DISCOUNTING OF NOTES RECEIVABLE

On October 14, 2022, the company received P200,000, 180-day, 15% note in
exchange for services rendered. In November, the company experienced financial
difficulty. Thus, on November 10, 2022, the company presented this note to the bank for
discounting. The bank discounted the note at 12%.
Assumption 1: With Recourse
2022
Oct 14 Notes Receivable 200,000.00
Service Income 200,000.00

Step 1: Maturity Value

Maturity Value = Principal + Interest
Principal 200,000.00
Interest (200,000 x 15% x 180/360) 15,000.00
Maturity Value 215,000.00 204,035.00 10,965.00

Step 2: Compute for the accrued interest from date of note to date of discounting

Oct (31 - 14) 17

Nov 10
Number of Days Accrued 27 Expired

Principal 200,000.00
x Rate 15%
x Time 27/360
Accrued Interest 2,250.00

Step 3: Compute for the Carrying Amount of Note as of date of discounting

Principal 200,000.00
Accrued Interest as of date of discounting (Nov 10) 2,250.00 unexpired portion of the term of the note
Carrying Amount of Notes Receivable 202,250.00

Step 4: Compute for the discount period

(discount period is the unexpired term of the note)
Term 180 days
Less: Accrued # of days 27 days
Discount Period 153

Step 5: Compute for the discount

Maturity Value (Step 1) 215,000.00
x Discount Rate (given information) 12%
x Discount Period (Step 4) 153/360
Discount on Notes Receivable 10,965.00

Step 6: Compute for the proceeds from discounting

Maturity Value (Step 1) 215,000.00
 - Discount on Notes Receivable 10,965.00
Proceeds from Discounting 204,035.00 the cash we will receive when we discount the NR

Step 7: Determine the gain or loss from discounting

Net Proceeds VS Carrying Amount
NP > CA, difference is gain
NP < CA, difference is loss

Net Proceeds (Step 6) 204,035.00

Carrying Amount (Step 3) 202,250.00
Gain from Discounting 1,785.00 Financial Statement Presentation
Notes to Financial Statement:
Step 8: Journalize the discounting Notes Receivable 500,000.00
Nov 10 Cash (Proceeds) 204,035.00 Less: Notes Receivable Discounted 200,000.00
Notes Receivable Discounted ( Principal) 200,000.00 Carrying Amount 300,000.00
Interest Income (Accrued Interest) 2,250.00
Gain from Notes Receivable Discounting 1,785.00 Cash (Proceeds)
Loss on NR Discounting (CA-NP)
Apr 12 Scenario 1: the customer honored the note NR Discounted (Principal)
Notes Receivable Discounted 200,000.00 Interest Income (Accrued Interest)
Notes Receivable 200,000.00 contingent liability

Scenario 2: the customer dishonored the note. The bank charged a

protest fee of P1,000.
Since this is with recourse, the company will be obliged to pay the
bank on behalf of the customer the maturity value of the note plus the
protest fee.
Accounts Receivable (215,000 + 1,000) 216,000.00
Cash 216,000.00
we pay the bank: Maturity value + Protest fee
and

Notes Receivable Discounted 200,000.00 the financial institution will not

Notes Receivable 200,000.00 collect payment for the note
from the company if the
Assumption 2: Without Recourse customer dishonors the note
Nov 10 Cash (Proceeds) 204,035.00
Notes Receivable ( Principal) 200,000.00
Interest Income (Accrued Interest) 2,250.00
Gain from Notes Receivable Discounting 1,785.00

April 12 Customer honored the note

No Entry

Customer dishonored the note

No Entry