR 700T AR 700T
Int Expense xx *DNP should be amortized
TO RECORD THE LOAN
DNP xx using STRAIGHT LINE
Bank loans 80% of Collateral less Service charge of 5T
METHOD
Cash 555T Cash 555T
SC 5T SC 5T
FS PRESENTATION NP 560T NP 560T
Current Liabilities: Issuance of Credit Memo (e.g. Sales Return)
NP – bank xx Sales Return to customer whose accounts was assigned, 20T
Disc on NP (xx) Sales Return 20T Sales Return 20T
Carrying Amount xx AR – Assigned 20T AR – Assigned 20T
TO RECORD COLLECTION
Disclosure/Note to FS The difference between the two basis is evident on the Collection.
“The NP to bank Matures on (date) and is secured by AR For Nonnotif, since the company still makes the collection so debit
with Face value of (xx).” CASH, however for Notif, customers can directly pay to the
assignee so directly debit NP instead
 Total collection of 300T less 2% discount

Cash 294T NP 294T

Sales Disc 6T Sales Disc 6T
AR-Assigned 560T AR-Assigned 560T
TO RECORD REMITTANCE
Another difference is in remittance. For Nonnotif, you have to
debit NP to reduce liab but for notif, since payments are directly
paid to the assignee then we no longer debit NP because it was
already deducted during collection.
Remitted total collection of 294T to the bank plus 1% interest on
the unpaid Loan balance.
NP 294T Int Exp 5600
Int Exp 5600 Cash 5600
Cash 299600

TO RECORD WRITE-OFF OF AR-ASSIGNED

AR-assigned of 15T proved worthless
ADA 15T ADA 15T
AR-Assigned 15T AR-Assigned 15T
TO TRANSFER REMAINING BAL OF AR-ASSIGNED TO AR
Remaining AR-assigned amounted to 65T
AR 65T AR 65T
AR-Assigned 65T AR-Assigned 65T
*The entity shall disclose its equity in the assigned
accounts determined as follows:
AR – Assigned. 1M
NP – Bank. (400T)
Equity in Assigned Accounts 600T
 3. FACTORING OF ACCOUNTS RECEIVABLE
= a SALE of AR
= entity may Sell AR to a FACTOR (bank or finance
entity)
= entity actually transfers OWNERSHIP of AR to
the FACTOR
*Customers whose Accounts are factored are NOTIFIED
and required to pay DIRECTLY to the factor
*Factor now has the responsibility of keeping the
factored AR and the subsequent collections.
CASUAL FACTORING FACTORING AS A
CONTINUING
AGREEMENT (Regular)
*Entity is in a critical cash *Where a finance entity
position, it may be forced to purchases all of the AR of
factor some or all of its AR a certain entity –
at a substantial discount to a CONTINUING AGREEMENT
factor to obtain the much *With this, if an entity
needed cash. solds merchandise, it needs
the credit approval first of
the factor before it is
shipped to the customer.
*If approved, factor now
assumes the AR and the
collection function.
Illustration: Illustration:
Entity factored AR – 100T Entity factored AR –
ADA – 5T, Selling Price – 500T, 2/10, n/30;
80T Commission based on Gross
AR factored(*1) – 5%;
Factor’s holdback- 20% of
Cash 80T
gross AR factored (*2)
ADA 5T
Loss on factoring 15T
AR 100T Cash 365T
Sales Disc 10T
Commission 25T
Account for the Loss/Gain on
Rec from factor 100T
factoring for the excess
AR
amount.
500T
If the customer is allowed
a credit memo of 50T for
damaged merchandise:
SRA 50T
Note: No Commission
SD
Expense in Entry for Casual
RFF
Factoring even if given.
*only solve for the SD , excess is a
deduction to rec from factor.
Clue: To determine if
Continuing agreement – AR If all AR factored are
are factored BEFORE or already collected with no
IMMEDIATELY AFTER further SRA, the final
shipment of GOODS settlement with the factor
is:
Cash (100T-49T) 51T
RFF 51T
*1. Factor may charge a commission/factoring fee for its
services of Credit Approval, billing, collecting, and
assuming uncollectible factored accounts.
*2. FACTOR’S HOLDBACK = factor may withheld a
predetermined amount as a protection against customer
returns and allowances and other special adjustments.
(RECEIVABLE FROM FACTOR = CA)
Settlement of Factor’s holdback is made after the
factored receivables have been fully collected.
Note: In recording the entry for factoring as continuing
agreement = solve first for the SD, RFF, Commission, and
the remaining amount is charged to Cash received from
factoring.
Formulas: Whether CASUAL or REGULAR basis
Gross AR xx
Less: Factoring Fee (xx)
Finance Charge & Int Exp (xx)
Net Selling Price xx
Less: Factor’s holdback (xx)
NET CASH RECEIVED xx
*Less Sales Discount (if any)
Gross AR xx
Less: Factoring Fee (xx)
Finance Charge & Int Exp (xx)
Net Selling Price xx
Less: Recourse oblig (if any) (xx)
Net Proceeds xx
Less: Book Value of AR (xx)
GAIN/LOSS ON SALE xx/(xx)
*Note: IF ALL ACCOUNTS ARE COLLECTED
Factoring fee xx
Finance Charge & Int Expense xx
COST OF FACTORING xx
*Cost of Factoring = Loss on Factoring
*Note: IF ALL ACCOUNTS ARE NOT COLLECTED
1T Include in the computation of cost of factoring the
49T ESTIMATED RECOURSE OBLIGATION
*Interest Expense may be computed on a WEIGHTED
AVERAGE TIME to maturity of AR, to solve:
IE = [(AR-factored X Int.Rate) X days] / 365 days
*Use 365 days to get average.
 ADA 100T Clients Ret 300T *1
Loss on factoring 350T Cash 2250T
AR 3M

Seller credits RFF equal to 10% of the outstanding AR;

CASUAL FACTORING PERTINENT ENTRIES: Collection = 2.5M
Without Recourse With Recourse Cash 250T Cash. 2.5M
RFF 250T AR 2.5M

To Record Factoring
Factored 100T of its AR for 85T; ADA = 3T; RFF = 5% of Purchase price Clients Ret. 250T
Cash 80750 *Recourse Obligation est FV = 5T Cash 250T
ADA 3000 Cash 80750 *1 Clients Retainer = Seller’s receivable from factor
Loss on Factoring 12T ADA 3000
RFF 4250 Loss on Factoring 17T
AR 100T RFF 4250
AR 100T
NOTE: To differentiate CASUAL from CONTINUING
Est. Reco Ob 5T AGREEMENT.
Additional entries for With Recourse:
Est. Reco Ob xx To record the transfer of
*CASUAL = Expense Accounts not included in the
Gain on Reco Ob xx recourse obligation – no journal entry: Commission Expense, Factoring fee
further payment was made and Finance charge or Interest Expense.
Loss on factoring xx To record the transfer of Loss on Factoring is instead included in the entry.
Cash xx recourse obligation – additional
payment was made *CONTINUING AGREEMENT = Expense accounts are
appropriately journalized. Loss on factoring account
Pertinent Entries for Regular Factoring or Continuing is not included in the entry.
Agreement
*similar to Casual factoring but appropriate expense account are
CLUE: To easily distinguish if CASUAL or CONTINUING
debited.
AGREEMENT or whether to use appropriate expense
*In Casual factoring we no longer debit for Factoring
fee/Commission Exp and Interest Expense but for Regular accounts or not.
factoring, it is important to Debit these expense accounts. *USE CASUAL IF:
=the book value of AR is not the same as the Face
Without Recourse With Recourse Value of the AR-factored or ADA specific to the
factored AR is given in the problem. This is to
To Record Factoring account for the LOSS ON FACTORING.
Factored 100T of its AR; ADA = 3T; RFF = 5% of Purchase price;
Commission = 10T; Int Expense = 2T
*USE CONTINUING AGREEMENT IF:
Cash 80750 *Recourse Obligation est FV = 5T
ADA 3000 Cash 80750 =the book value of AR-factored is equal to the
RFF 4250 ADA 3000 Face Value of the AR-factored or if No ADA for the
Factoring fee 10T RFF 4250 AR-factored is given in the problem. Since in this
Int Exp 2T Factoring fee 10T case, the Loss on factoring would be equal to the
AR 100T Int Exp 2T Cost of factoring then it is necessary to include
Loss on factoring*1 5T
appropriate expense accounts.
AR 100T
Est. Reco Ob 5T
*1 Loss on Factoring for With Recourse is EQUAL to Est
Recourse Obligation. Additional:
CREDIT CARD
*Major difference between Casual and Regular is that = which enables the holder to purchase goods and
Appropriate expense accounts are recorded in Regular services up to a predetermined credit limit.
with no Gain/Loss on factoring (w/out Recourse) but in = holders obtain possession of the goods but do not
Casual factoring, Loss on factoring are emphasized. have to pay for the goods for about one month.
Major credit cards in the Philippines:
BELOW shows the COMPARISON between Seller and Diners Club VISA
Buyer of AR. Pertinent entries include: American Express MasterCard
= entities responsible for approving the credit
To record transactions on the books of Seller and Buyer
Illustration: AR factored=3M; ADA=100T; ComExp=15% of AR;
and charges a service fee from 1% to 5% of the
RFF=10% of AR; credit card sales upon collection of AR.
Seller of AR Buyer of AR (Factor) To visualize:
If a customer buys goods and uses a credit
Cash 2250T AR 3M
RFF 300T CommInc 450T card, the retailer will forward the credit card
 receipt to the card issuer who will then pay for
the goods minus the credit service charge.

Illustration: Credit Card Sales using Diners Club – 200T

Credit Card Service Charge – 3% of CC sales
AR – Diners Club 200T To Record Credit Card Sales
Sales 200T
Cash 194T To record the PAYMENT
CCSC 6T received from Diners Club
AR – Diners Club. 200T

Some credit cards issuer allow the retailer to deposit the

Credit Card Receipt directly to their Current Account.
No more AR from issuer, directly increases Cash
minus Credit Card Service Charge
Illustration: Credit Card Sales – 200T
Credit Card Service Charge – 10T
Cash 190T To record the Credit Card
CCSC 10T Sales.
Sales 200T
*The case above is a Form of FACTORING of AR because
the Sales are treated directly as cash by retailers.