RECEIVABLE FINANCING

DISCOUNTING OF NOTE RECEIVABLE

CHAPTER 9
DISCOUNTING OF NOTE RECEIVABLE
Is a sale of the note to a 3rd party,
usually a bank. The sale is usually on a
with recourse basis which means that
upon the default of the debtor, the
seller of the note becomes liable for
its maturity value.
 ENDORSEMENT
 Endorsement is 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
endorser shall pay the endorsee if the maker dishonors the note.
 In the legal parlance, this is the secondary liability of the
endorser.
 In the accounting parlance, this is the contingent liability of the
endorser.
 TERMS RELATED TO DISCOUNTING OF
NOTE
• Net proceeds refer to the discounted value of the note received by the endorser
from the endorsee.
Net proceeds = Maturity value minus Discount
• Maturity value is the amount due on the note at the date of maturity. Principal
plus interest equals the maturity value.
• Maturity date is the date on which the note should be paid.
• Principal is the amount appearing on the face of the note. It is also referred to as
face value.
• Interest is the amount of interest for the full term of the note. Interest is
computed as Principal x rate x time.
 TERMS RELATED TO DISCOUNTING OF
NOTE
 Interest rate is the rate appearing on the face of the note.
 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.
 Discount is the amount of interest deducted by the bank in advance. Discount is equal
to maturity value times discount rate times discount period.
 Discount rate is the rate used by the bank in computing the discount. The discount
rate should not be confused with the interest rate. The discount rate and interest rate
are different from each other. If no discount rate is given, the interest rate is safely
assumed as the discount rate.
 Discount period is the period of time from date of discounting to maturity date.
 BASIC FORMULAS
 INTEREST= Principal x Rate x Time
 MATURITY VALUE= Principal + Interest
 DISCOUNT= MV x Discount Rate x Discount Time
 NET PROCEEDS= MV – Discount
 ACCRUED INTEREST= Principal x Rate x Time
 CARRYING AMOUNT= Principal + Accrued Interest
 GAIN/ LOSS ON DISCOUNTING= Net Proceeds – C.A
BASIC PROBLEM
 A P1,000,000, 180-day, 12% note dated
July 1 was received from customer and
discounted without recourse on August
30 at 15% discount rate.
BASIC PROBLEM
A P2,000,000, 6-month, 12% note dated
February 1 is received from a customer
by an entity and discounted by First
Bank on March 1 at 15%.
 JOURNAL ENTRIES – WITHOUT
RECOURSE
 CASH (NET PROCEEDS) XXX
 LOSS ON N/R DISCOUNTING XXX
 NOTE RECEIVABLE XXX
 INTEREST INCOME(ACCRRUED INT.) XXX
 CONDITIONAL SALE OR SECURED
BORROWING- WITH RECOURSE
 PFRS 9, paragraph 3.2.3, provides that an entity shall derecognize a financial asset when either
one of the following criteria is met:
a) The contractual rights to the cash flows of the 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.

PFRS 9, paragraph 3.2.6, provides the following guidelines for derecognition based on transfer of risks
and rewards:
 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 not be
derecognized.
 If the entity has neither transferred nor retained substantially all risks and rewards, derecognition
depends on whether the entity has retained control of the asset.
a) If the entity has lost control of the asset, the financial asset is derecognized in its entirety.
 JOURNAL ENTRIES- CONDITIONAL
SALE-WITH RECOURSE
 CASH (NET PROCEEDS) XXX
 LOSS ON N/R DISCOUNTING XXX
 NOTE RECEIVABLE DISCOUNTED XXX
 INTEREST INCOME(ACCRRUED INT.) XXX
 JOURNAL ENTRIES- SECURED
BORROWING-WITH RECOURSE
 CASH (NET PROCEEDS) XXX
 INTEREST EXPENSE XXX
 NOTE RECEIVABLE DISCOUNTED XXX
 INTEREST INCOME(ACCRRUED INT.) XXX
ASSUMPTION HONORED BY MAKER-
SO MAKER PAID THE MATURITY.
 CONDITIONAL SALE
 NOTES RECEIVABLE DISCOUNTED XXX
 NOTES RECEIVABLE XXX
 SECURED BORROWING
 LIABILITY ON N/R DISCOUNTED XXX
 NOTES RECEIVABLE XXX
 ASSUMPTION DISHONORED BY
MAKER-SO PAYEE PAID MATURITY.
 CONDITIONAL SALE/ SECURED BORROWING
 ACCOUNTS RECEIVABLE XXX
 CASH XXX
 CONDITIONAL SALE
 NOTES RECEIVABLE DISCOUNTED XXX
 NOTES RECEIVABLE XXX
 SECURED BORROWING
 LIABILITY ON N/R DISCOUNTED XXX
 NOTES RECEIVABLE XXX