Problem 7-16 (IAA) 41, 2022, London Bank granted a 5,099, On December St, Mfith 10% stated rate payable anmyat? Joan eg im 8 years. The loan was discounted at ty) market interest rate of 12% Unfortunately, the financial condition of the borrower ‘worsened because of lower revenue, 1m December 31, 2024, the bank determined that the Be oe ald poy buck only P3000,000 of the principale Howover, it was considered likely that interest would continue to be paid on the P5,000,000 loan. ‘The present value of 1 at 12% is .57 for five periods and 71 for three periods. The present value of an ordinary annuity of 1 at 12% is 3.60. for five periods and 2.40 for three poriods. 1. What is the amount of eash paid to the borrower on December 31, 2022? a. 4,400,000 b. 4,500,000 2 What is the carrying amount of the Joan receivable on December 31, 2024? a. 4,650,000 b. 790,000 © 4.772'960 4. 4720,000 3. What amount should be re ted as impairment loss o* loan receivable for 2024? pred 7 2. 2.000000 B. e!se0 a 210 CHAPTER 8 RECEIVABLE FINANCING Pledge, assignment and factoring TECHNICAL KNOWLEDGE To know the accounting for pledge of accounts receivable. To know the accounting for assignment of accounts receivable. To understand factoring of accounts receivable. To know the classification and presentation of pledged, assigned and factored accounts receivable. aunRECEIVABLE FINANCING Je financing is the financial flexibility or ea, ability og During a general business decline, an entity may Baer pminn beswe sles decrease nnd pot paying their aecounts on time. find itsely staat But the entity's current accounts and notes payable continue tobe paid fit credit standing is not to sues, "tS ‘The entity then would be in a financial distress as cof receivable are delayed but cash payments for obligat be maintained, collections tions must Under these circumstances, if the situation becomes very ential, the entity may be forced to look for cash by financing its receivables, The common forms of receivable financing are pledge of accounts receivable, assignment of accounts receivable, factoring of ‘counts receivable and discounting of notes receivable. 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. Normally, the borrowing entity makes the collections of the Pledged accounts but may be required to turn over the ‘olleetions to the bank in satisfaction for the loan. No complex problems are involved in this form of financing except the accounting for the loan, penadian is recorded by debiting cash and discount on note Pavable if loan is disoounted, and crediting note payable. The subsequent payme biting rete pay and eet ofthe loan in recorded by del With respect to the pledged accou: a try would be cei ein eben fed gocounts, no entry : t tre i made in 8 ote to financial state Beet Illustration On November 1, 2022, an entity borrowed P from tank and issued a promissory note for the same ore ‘The term of the Joan ia one year and discounted at 12%, The entity pledged accounts receivable of P2.000,000 to cccure the loan, Ifthe loan is discounted, in the banking parlance this means that the interest for the term of the loan is dedueted in advance, cash £880,000 Discount on note payable 120,000 Note payable - bank 1,000,000 Feco amount of loan 1,000,000 Interest deducted in advance (1,000,000 x 12%) 120,000) Netproceeds 380,000 On December 31, 2022, using the straight line method, the discount on note payable is amortized as interest expense for two months from November 1 to December 31 Interest expense (120,000 x2/12) 20,000 Discount on note payable 20,000 Ifa statement of financial position is prepared on December 431, 2022, the note payable-bank and the discount on note payable ted ws current Lability ‘Note payable-bank Discount on note payable 1,000,000 C100 .000), Carrying amount A note to financial statement should be made, ‘The note payable to bank matures on November 1, 2023 and is Sscured by aueoute roctvable with face amount of P2000, 000, On November 1, 2023, the payment ofthe bank loan i recorded ani the discousit on tote payable is nally amortized 1,000,000 aepaatedank oe Interestexpense tice) Discount on note payable seas 213[Assignment of accounts receivable of accounts receivable means that a borrower ‘Pinafore rights in some ACCOLALS receivable 44 “he assignee in consideration for a loan, Assignment the assignor lender called Be ea a eet acl det eee Actual, agers Uhaegnment is secured boron Account nang agreement and a Promissory note wt Sa ccigoreme However, pledging is general because all accounts receivate serve as collateral security for the loan. On the other hand, assignment is specific because speife ccounts receivable serve as collateral security for the loan, ‘Assignment may be done either on a nonnotification or notification basis. When accounts are assigned on a nonnotification bass, customers are not informed that their accounts have beet assigned ‘As a result, the customers continue to make payments to the assignor, who in turn remits the collections to the assignee. ‘When accounts are assigned on a notification basis, customers are notified to make their payments directly to the assignee. ‘The assignee usually lends only a certain percentage of the face value ofthe accounts assigned because the assinel accounts may not be fully realized by reason of such factors 8 tales discount, sales return and allowances and uncolletble The percentage maybe or 90% depending on t# ay oe ala, Ne EO ARO hy eee wally charges interest forthe loan that it make ire a erie or financing charge ot commissio? the aasignment agreesne nn Charge or com a4 lustration ~ nonnotification basis April 1 An entity assigned P700,000 of accounts receivable to a bank under a nonnotification arrangement. The bank advances 80% less a service charge of P5,000. ‘The entity signed a promissory note that provides for interest of 19% per month on the unpaid Joan balance. ‘To separate the assigned accounts: Accounts receivable-assigned 700,000 ‘Accounts receivable 700,000 ‘To record the loan: Cash (660,000 - 5,000) 595,000 Service charge 5,000 ‘Note payable-banke 560,000 5 Issued a credit memo for sales return to a customer whose account was assigned, P20,000, Sales return 20,000 ‘Accounts receivable-assigned 20,000 10 Collected P300,000 of the assigned accounts less 2% discount, Cash 294,000 Sales discount: (2% x $00,000) ‘Accounts receivable-assigned 000 300,000 30 Remitted the total colleetions to the bank plus interest for one month. Note payable-bank. 294,000 Interest expense (19%x 560,000) 5,600 Cash 299,600 215May 7 Assigned accounts of P15,000 proved worthless, Allowance for doubtful counts 16,000 punta recevab-asigned ae 2p Cileted P300,000 of the assigned nocounts coh 300,000 counts recrvable-assigned oa 50° Remitted the total amount due the bank to pay of the Joan balance plus interest for one month, Note payable-bank (660,000- 284,000) 266,000 Interest expense (11% 266,000) 2,660 Cash 268680 To transfer the remaining balance of assigned accounts to accounts receivable: Accounts receivable 165,000 © Accounts rectivabe-assigned 65,000 ‘otal accounts receivable-assigned ‘oo,eo0 Less: Collections (294,000 +300,000) 594,000 Sales discount 6,000 Salee return 20,000 Worthless accounts 15,000 _635000 Bieo me 216 Illustration ~ notification basis duly ‘The bank loans 80% less 4% se1 Accounts receivable 2 1,000,000 eh. s00m a woreda se S1 Received notice from bank that P600,000 of the assigned accounts were collected less 2% discount. A check was sent to the bank for the interest due. ‘Note payable-bank 588,000 Sales discount (2%x 600,000) 12,000 Accounts receivable-assigned {600,000 Interest expense (1% x 800,000) 8,000 Cash 8,000 August ‘31 Received notice from bank that P300,000 of the assigned accounts were collected. Final settlement was made by the bank for the excess collections together with the uncollected assigned accounts of P100,000. Cash 85,880 Interest expense 2120 Note payable-banke 212,000 ‘Accounts receivable-assigned 300,000 Accounts receivable 100,000 Accounts receivable-assigned 100.000 217Computation 2 “a tans tak ts Soe cs ie 20 ee sue tepateiss Ss = Baal ais oe es = Statement presentation [An entity provided the following accounts at year-end: Accounts receivable-unassigned 4,000,000, Accounts recsivable-assigned 060,000 Allowance for doubtful accounts 100.000 Note payable-bank (elated to assignment) 40,000 Accounts recevable-unassigned 4,000,000 ‘Accounts receivable-assigned 3,000,000 Total 5,000,000 Allowance for doubtful accounts 00,000) Netrealizable value 4,900,000 ‘The net realizable value of P 4,900,000 is included in the caption “trade and other receivable Equity in assigned accounts Moreover, the entity shall disclose its e the assigned shall disclose its equity in ‘accounts. The equity in assigned accounts is equal to the balan of assigned accounts receivable minus the balance of the rel! ‘note payable to bank. Accounts receivable-assigned Loan ‘Note payable-bank (m8 218 Factoring Factoring is a sale of accounts receivable usually on a wi Facts, notification basis, ab usually on a without Ina factoring arrangement, an entity sells accounts receiv toa bank or finance entity called a factor, able Accordingly, a gain or loss is recognized for the difference faveen the proceeds received and the net carrying amount the reacivables factored carrying amount of Factoring differs from an assignment in that an entity actual transfers ownership of the accounts receivable to the fetea” ‘Thus, the factor assumes:responsibility for uncollectible factored accounts. Inassignment, the assignor retains ownership of the accounts assigned. Because of the nature of the transaction, the customers whose axounts are factored are notified and required to pay directly to the factor. z The factor has then the responsibility of keeping the receivable records and collecting the accounts. Factoring may take the form of the following: a. Casual factoring b. Factoring as continuing agreement Casual factoring fan entity finds itself in a eritical cash position, it may be foreed to factor some or all of its accounts receivable at a substantial discount to a bank or a finance entity to obtain the ‘much needed cash, Forexample, an entity factored P100,000 of gecounts receivable with an allowance for doubtful accounts of P5,000 fr P80,000. Journal entry to record the sale ca 1,000 Allowance for doubtful account 6,000: sintncng ge soto Accounts receivable 219Factoring as a continuing agreement Factoring may involve a continuing arrangement where finance entity purchases all of the accounts receivable of + certain entity In this setup, before a merchandise is shipped to a customer, the selling entity requests the factor’s credit approval. Ifit 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 colleetion function. For compensation, typically the factor charges a commission or factoring fee of 5% to 20% for its services of credit approval, billing collecting, and assuming uncollectible factored accounts. ‘Moreover, the factor may withhold a predetermined amount as a protection against customer returns and allowances and ther special adjustments, ‘This amount withheld is known as the “factor’s holdback”. ‘The factor’s holdback is actually a receivable from factor and classified as current asset, Final settlement of the factor's holdback is made after the factored receivables have been fully collected: Mustration ‘An entity factored accounts receivable of P the goods to the customer, omen The factor charged a 5% commission based on the gross amount of the receivables factored, als In addition, the factor withheld 20% of the amount of the receivables factored to cover sales return and allowances Journal entry to record the factoring Coch 365,000, Seles discount Commission Receivable from factor ‘Accounts receivable 500,000 Computation Gross amount ese Sales discount —_( 2% x 500,000) Commission (5% x 500,000) Factor's holdback (20% x 500,000) Cash received from factoring 500,000 135.000 Ifthe customer is subsequently allowed a credit of P50,000 for damaged merchandise, the journal entry is: Salesreturn and allowance 50,000 Sales discount (2% x 50,000) oe Receivable from factor ‘9 When all the receivables factored are collected by the factor with no further returns and allowances, the final settlement with the factor is normally recorded. Cash (100,000 - 49,000) Ce | cipto Receivable from factor 22tllustration- with recourse for nonpayment an entity factored P3,000,000 of aecounts receivable ay javetnd. Control was surrendered. ‘The factor accepted the accounts receivable subject 10 recourse for nonpayment. ‘The fair value of the recourse obligation is P100,000. ‘The factor assessed a fee of 6% and retained a holdback equal to 10% of the accounts receivable In addition, the factor charged 12% interest computed on a tucighted-averoge time to maturity of 50 days. Computation Accounts receivable 3,000,000, Factorsholdback — (10%x3,000,000) 300,000) Factoring foe (6% 8,000,000) (180,000) Intereet (6,000,000 x 12% x 50/363) (49,315) Cash initially received from factoring If the interest is computed on a weighted average time basis, the denominator is 965 days, In the absence of any contrary statement, the simple interest 4s computed using 360 days as denominator. Factoring fee Aso Interest eral Recourse obligation 100,000 ‘Total los on factoring initially recognised nee Note that the recours *¢ obligation is initially recorded as loss ‘on factoring, : 222 Journal entries to record the factoring te 2,470,685 Miotngtee saoee Li vstexpense 180,000 toss on ecnurae obliga 40318 ‘en counts rectivable 100,060 Recourse ability 41000,008 100,000 To reverse the recourse liability fully collected by the factor Recourse liability 100,000 Loss on recourse obligation assuming the accounts are 100,000 This means that the net loss from factoring is P329,315 minus 100,000 or P229,315. To collect the factor’s holdback ach * 300,000 Due from factor 300,000 Assuming the accounts are not collected by the factor To settle the recourse obligation to the factor Recourse liability 100,000 Cash, 100,000 Tocollect the factor's holdback Cosh 300,000 Due from factor 1200 000, The two entries can be compounded Cat 200,000 Recourse liability 100,000 Due from factor feo, 000, Normally, the factor deducts the recourse liability from the ors holdback upon final settlement. 223 |Credit card ard isa plastic card which enables the holder too reit card has enabled retailers and other businesses to com of he goods immediately but do not have to pay for The goods for about one month. nks offer credit cards to their depositor. ‘The major Mog! bans tye Phuippines are Diners Club, American Express, VISA and MasterCard. ‘These entities are generally responsible for approving the eredit Gfeastomers and collecting the receivables for a service fee from 1% to 5% of the credit card sales. Generally, if customer buys goods and uses a credit card, the credit card receipt must be forwarded by the retailer to the tard issuer who will then pay the retailer the appropriate famount minus the credit service charge. ‘Two entries are necessary, one entry at the time of sale and another entey when payment is received from the card issuer. Mlustration Credit card sales to customers using Master Card amount to 'P200,000 for a certain period. ‘The credit card receipts are forwarded to Master Card and payment is subsequently received from Master Card minus & 5% service charge. 1. To record the credit card sales: ‘Account recrvable MasterCard. 200,000 a 200.00 2 To record the payment from Master Card: Ca C 194,000 Crditcardvervice charge 2000003) "6000 Acounta receivable MasterCard bear 224 QUESTIONS 1. Explain receivable financing. 2, Enumerate the four common forms of receivable financing 4.What are the forms of financing rela Lotro inancing related to accounts 4, Explain pledge of accounts receivable 5. Explain assignment of accounts receivable. 6 Distinguish pledge and assignment of accounts receivable 1. Explain nonnotifcation and notification basis with re to assignment of accounts receivable. ran & Explain briefly factoring. 9.Explain casual factoring and factoring as a continuing agreement, 10, What is a credit card? 226Problem 8-20 Multiple choice (AICPA. Adapted) 1, Why would an entity factor accounts receivable? a, To improve the quality of credit granting process 6 T al Tiability Toa ‘access to amount collected d. To comply with customer agreements 2 The practice of realizing cash from accounts receivable prior to maturity date is widespread. Which term is not associated with this practice? a. Hypothecation b. Factoring ©, Defaleation 4. Pledging 3. When an entity factored accounts receivable without recourse with a bank, the transaction is best described as «. Bank Joan collateralized by the accounts receivable. 5. Bank loan tobe repaid by the proceeds from the accounts © Sale ofthe accounts receivable to the bank, with risk of Luncollectible accounts retained by the entity 4. Sale of the accounts receivable to the bank, with the risk of uncollectible accounts transferred to the bank. 4, Which statement is true when accounts receivable are factored without recourse? fe he transaction maybe aeounted fo either as secured ie accounts receivable are used as collateral. b © The factor assumes the risk of collectibility and absorbs The feat oss a collecting the counts, receivable. the canine 2k shoul be recognized ratably All but one of accounts of the fillowing aze required before a transfer receivable can be recorded as a sale. The transferred accounts receivable are beyond the Thee accounts receivable are beyon p, Hush of the transferor and the eetmeane repurchase oy, ot kept effective control through ‘The transferee ‘he transforee ean i continuing involvement. ige the accounts receivable. 238 CHAPTER 9 RECEIVABLE FINANCING Discounting of note receivable TECHNICAL KNOWLEDGE Toknow the concept of discounting of note receivable. To distinguish discounting of note receivable with recourse and without recourse. To understand discounting of note receivable accounted for as conditional sale with recognition of contingent liability. To understand discounting of note receivable accounted for as secured borrowing. 239DISCOUNTING OF NOTE RECEIVABLE Aw a form of receivable financing, discounting specifica, jertains to note receivable, Ina promissory note, the original parties are the maker ang payee. ‘The makers the one lable and the payee isthe one entitled tp payment on the date of maturity When # note is negotiable, the payee may obtain cash before rnaturity date by discounting the note ata bank or other financing company. ‘To discount the note, the payee must endorse it, ‘Thus, legally the payee becomes an endorser and the bank ‘becomes an endorse. Endorsement Endorsement i the transfer of right to a negotiable instrument by simply signing at the back of the instrument. Endorsement may be with recourse which means that the endorset shall pay the endorsee if the maker dishonors the note. In the legal parlance, this is the secondary liability of the endorser, mn the accounting parlance, this is the contingent liability, of the endorse ‘ni the contigs Endorsement may be uithout recourse which means that the ndorser avoids future liability even if the maker refuses (0 Pay the endorsee on the date of maturity. In the a a maa any evidence to the contrary, endorsement to be with recourse. 240 germs related to discounting of note [Net proceeds refer to the discounted value of the : ‘iy the endorsor from the endorse. reas Net proceeds = Maturity value minus Discount 2. Maturity value is the amount due on the note at the date of maturity. Principal plus interest equals the maturity value. 4 Maturity date is the date on which the note should be paid. 4. Principal is the amount appearing on the face ofthe note. it is also referred to as face value. 4, Interest is the amount of interest for the full term of the note. Interest is computed as Principal x rate x time. 6 Interest rate is the rate appearing on the face of the note. 1. Time is 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 or “full term’ of the note. 8 Discount is the amount of interest deducted by the bank in advance. Discount is equal to maturity volue times discount rate times discount period, 9. Discount rate is the rate used by the bank in computing the discount, The discount rate should not be confused with the {nterest rate, The discount rate and interest rate are different fiom each other, Ifno discount rate is given, the interest rate is safely assumed 8 the discount rate, 10. Discount period is the period of time from date of discounting ‘wo maturity date. Simply computed, discount period equals term of the note minus the expired portion up to the date of discounting he discount period is the unexpired ferm of the note. 241illustration - discounting without recourse ’. rd July 1 wi 0, 180-day, 12% note dated July 1 was received ‘August 30 at 15% discount rate. Computation Maturity value is equal tothe principal plus interest, Principal 1,000,000 Taterest (1,000,000 12% x 180/360) cata Maturity value “1,060,000 Observe that the interest must be for the full term of the note in determining the maturity value Discount is equal to the maturity value times discount rate times discount period. Discount (1,060,000 x 15% x 120/360) 000 ‘The discount period is the remaining term of the note on the date of discounting. Term of note 180 days Lesa: Daye expired from July 1 to August 30 _Bodays Discount peried—romaining term 120d In counting, “exclude the first day but include the last day” Net proceeds from discounting Maturity valye 1,060,009 Dict 33,000 ‘Net proceeds from discounting, 11,007,008 242 cairying amount of the note receivable peinspal 1,000,000 20,000 Pree interest receivable (1,000,000 x12%x 60/360) ‘caning amount of note receivable ‘te accrued interest receivable is interest earned from Jul Tio the date of discounting on August 30, or 60 days, iS ain or loss on note discounting Netproceeds from discounting 1,007,000 Cermingamount of note receivable 1,020,000 Ison nate discounting 13,000) ‘he difference between the net proceeds from discounting and the careying amount of the note receivable is recognized as ain or loss. Accounting for note receivable discounting ‘The accounting for note receivable discounting depends on whether the discounting is with or without recourse. lithe discounting is without recourse, the sale of the note rosivable is absolute and therefore there is no contingent lability. Journal entry Ch 3,007,000 lesson note receivable diseounting 13,000 Note receivable 1,000,000 Interest income 20,000 The note receivable account is credited directly because thesale of the note receivable is without recourse or absolute The interest income is credited for the actual interest ‘arned on the date of discounting. 243Illustration - discounting with recourse 2,400,000, 6month, 12% note dated February 1 ig fama vestomer by an entity and discounted by First posed March 1 at 15%. Bank oy Principal 2,400,009 (2,400,000 x 12% x 6/12) Inverest (2,400,000 x 12% x 6/12) rage Maturity value Discount (2,544,000x 15% 5/12) [Netproceede from discounting Term ofnote Less: Age ofnote (February 1 to March 1) Discount period Since the term of the note is expressed in “months*, the counting is by months regardless ofthe number of days in a mont, Principal 2,400,000 Accrued interestreceivable (2,400,000x 12% x 1/12)” 24.000 (Carrying amount ofnote receivable 2,424,000 ‘The accrued interest receivable is for one month from February 1 to the date of discounting on March 1. Sa [Net proseeds from discounting 2,385,000 Caring amount of note esivable 21428,000 ‘om on mite resvable discounting {ithe discounting is with recourse, the transaction is fos cther ofthe flloning, ” '* Tansnetion a accounted & Conditional. Liability te of note reocivable recognizing a contingent 4. Secured borrowing 24 conditional sale { the discounting is treated as a conditional sale of no A Giable, a contingent Liability is recognisal ne Mane ao 2,985,000 {meson note receivable discounting 39,000 ‘Note receivable discounted, 2,400,000 Interest income 24,000 ‘he note receivable discounted account is deducted from the total notes receivable when preparing the statement of financial position with disclosure of the contingent liability. Note is paid by maker on maturity n August 1, date of maturity, the note is paid by the maker to the First Bank. The contingent liability is simply extinguished Noterecvivable discounted ‘Note receivable 2,400,000 2,400,000 Note is dishonored by maker ‘The note is dishonored by the maker on August 1, and the entity pays the First Bank the maturity value of the note, P2,544,000, plus protest fee and other bank charges of P6,000. The total payment is charged to accounts receivable Journal entries 1. To record the payment to First Bank: Accounts receivable 2,550,000 Cash 2,550,000 2 To cancel the contingent liability: Note receivable discounted. 2,400,000 Note reeuivable 2,400,000 245,Secured borrowing discounting is treated as a secured BOFTOWNg, the nog nee xd but instead 2 ivable is not derecognized bu! an account; reali mf $e amount eal othe face amon the note receivable discounted. Journal entry itetenene 59.000 TTA Bae eae dinted aaa teen 0a ‘There is no objection ifthe interest expense is "nettod® agaings the interest income ora net interest expense of P15,000 because the disounting transaction is a borrowing. ‘There is no gain or loss on discounting if the note receivable discounting is accounted for as secured borrowing. Note is paid by maker on maturity If the note is paid by the maker to the First Bank, the liability for note receivable discounted and note receivable are derecognized. Liability for note receivable discounted 2,400,000 Note receivable Note i 2,400,000 dishonored by maker ‘The note is dishonored by the maker on August 1, and the entity pays the First Bank the maturity value of the note, 2,544,000 plus protest fee and other bank charges of PE,000. Journal entries 1. To record the payment to First Bank: Accounts receivable 2,550,000 Cash 2,550,000 2 To derecognize the liability for note receivable discounted and note receivable: ibility for note receivable di receivable discounted 2,400,000 Nate receivable 2,400,000 246 Conditional sale or secured borrowing PERS 9, paragraph 3.2.5, provides derecognize a financial asset when eith criteria is met: that an entity shall ler one of the following a. The contractual rights to the cash flows ofthe financial asset have 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. ‘he first criterion is usually easy to apply ‘The contractual rights to the cash flows may expire, for example, when a note receivable from a customer is fully collected, ‘The application of the second eriterion is often complex. Itrelies on the assessment of the extent of the transfer of risks and rewards of ownership. PERS 9, paragraph 3.2.6, provides the following guidelines for dereeognition based on transfer of risks and rewards: 1. If the entity has transferred substantially all risks and rewards, the financial asset shall be derecognized. If the entity has retained substantially all risks and rewards, the financial asset shall net be derecognized. 4 If the entity has neither transferred nor retained substantially all risks and rewards, dereengnition depends on whether the entity has retained control ofthe asset. a. If the entity has lost control of the asset, the financial asset is derecognized in its entirety. ». If the entity has retained control over the asset, the financial asset is not derecognized. 247Evaluation rif he cash sustionably, the contractual rights to the cash flowy Tansee eevivable discounted with recourse have nop re of "transfer of risks and rewards of ownership", ‘The discounting transaction is a combination of thy ‘guidelines in the second criterion. a. The entity has substantially transferred all "reward! b. The entity has retained substantially all "risks . The entity has lost control of the note receivable. Conclusion Much debate on this accounting issue can go on among academicians and theoreticians until a clearcut interpretation of the standard is made by the Financial Reporting Standards Council Premises considered, it is believed that the discounting of note receivable with recourse is to be accounted for as @ conditional sale with recognition of a contingent liability. ‘The main justification is that upon discounting ot 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 practice) ability to sell the asset to a hind party without attaching ‘ny restrictions to the transfor, 248 QUESTIONS 1.Bsplain discounting of note receivable 2, Who are the original parties ina promissory note? 4.Who are the parties involved after discounting of note receivable? 4. Explain endorsement of a negotiable instrument. 5, What is the formula in computing net proceeds from discounting of note receivable? 6 Explain maturity value, 1.What is the formula in computing interest on the note receivable? 8.Explain discount in relation to discounting of note receivable. 8, What is the formula in computing discount? 10.Bxplain the carrying amount of the note recsivable upon discounting. 1. Whats the formula in computing gain or loss on discounting of note receivable? 22 Explain discounting without recourse. 1.Explain discounting with recourse accounted for as ‘conditional sale. ‘1 Brolain discounting with resourse accounted for as secured orrowing, '5 What are the eriteria for the derecognition of a financial asset? 249