DISCOUNTING

ON NOTES
RECEIVABLE
Lailane Amoroto
As a form of receivable financing, discounting specifically
pertains to notes receivable.

Maker Endorser
Payee
Endorser

Bank
Endorsee
Endorsee

Endorsement
Endorsement
-Endorser shall pay the endorsee if the maker
dishonors the note. This is the contingent or secondary
liability of the endorser.
- Endorser avoids future liability even if the maker
refuses to pay the endorsee on the date of maturity.
 Terms related to discounting of note

Net
Net Proceeds
Interest Rate
Proceeds
Interest Rate Maturity
Rate Valueonminus
appearing Discount
the face of the note

Maturity
Maturity Full term
Principal of the
plus note
Interest
Time
Time
Value
Value
Maturity Date
Discount Maturity
Date value
on which the times discount
note should be rate
paid
Maturity Date
Discount
times discount period

Principal
Discount Rate
Principal
Discount Rate Amount
Rate inappearing
computingon the
the face of the note
discount

Interest
Discount Period
Interest
Discount Period Period of time
Principal x ratefrom date of
x time
discounting to maturity date
 Accounting for note receivable
discounting

With
With recourse
recourse Without
Without recourse
recourse

The note receivable account is credited directly because

the sale of the note receivable is without recourse or
absolute.

The interest income is credited for the actual interest

earned on the date of discounting.
Cash xxx
Loss on note receivable discounting xxx
Notes Receivable xxx
Interest income xxx
#
 With
With recourse
recourse

Secured
Conditional Sale
borrowing
Cash
Cash xxx
xxx
Loss
Losson
onnote
notereceivable
receivablediscounting
discounting xxx
xxx
Notes
Notesreceivable
receivablediscounted
discounted xxx
xxx
Interest
Interestincome
income xxx
xxx

The 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

Note
Notereceivable
receivablediscounted
discounted xxx
xxx
Note
Notereceivable
receivable xxx
xxx
##

Note is dishonored by maker

Accounts
AccountsReceivable
Receivable xxx
xxx
Cash
Cash xxx
xxx
##

Note
Notereceivable
receivablediscounted
discounted xxx
xxx
Note
Notereceivable
receivable xxx
xxx
##
 Secured
borrowing
The note receivable is not derecognized but instead an
accounting liability is recorded at an amount equal to the
face amount of the note receivable discounted.

Cash
Cash xxx
xxx
Interest
InterestExpense
Expense xxx
xxx
Liability
Liabilityfor
fornote
notereceivable
receivablediscounted
discounted xxx
xxx
Interest
Interestincome
income xxx
xxx

There is no gain or loss on discounting if the note

discounting is accounted for as secured borrowing.
Note is paid by maker on maturity

Liability
Liabilityfor
fornote
notereceivable
receivablediscounted
discountedxxx
xxx
Note
Notereceivable
receivable xxx
xxx
##

Note is dishonored by maker

Accounts
AccountsReceivable
Receivable xxx
xxx
Cash
Cash xxx
xxx
##

Liability
Liabilityfor
fornote
notereceivable
receivablediscounted
discounted xxx
xxx
Note
Notereceivable
receivable xxx
xxx
##
 Problem 14-13

Generous Company provided the following information with

respect to factoring of accounts receivable.
July 1 Factored P800, 000 of accounts receivable
without recourse with a bank on notification basis.
Required:
The
Cashbank
Sales charged
return a factoring
and allowances 20,fee
680, 000 000of 5% of the
amount Service
of accounts receivable
Charge(800,
Receivable from000 factored
x 5%)
factor 20,and
40, 000
000 withheld
10% of the Prepare
Receivable# from
accounts journal
factor(800,
receivable
Accounts Receivable
factoredentries
000x 10%)
800, 000
to
to80, 000 sales
cover
return and allowances.
July 15Cash record
Received the
(80,# 000notice
– 20, 000) transactions.
from 60,the
000bank that factored
accounts areReceivable from factor
fully collected 60, 000
less sales return and
#
allowances of P20, 000.
31 Received a check from the bank as a final
settlement of the factoring contract.
 Problem 14-14
Commonplace Company provided the following
Cash 340, 000
transactions
Sales discount(500, 000 x 2%)year. 10, 000
for the current
Commission ( 500, 000 x 5%) 25, 000
June 1Receivable
Sold
Sales
from factor(500, 000 x 25%) 125, 000
merchandise
Required:
returnsReceivable
and allowances
to a customer
50,
for
Accounts 500,000
000
P500,
Sales#000, terms
discount ( 50, 2/10, n/30. 1, 000
000 x 2%)
3 Receivable
Factored thefrom factor to a bank.
account 49,The
000 bank
charged 5% Prepare
commissionjournal entries to
#

Cashrecord
9 Granted the 000-
( 125,
No Entry
the
customer
49,
and 25% holdback.
Accounts receivable 500, 000
transactions.
000)a credit allowance of
76, 000
Sales 500, 000
P50, 000 Receivable
for damage
# in the
from shipment.
factor 76, 000
#
11 The customer paid in full its account to the
bank.
15 Final settlement was made with the bank.
 Problem 14-24

Earth 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 would be recorded as a gain or
Finance Charge
loss on the transfer of accounts receivable?
(4, 000,000 x 5% )
a) 200, 000 loss
b) 200, 000 gain
c) 600, 000 loss 200, 000
d) 600, 000 gain
__________________________________________
 Problem 14-25

Crater Company factored with recourse P2, 000,000 of

accounts receivable with a bank. The finance charge 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
Accounts receivable factored 2, 000,000
b) 1, 900,000 Finance Charge(2, 000,000 x 3%) (60,000)
Holdbak (2, 000,000 x 5%) (100,000)
c) 1, 840,000 1, 840,000
d) 2, 000,000
1,840, 000
_________________________________________________
 Problem 14-26
Daisy 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. The entity had previously established an
allowance for doubtful accounts of P200, 000 for the accounts
Accounts
factored. By year- end, the entity receivablethe
had collected factored 6, 000,000
factor’s
Commission ( 900,000)
holdback there being no customer Net returns
sale price and other5, 100,000
adjustments. What is the loss onCarrying
factoring?
amount
(6, 000,000- 200, 000) (5, 800,000)
Loss on factoring (700,000)
a) 700, 000
b) 900, 000
c) 200, 000 (700, 000)
d) 0 ________________________________________
 Problem 15- 7

On August 31, 2015, Stable Company discounted with

recourse a customer’s note at the bank at discount rate
of 15 %. Required:

The note was received

Prepare from entries
journal the customer ontoAugust 1,
related
2015, is for 90 days, has a face value of P5, 000,000, and
the discounting of note
carries an interest rate of 12%. The customer paid the
note to thereceivable, assuming
bank on October the the date of
30, 2015,
maturity. discounting is accounted for as a
secured borrowing.
 Problem 15- 7
Cash 5, 021,250
Interest Expense 28,750
Liability for note receivable discounted 5, 000,000
Interest income 50,000
#
Principal 5, 000,000
Interest (5,000,000x 12%x 90/360) 150, 000
Maturity Value 5, 150, 000
Discount (5150,000x15%x60/360) 128, 750
Net Proceeds 5, 021, 250

Principal 5, 000, 000

Accrued interest receivable 50, 000
Carrying Amount 5, 050, 000

Net proceeds 5, 021, 250

Carrying amount 5, 050, 000
Loss on discounting (28, 750)
 Problem 15- 7

Liability for note receivable discounted 5, 000,000

Note Receivable 5, 000,000
#
 Problem 15- 8
On January 1, 2015, Machete Company sold land with carrying
amount of P1, 500,000 in exchange for a 9-month, 10% note with
Principal 2 000,000
face value of P2, 000,000. The 10% rate properly
Interest (2,000,000x reflects the time
October 1 Accounts Receivable 2, 160,10%x
000 9/12 ) 150, 000
value of money for this typeMaturity
of note. Value 2, 150, 000
Cash (2, 150,000 + 10,000) 2, 160, 000
Discount (2150,000x12%x6/12) 129, 000
# Net Proceeds 2, 021, 000
On April 1, -2015, the entity discounted the
Liability of note receivable discounted note with recourse. The
2, 000,000
January 1 rate
bank discount NoteisReceivable
12%. The 2, 000,000
discounting transaction
Note Receivable Principal 2, 000,000 2, 000, 000 is
accounted forLand 1, 500,000
as a#secured Accrued
borrowing.interest receivable 50, 000
December 31on
Gain Cash
sale of land 2, 224,000
500,000
Carrying Amount 2, 050, 000
Accounts
# Receivable 2, 160,000
On October 1, Interest
2015, the maker dishonored
Income 64,000 the note receivable. The
Net proceeds 2, 021, 000
entity paid the(2,
bank thexmaturity
160,000 12% x 3/12)
Carryingvalue of the note plus 2,protest 050, 000 fee
April 1 Cash 2, 021, 000 amount
of P10, 000. Interest expense Loss 29,
on discounting
000 (29, 000)
Liability for note receivable discounted 2, 000,000
#
On December 31, 2015, the entity collected the dishonored note
receivable in full plus 12% annual interest on the total amount due.
 Problem 15-13
On June 30, 2015, Bosom Company discounted at the
bank a customer’s P600, 000, 6 month, 10% note
receivable dated April 30, 2015. The bank discounted
the note at 12%. What amount should be reported as
proceeds from the discounted note ?
Principal 600,000
a. 564, 000 Add: Interest 30,000
Maturity Value 630,000
b. 576, 000 Discount (630,000x12%x4/12)
(25,200)
c. 604, 800 Net Proceeds 604,800
d. 617, 400

(C)
Problem 15-14
On july 1, 2015, Karma Company sold equipment to a
customer for P 1, 000,000. The entity accepted a 10%
note receivable for the entire sale price. This note is
payable in two equal installments of P500, 000 plus
accrued interest on December 31, 2015 and December
31, 2016. On July 1, 2016, the entity discounted the note
Principal 500, 000
at a bank at an interest rate of Interest
Add: 12%. What is50,the000amount
received from the discounting of Value
Maturity note receivable?
550, 000
Less: Discount 33, 000
a. 484, 000 Net Proceeds 517, 000
b. 493, 500
c. 503, 500
d. 517, 000 517, 000
 Problem 15- 15

Apex Company accepted from a customer P1, 000,000

face amount, 6- month, 8% note dated at the beginning
of current year. On the same date, Apex discounted the
note with recourse at the bank at a 10% discount rate.
The discounting is accounted for as a secured
Principal
borrowing. What is the interest expense 1, to
000,000
be
recognized on the date of Add: Interest
discounting? 40,000
Maturity Value 1, 040,000
a. 50, 000 Less: Discount 52,000
b. 40, 000 Net Proceeds 988,000
c. 52, 000 Carrying Amount 1, 000,000
d. 12, 000 Interest Expense 12, 000