NOTES RECEIVABLE

I. Review of last Week

II. Review on Present Value
III. Theory – Discussion
IV. Problem Solving

Notes Receivable – a claim supported by formal promise (promissory notes) to pay.

Two Parties : a. The Maker (The debtor)

b. Payee (The Creditor)

Measurement:

a. Generally measured at present value (the sum of the discounted future cash flows)
b. Short Term VS. Long Term.
Short term notes are initially recorded at face value
c. Long Term Notes:
c.1 Interest Bearing Notes are initially recorded at face value
c.2 Non-Interest Bearing Notes are measured at their present value

d. Subsequent Measurements are its Amortized Cost

 The major differences between trade accounts receivables and trade notes receivables are
(a) notes represent a formal promise to pay and
(b) notes bear an interest element because of the time value of money.

 Interest-bearing notes have a stated rate of interest, whereas zero-interest-bearing notes

(non-interest-bearing) include the interest as part of their face amount instead of stating it
explicitly.

 Notes are classified as notes bearing interest equal to the effective rate and those bearing
interest different than the effective rate.

 Short-term notes are generally recorded at face value (less allowances) because the interest
implicit in the maturity value is immaterial.

 A general rule is that notes treated as cash equivalents (maturities of 3 months or less) are not
subject to premium or discount amortization.

 Long-term notes receivable, however, are recorded at the present value of the future cash
inflows. Determination of the present value can be complicated, particularly when a zero-interest-
bearing note or a note bearing an unreasonable interest rate is involved.

 Long-term notes receivable should be recorded and reported at the present value of the cash
expected to be collected.
  When the interest stated on an interest-bearing note is equal to the effective (market) rate of
interest, the note sells at face value.

 When the stated rate is different from the market rate, the cash exchanged (present value) is
different from the face value of the note. Companies record the note at present value and
amortize any discount or a premium, over the life of the note to approximate the effective
interest rate.

REMINDERS ON NOTES:

1. If the note is an interest bearing and no statement as to market rate = Don’t Discount, the
Face Value = Present Value

2. If the nominal interest is very low compared to market rate – discount if more than one
year.

3. Nominal = Effective Rate = ( Notes are sold at Face Value = Present Value)

4. If the note is non- interest bearing

a. If it is 1 year or less - PV = Face Value

b. If more than one year – Discount the note (PV of P + PV of the Interest)

5. If the Nominal >Effective - Discount the Note = ( Notes are sold higher than the Face Value
or at premium) or PV is higher than its Face Value

6. If Nominal<Effective – Discount the note = (Notes are sold lower than the Face Value or
discount) or its Present Value id lower than the face Value.

Present Value = PV of Principal (Face Value ) + PV of all the Interest

 Whenever the face amount of a note does not reasonably represent the present value of the
consideration given or received in the exchange, the accountant must evaluate the entire
arrangement to record properly the exchange and the subsequent interest.

 Notes receivable are sometimes issued with zero interest rate stated or at a stated rate that is
unreasonable. In such instances the present value of the note is measured by the cash
proceeds to the borrower or fair value of the property, goods, or services rendered. The
difference between the face amount of the note and the cash proceeds or fair value of the
property represents the total amount of interest during the life of the note.
  If the fair value of the property, goods, or services rendered is not determinable, estimation of the
present value requires use of an imputed interest rate. The choice of a rate may be affected
specifically by the credit standing of the issuer, restrictive covenants, collateral, payment, and
the existing prime interest rate.

 Determination of the imputed interest rate is made when the note is received; any subsequent
changes in prevailing interest rates are ignored.

Valuation of Notes Receivable

 The valuation of short-term notes receivable and the related recognition of bad debt expense
and allowance parallels that for accounts receivable. Companies often use one of the
collective assessment methods (percentage-of-sales or percentage-of-receivables) to measure
possible impairments.

 The valuation of long-term notes receivable involves impairment testing on an individual note
basis. The test involves comparing the carrying amount of the note to the present value of the
future cash flows discounted at the original effective interest rate. If the discounted amount is
less than the carrying amount of the note, an impairment has occurred. The journal entry
includes a debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts.

Special Issues Related to Receivables

 Companies may choose to report their receivables using the fair value option. This choice must
be made when the receivable is originally recognized or some event triggers a new basis of
accounting, such as a business acquisition. The choice must be applied in all subsequent
periods in which the company holds the receivables. If the fair value option is not chosen, then
the receivables are reported at their carrying value (amortized cost).

 When using the fair value option, any unrealized holding gains or losses are reported as part of
net income in the “Other income and expense” section. Unrealized holding gains and losses
are measured as the difference between the fair value and the carrying amount of the
receivables.

 Derecognition of a receivable occurs when it can no longer be included as an asset of a

company. For example, when a receivable no longer has any value because the customer is
bankrupt. Or, when the company sells its receivables to another company, transferring the
risks and rewards of ownership to the other company.

 Receivables are often used as collateral in a borrowing transaction. A creditor often requires that
the debtor designate (assign) or pledge receivables as security for the loan. If the loan is not
paid when due, the creditor has the right to convert the collateral to cash, that is, to collect the
receivables.

 Selling receivables may be without guarantee (without recourse) or with guarantee (with
recourse). Sales without guarantee are recognized as an outright sale in form and substance.
The seller debits Cash for the proceeds and credits Accounts Receivable for the face value of
the receivables. The difference is debited to Due from Factor and Loss on Sales of
Receivables. Sales with guarantee do not transfer all of the risks and rewards of ownership of
the receivables to the factor. As a result, the transfer is considered borrowing (failed sale) and
 is recorded as such. The seller (borrower) debits Cash for the proceeds, credits Recourse
Liability for the face value of the receivables. The difference is debited to Due from Factor and
Finance Charge. As the transferred receivables are collected the seller reduces their potential
liability by debiting the Recourse Liability and crediting Accounts Receivable.

Presentation and Disclosure

The presentation of receivables in the statement of financial position includes the following
considerations:
a) segregate the carrying amounts of the different categories of receivables;
b) indicate the receivables classified as current and non-current in the statement of financial
position;
c) appropriately offset the valuation accounts for receivables that are impaired, including a
discussion of individual and collectively determined impairments;
d) disclose the fair value of receivables in such a way that permits it to be compared with its
carrying amount;
e) disclose information to assess the credit risk inherent in the receivables by providing
information on
i) receivables that are neither past due nor impaired,
(ii) the carrying amount of receivables that would otherwise be past due or impaired, whose
terms have been renegotiated,
(iii) receivables that are either past due or impaired, an analysis of the age of receivables that
are past due;
f) disclose any receivables pledged as collateral; and (g) disclose all significant concentrations
of credit risk arising from receivables.

SAMPLE PROBLEMS:

1. Initial measurement (Short Term = Face Value; Long Term Interest Bearing
= Face Value; Long Term Non-Interest bearing = Present Value.
ABC Co. received the following note receivables on January 1, 2021:
9-month, 10% note from Alpha Company. 15,000
6-month, noninterest bearing note from Beta, Inc.
(the effect of discounting is deemed immaterial) 20,000

14%, 3-year note from Charlie Corp. 30,000

Market rate of interest on January 1, 2021 10%

At what total net amount will the notes be initially recognized?

(15,000+20,000+32,984) = 67,984

PV of Principal = 30,000 X PVF10%; n=3 = 30,000 x .7513 = 22,539

+ Interest = 30,000 x .14 = 4,200 x PVFA 10% n=3(2.4868)= 10,445
PV total 32,984
If nominal Interest > Effective Rate = PV > Face Value
If nominal Interest < Effective Rate = PV < Face Value
If Nominal Rate = Effective = PV = Face Value

Formula:
PV Factor Lump Sum = 1+i (market rate) //
= (as the no. of years)

PV Factor Lump Sum = 1+i (market rate) //

= (as the no. of years)

PV Factor Annuity (Ordinary) = 1+i (market

rate) // = (as the no. of years) -1 / i

PV Factor Annuity Due (Advance)1= 1+i

(market rate) // = (as the no. of years less
1 year) -1 / i - 1
2. Simple interest
On August 1, 2021, ABC Co. received a ₱1,200,000, 10%, 3-year note receivable in
exchange for a vacant lot carried in the books at ₱850,000. Principal, in three equal
installments, plus interest are due annually starting August 1, 2022. Current market
rates as of August 1, 2021, December 31, 2021, and December 31, 2022 are 10%, 12%
and 13%, respectively.

a. Prepare Journal entries if the reporting date is December 31.

Aug 1,2021 Notes Receivable 1,200,000

Land 850,000
Gain on Sale 350,000
Dec. 31,2021 Interest Receivable (1.2M x .10 x 5/12) 50,000
Interest Income 50,000
Aug. 1,2022 Cash (400,000 + 120,000) 520,000
Notes Receivable (1.2M / 3) 400,000
Interest Receivable 50,000
Interest Income (1.2M x .10 x 7/12) 70,000
Dec. 31, 2022 Interest Receivable (1.2M - .4M) x .10 x 5/12) 33,333
Interest Income 33,333
Aug. 1, 2023 Cash 400,000 + (800,000 x .10 x 12/12) 480,000
Notes Receivable(1.2M / 3) 400,000
Interest Receivable 33,333
Interest Income (800,000 x .10 x 7/12) 46,667
Dec. 31, 2023 Interest Receivable (400,000 x .10 x 5/12) 16,667
Interest Income 16,667
Aug. 1, 2024 Cash 400,000 + (400,000 x .10 x 12/12) 440,000
Notes Receivable 400,000
Interest Receivable 16,667
Interest Income (400,000 x .10 x 7/12) 23,333

Presentation
Notes Notes Notes Interest Interest
Dec. 31 Receivable Receivable - Receivable- Receivable Income
Total Current Long Term
2021 1,200,000 400,000 800,000 50,000 50,000
800,000 400,000 400,000 33,333 103,333
2022 (70,000 +
33,333)
2023 400,000 400,000 - 16,667 63,334
(46,667 +
16,667)
2024 - - - - 23,333

WORK PROBLEM # 1
On January 1, 2021, ABC Co. received a ₱1,200,000, 10%, 4-year note receivable in
exchange for a vacant lot carried in the books at ₱850,000. Principal, in four equal
installments, plus interest are due annually starting Dec. 31, 2021, and thereafter.
Current market rates as of January 1, 2021, December 31, 2021, and December 31,
2022 are 10%, 12% and 13%, respectively.

3. Compounded interest
On January 1, 2021, ABC Co. extended a ₱1,200,000 loan to one of its officers as part of
ABC Co.’s car and housing assistance program. The note received and interests are due
on January 1, 2024 and bears 10% interest compounded annually.
a. Prepare Journal Entries if the reporting period is December 31.

1.1.21 Notes Receivable 1,200,000

Cash 1,200,000
12.31.21 Interest Receivable 120,000
Interest Income 120,000
12.31.22 Interest Receivable 132,000
Interest Income 132,000
12.31.23 Interest Receivable 145,200
Interest Income 145,200
1.1.24 Cash (1,200,000 + 397,200) 1,597,200
Notes Receivable 1,200,000
Interest Receivable 397,200

Solution:
Interest income - 2021 (1,200,000 x 10%) 120,000
Interest income - 2022 [(1,200,000 + 120,000 ) x 10%] 132,000
Interest income - 2023 [(1,200,000 + 252,000 ) x 10%] 145,200
397,200

Semi - Annual:
2021 – June 30 – 1.2M x .10 x ½ = 60,000
Dec. 31 - (1.2M + 60,000) x .10 x ½ = 63,000

2022 – June 30 – 1.2M +123,000) x .10 x ½ = 66,150

Dec. 31 - (1.2M + 189,150) x .10 x ½ = 69,458

4. Noninterest-bearing note – lump sum (they are initially reported at Present

Value at lump sum)
Use the following information for the next two questions:
On January 1, 2021, ABC Co. sold a transportation equipment with a historical cost of
₱1,000,000 and accumulated depreciation of ₱300,000 in exchange for cash of ₱100,000
and a noninterest-bearing note receivable of ₱800,000 due on January 1, 2024. The
prevailing rate of interest for this type of note is 12%.

a. Prepare Journal Entries.

b. How much is the interest income in 2021?
c. How much is the carrying amount of the receivable on December 31,
2022?

PV Factor = 1+I / / =(No. of years)

 1. Compute the Present Value of the Note:
PV Of Principal = 800,000 x .7117802478 = 569,424
PV of Interest = 0
PV 569,424
2. Prepare Amortization Table

DATE (a) (b) (c) (d)

Cash Flow Interest Income Principal Present Value
(d x Eff. Rate) (a-b) - c+b

01.01.2021 569,424
12.31.2021 0 68,331 637,755
12.31.2022 76,531 714,286
12.31.2023 85,714 800,000
01.01.2024 800,000 800,000 0

1.1.21 Notes Receivable 800,000

Cash 100,000
Accumulated Depreciation 300,000
Loss on Sale 30,576
Discount on Notes Receivable 230,576
Equipment 1,000,000

Received -100,000 + (800,000-230,576) 669,424

Given – (1,000,000 – 300,000) 700,000
Loss 30,576
12.31.21 Discount on Notes Receivable 68,331
Interest Income 68,331
12.31.22 Discount on Notes Receivable 76,531
Interest Income 76,531
12.31.23 Discount on Notes Receivable 85,714
Interest Income 85,714
1.1.24 Cash 800,000
Notes Receivable 800,000

Presentation

Beg. Notes Receivable 800,000

Less: Discount on NR (230,576) 569,424
Dec. Notes Receivable 800,000
2021 Less: Discount on NR (162,245) 637,755
Dec. Notes Receivable 800,000
2022 Less: Discount on NR ( 85,714) 714,286
Dec. Notes Receivable 800,000
2023 800,000

WORKPROBLEM # 2
On January 1, 2021, ABC Co. sold a transportation equipment with a historical cost of
₱1,000,000 and accumulated depreciation of ₱600,000 in exchange for a noninterest-
bearing note receivable of ₱ 600,000 due on January 1, 2024. The prevailing rate of
interest for this type of note is 10%.

5. Noninterest-bearing note – installments

Use the following information for the next three questions:
On January 1, 2021, ABC Co. sold transportation equipment with a historical cost of
₱20,000,000 and accumulated depreciation of ₱7,000,000 in exchange for cash of
₱500,000 and a noninterest-bearing note receivable of ₱8,000,000 due in 4 equal annual
installments starting on December 31, 2021 and every December 31 thereafter. The
prevailing rate of interest for this type of note is 12%.

a. Prepare Journal Entries.

b. How much is the interest income in 2021?
c. How much is the current portion of the receivable on December 31, 2021?
d. How much is the carrying amount of the receivable on December 31,
2022?

Solution:
Initial measurement: (8M ÷ 4) x PV ordinary annuity of 1 @12%, n=4 = 6,074,699

PV Factor = 1+i / / =(No. of years) - 1 / i

1. Compute for the Present Value

PV of Principal = (8M / 4) x( PVF OA 12% n = 4) =
+ 2M x 3.037349 = 6,074,699
PV of Interest = 0
PV of the note 6,074,699

Scientific:

1/(1+i) ^3 -1 / i = 1/1.331 -1 / .10 = 2.48685199

2. Prepare an amortization table:

Subsequent measurement:
Date Collectio Intere Amortizati Present
ns st on value
(a) incom (c) (d)
e (b)= (a- b) (Beg +-
 dx
c)
Eff.
Rate
6,074,6
1/1/2021
99
12/31/20 2,000,00 728,9 4,803,6
1,271,036
21 0 64 63
12/31/20 2,000,00 576,4 3,380,1
1,423,560
22 0 40 02
12/31/20 2,000,00 405,6 1,785,7
1,594,388
23 0 12 14
12/31/20 2,000,00 214,2
1,785,714 0
24 0 86

3. Prepare the Journal Entries

1.1.21 Cash 500,000
Notes Receivable 8,000,000
Accumulated Depreciation 7,000,000
Loss on Sale of Equipment 6,425,301
Discount (8M – 6,074,699) 1,925,301
Equipment 20,000,000

Loss = (6,074,699 + 500,000) –

13,000,000 (20M – 7M) = 6,425,301

Received – 500,000 + 6,074,699 6,574,699

Given (20M – 7M) 13,000,000
Loss 6,425,301
12.31.21 Discount on Notes Receivable 728,964
Interest Income 728,964
Cash 2,000,000
Notes Receivable 2,000,000
12.31.22 Discount on Notes Receivable 576,440
Interest Income 576,440
Cash 2,000,000
Notes Receivable 2,000,000
12.31.23 Discount on Notes Receivable 405,612
Interest Income 405,612
Cash 2,000,000
Notes Receivable 2,000,000
12.31.24 Discount on Notes Receivable 214,285
Interest Income 214,285
Cash 2,000,000
Notes Receivable 2,000,000

4. Presentation
Notes Notes Notes Interest
ec.31 Receivable Receivable - Receivable- Income
 Total Current Long Term
021 Notes Receivable 6,000,000 2,000,000 4,000,000 729,964
Discount on NR (1,196,337 (576,440) (619,897)
Present Value ) 1,423,560 3,380,103
4,803,663
022 Notes Receivable 4,000,000 2,000,000 2,000,000 576,440
Discount on NR (619,897) (405,612) (214,285)
Present Value 3,380,103 1,594,388 1,785,715
023 Notes Receivable 2,000,000 2,000,000 405,612
Discount on NR (214,285) (214,285)
Present Value 1,785,715 1,785,715
024 214,285

Work Problem # 3

Noninterest-bearing note – installments

Use the following information for the next three questions:
On January 1, 2021, ABC Co. sold transportation equipment with a historical cost of
₱15,000,000 and accumulated depreciation of ₱7,000,000 in exchange for cash of
₱1,000,000 and a noninterest-bearing note receivable of ₱6,000,000 due in 3 equal
annual installments starting on December 31, 2021 and every December 31 thereafter.
The prevailing rate of interest for this type of note is 10%.

6. Noninterest-bearing note – installment in advance

Use the following information for the next three questions:
On January 1, 2021, ABC Co. sold transportation equipment with a historical cost of
₱12,000,000 and accumulated depreciation of ₱7,000,000 in exchange for cash of
₱100,000 and a noninterest-bearing note receivable of ₱4,000,000 due in 4 equal annual
installments starting on January 1, 2021 and every January 1 thereafter. The prevailing
rate of interest for this type of note is 12%.

a. Prepare Journal entries.

b. How much is the interest income in 2021?
c. How much is the carrying amount of the receivable on December 31,
2021?
d. How much is the carrying amount of the receivable on January 1, 202

Solutions:
1. Computation of Present Value:

PV of Principal: (4M ÷ 4) x PV annuity due of 1 @12%, n=4 = 3,401,831

1M x 3.40183126833
+ PV of Interest = 0
PV of the Note 3,401,831

PV Factor = 1+i / / =(No. of years less 1) - 1 / i - 1

 2. Preparation of the Amortization Table
Subsequent measurement:
Interest
Date Collections Amortization Present value
income
Jan. 1, 2021 3,401,831
Jan. 1, 2021 1,000,000 - 1,000,000 2,401,831
Jan. 1, 2022 1,000,000 288,220 711,780 1,690,051
Jan. 1, 2023 1,000,000 202,806 797,194 892,857
Jan. 1, 2024 1,000,000 107,143 892,857 0

The carrying amount of the notes receivable as of December 31, 2021 is determined as
follows:
Carrying amount of notes receivable - Jan. 1, 2022 1,690,051
Add back: Collection on Jan. 1, 2022 1,000,000
Carrying amount of notes receivable - Dec. 31, 2021 2,690,051

1.1.21 Cash 100,000

Notes Receivable 4,000,000
Accumulated Depreciation 7,000,000
Loss on Sale of Equipment 1,498,169
Discount (4M – 3,401,831) 598,169
Equipment 12,000,000

Received – 100,000 +3,401,831 3,501,831

Given (12M – 7M) 5,000,000
Loss 1,498,169
Cash 1,000,000
Notes Receivable 1,000,000
12.31.21 Discount on Notes Receivable 288,220
Interest Income 288,220
1.1.22 Cash 1,000,000
Notes Receivable 1,000,000
12.31.22 Discount on Notes Receivable 202,806
Interest Income 202,806
1.1.23 Cash 1,000,000
Notes Receivable 1,000,000
12.31.23 Discount on Notes Receivable 107,143
Interest Income 107,143
1.1.24 Cash 1,000,000
Notes Receivable 1,000,000

Presentation

Notes Notes Notes Interest

Dec.31 Receivable Receivable - Receivable- Income
 Total Current Long Term
2021 Notes Receivable 3,000,000 2,000,000 1,000,000 288,220
Discount on NR (309,949) (202,806) (107,143)
Present Value 2,690,051 1,797,194 892,857
2022 Notes Receivable 2,000,000 2,000,000 202,806
Discount on NR (107,143) (107,143)
Present Value 1,892,857 1,892,857
2023 Notes Receivable 1,000,000 1,000,000 107,143
Discount on NR 0 0
Present Value 1,000,000 1,000,000

7. Noninterest-bearing note – semiannual cash flows

Use the following information for the next two questions:
On January 1, 2021, ABC Co. sold machinery with historical cost of ₱3,000,000 and
accumulated depreciation of ₱900,000 in exchange for a 3-year, ₱2,100,000
noninterest-bearing note receivable due in equal semi-annual payments every July 1 and
December 31 starting on July 1, 2021. The prevailing rate of interest for this type of
note is 10%.

a. Prepare Journal Entries

b. How much is the interest income in 2021?
c. How much is the carrying amount of the receivable on December 31, 2021?

Solution:
Initial measurement:
PV of Principal = (2.1M ÷ 6) x PV ordinary annuity of 1 @5%, n=6 = 1,776,492
+ = 350,000 x 5.0756920678
PV of Interest 0
PV of the Note 1,776,492

Subsequent measurement:
Interest
Date Collections Amortization Present value
income
Jan. 1, 2021 1,776,492
July 1, 2021 350,000 88,825 261,175 1,515,317
Dec. 31, 2021 350,000 75,766 274,234 1,241,083
July 1, 2022 350,000 62,054 287,946 953,137
Dec. 31, 2022 350,000 47,657 302,343 650,794
July 1, 2023 350,000 32,540 317,460 333,333
Dec. 31, 2023 350,000 16,667 333,333 0

Interest income in 2021 = (88,825 + 75,766) = 164,591

8. Noninterest-bearing note – non-uniform cash flows

On January 1, 2021, ABC Co. sold machinery costing ₱3,000,000 with accumulated
depreciation of ₱1,100,000 in exchange for a 3-year, ₱900,000 noninterest-bearing note
receivable due as follows:
Date Amount of installment
December 31, 2021 400,000
December 31, 2022 300,000
December 31, 2023 200,000
Total 900,000

The prevailing rate of interest for this type of note is 10%.

a. Prepare Journal Entries.
b. How much is the carrying amount of the receivable on December 31,
2021?

Solution:
Initial measurement:
PV of P1 @
Present
Date Collections 10%, n= 1
value
to 3
Dec. 31,
400,000 0.90909 363,636
2021
Dec. 31,
300,000 0.82645 247,935
2022
Dec. 31,
200,000 0.75131 150,262
2023
Totals 900,000   761,833

Subsequent measurement:
Date Collections Interest income Amortization Present value
Jan. 1, 2021 761,833
Dec. 31, 2021 400,000 76,183 323,817 438,016
Dec. 31, 2022 300,000 43,802 256,198 181,818
Dec. 31, 2023 200,000 18,182 181,818 0

Presentation:
Jan. 1, Dec. 31, Dec. 31, Dec. 31,
2021 2021 2022 2023
Notes Receivable 900,000 500,000 200,000 0
(900,000 – (500,000- (200,000 –
400,000) 300,000) 200,000)

Unearned (138,167) (61,984) (18,182) 0

Interest / (138,167 - (61,984 – (18,182-
Discount 76,183) 43,802) 18182)
NRV 761,833 438,016 181,818 0
Jan 1, Accumulated Depreciation 1,100,000
2021 Notes receivable 900,000
Loss on Sale 1,138,167 3,000,000
Machinery 138,167
Discount on NR(900,000 -761,833)
Dec. 31, Discount on NR 76,183
2021 Interest Income 76,183
Cash 400,000
Notes Receivable 400,000

9. Note with below-market interest (simple interest) - Principal due at

maturity, interests due periodically
On January 1, 2021, ABC Co. sold machinery with historical cost of ₱5,000,000 and
accumulated depreciation of ₱1,900,000 in exchange for a 3-year, 3%, ₱3,000,000 note
receivable. Principal is due on January 1, 2024 but interest is due annually every
December 31. The prevailing interest rate for this type of note is 12%.
a. Prepare Journal Entries
b. How much is the carrying amount of the receivable on December 31, 2021?

Solution:
Initial measurement:
To compute for the present value of the note, the future cash flows are first identified
then multiplied by the present value factors.
Present value factors
Future cash flows   @12%, n=3 Present value
Principal 3,000,000 0.71178 a 2,135,340
Annual interest (3M x 3%) 90,000 2.40183 b 216,165
Total ( Present Value) 2,351,505
a (PV of P1 @12%, n=3)
b (PV of ordinary annuity of P1 @12%, n=3

Subsequent measurement:
Collections on Interest
Date Amortization Present value
interests income
Jan. 1, 2021 2,351,505
Dec. 31, 2021 90,000 282,181 192,181 2,543,685
Dec. 31, 2022 90,000 305,242 215,242 2,758,927
Dec. 31, 2023 90,000 331,071 241,071 2,999,999

Dec. 31, 2021

Notes Receivable 3,000,000

Discount (3,000,000 – 2,351,505)= 648,495 – 192,181 (456,314)
2,543,686
Jan 1, 2021 -
Accumulated Depreciation 1,900,000
Notes Receivable 3,000,000
Loss on Sale 748,495
Machinery 5,000,000
Discount on NR (3M -2,351,505) 648,495

Dec. 31, 2021

Cash 90,000
Discount on NR 192,181
Interest Income 282,181

10. Note with below-market interest (simple interest) - Principal due at

maturity, interests due in semi-annual installments
On July 1, 2021, ABC Co. sold machinery costing ₱12,000,000 with accumulated
depreciation of ₱9,000,000 in exchange for a 3-year, 3%, ₱4,000,000 note receivable.
Principal is due on July 1, 2024 but interests are due semiannually every July 1 and
January 1. The prevailing interest rate for this type of note is 12%. How much is the
interest income in 2021?
a. 186,893 b. 381,399 c. 94,147 d. 120,000
A
Solution:
Initial measurement:
The present value of the note is computed as follows:
Future cash flows PV factors @ 6%, n= 6 Present value
4,000,00
Principal 0 0.70496 a 2,819,840
Semiannual interest
(4M x 1.5%) 60,000 4.91732 b 295,039
Total 3,114,879
a (PV of P1 @6%, n=6)
b (PV of ordinary annuity of P1 @6%, n=6

Subsequent measurement:
Collections on Interest
Date Amortization Present value
interests income
July 1, 2021 3,114,879
Jan. 1, 2022 60,000 186,893 126,893 3,241,772
July 1, 2022 60,000 194,506 134,506 3,376,278
Jan. 1, 2023 60,000 202,577 142,577 3,518,855
July 1, 2023 60,000 211,131 151,131 3,669,986
Jan. 1, 2024 60,000 220,199 160,199 3,830,185
July 1, 2024 60,000 229,811 169,811 3,999,997
11. Note with below market interest (simple interest) - Principal and interests
collectible in installments
On January 1, 2021, ABC Co. sold machinery costing ₱2,000,000 with accumulated
depreciation of ₱950,000 in exchange for a 3-year, 3%, ₱900,000 note receivable.
Principal is due in three equal annual installments. Interests on the outstanding principal
balance are also due annually and are to be collected together with the periodic
collections on the principal. The prevailing interest rate for this type of note is 12%.
a. Prepare Journal Entries
b. How much is the carrying amount of the receivable on December 31, 2021?

A
Solution:
Initial measurement:
The future cash flows from the note are determined as follows:
Collections on Interest on outstanding Total cash
Date
principal principal balance flows
Dec. 31, 2021 300,000 (900,000 x 3%) = 27,000 327,000
Dec. 31, 2022 300,000 (600,000 x 3%) = 18,000 318,000
Dec. 31, 2023 300,000 (300,000 x 3%) = 9,000 309,000

The present value of the note is computed as follows:

PV of P1 factors @12%,
Date Future cash flows Present value
n=1 to 3
Dec. 31, 2021 327,000 0.89286 a 291,965
Dec. 31, 2022 318,000 0.79719 b 253,506
Dec. 31, 2023 309,000 0.71178 c 219,940
Total     765,412
a (PV of 1 @12%: n=1); b (n=2); c(n=3)

Subsequent measurement:
Interest Amortizatio
Date Collections Present value
income n
Jan. 1, 2021 765,412
Jan. 1, 2022 327,000 91,849 235,151 530,261
Jan. 1, 2023 318,000 63,631 254,369 275,892
Jan. 1, 2024 309,000 33,107 275,893 -1

12. Note with below market interest (compound interest) - Principal and
interests due at maturity
On January 1, 2021, ABC Co. sold machinery costing ₱2,000,000 with accumulated
depreciation of ₱950,000 in exchange for a 3-year, ₱1,200,000 note receivable. Principal
and interest at 3% are due on January 1, 2024. The prevailing interest rate for this type
of note is 12%.

a. How much is the carrying amount of the receivable on initial recognition date?

Notes Receivable 1,200,000

Discount ( 266,663)
 NRV/Present Value 933,337

Solution:
The future cash flow from the note is computed as follows:
Jan. 1, 2021 1,200,000
Interest in 2021 (1.2M x 3%) 36,000
Interest in 2022 [(1.2M + 36K) x 3%] 37,080
Interest in 2023 [(1.2M + 36K + 37.080K) x 3%] 38,192
Total future cash flow 1,311,272

Alternatively, the future cash flow from the note may also be computed as follows:
Face amount of note receivable 1,200,000
FV of P1 @ 3%, n=3 1.092727
Future cash flow 1,311,272

The present value of the note is computed as follows:

Future cash flow 1,311,272
PV of P1 @12%, n=3 0.71178
PV of note receivable – Jan. 1, 2021 933,337

13. Total interest income over the life of a note

ABC Co. received a ₱1,000,000, 8%, 5-year note that requires five equal annual year-
end payments. The effective interest rate on the note is 9%. How much is total interest
revenue to be earned on the note?

Solution:

CF x PVF = PV

Where:
CF = future Cash Flows
PVF = Present value factor
PV = Present value

CF x PVF = PV
CF x (PV of ordinary annuity of 1 @8%, n=5) = 1,000,000
CF x 3.993 rounded-off = 1,000,000
CF = 1,000,000 ÷ 3.993
Equal annual year-end payments = 250,438

The total interest revenue to be earned on a note is computed as follows:

Total cash flows from the note (250,438 x 5 years) 1,252,191
Less: Present value of the note using effective interest rate
(250,438 x PV ordinary annuity of 1 @9%, n=5) (974,118)
Total interest revenue over the life of the note 278,074
14. Non-interest bearing note with deferred uniform payments
On January 1, 2021, ABC Co. sold a used equipment in exchange for a ₱1,200,000
noninterest-bearing note receivable due in three equal annual installments starting
January 1, 2024. The current market rate of interest on January 1, 2021 is 12%.

How much is the carrying amount of the receivable on initial recognition date?

Solution:
Date Cash flows PV of ₱1 PV factors Present value
Jan. 1, 2024 400,000 PV of ₱1 @ 12%, n=3 0.71178 284,712
Jan. 1, 2025 400,000 PV of ₱1 @ 12%, n=4 0.635518 254,207
Jan. 1, 2026 400,000 PV of ₱1 @ 12%, n=5 0.567427 226,971
765,890

15. Non-interest bearing note with deferred non-uniform payments

On January 1, 2021, ABC Co. sold a used equipment in exchange for a ₱4,500,000 non-
interest bearing note due in three annual installments as follows:
Jan. 1, 2018 2,000,000
Jan. 1, 2019 1,500,000
Jan. 1, 2020 1,000,000
Total 4,500,000

The current market rate of interest on January 1, 2021 is 12%.

How much is the carrying amount of the receivable on initial recognition date?

Solution:
Date Cash flows PV of ₱1 PV factors Present value
Jan. 1, 20x4 2,000,000 PV of ₱1 @ 12%, n=3 0.71178 1,423,560
Jan. 1, 20x5 1,500,000 PV of ₱1 @ 12%, n=4 0.635518 953,277
Jan. 1, 20x6 1,000,000 PV of ₱1 @ 12%, n=5 0.567427 567,427
2,944,264
16. Pre-acquisition accrued interest
On March 1, 2021, ABC Co. received a ₱1,000,000, 12%, one-year note dated January
1, 2021 from XYZ, Inc. in exchange for a ₱1,000,000 past due account. How much
interest income is recognized in 2021?

(1,000,000 x 12% x 10/12) = 100,000

LOAN RECEIVABLE

31. Origination costs and fees

On January 1, 2021, ABC Bank extended a 12%, ₱1,000,000 loan to XYZ, Inc. Principal
is due on January 1, 2018 but interests are due annually every January 1. ABC Bank
incurred direct loan origination costs of ₱88,394 and indirect loan origination costs of
₱18,000. In addition, ABC Bank charged XYZ a 2.5-point nonrefundable loan origination
fee. How much is the interest income in 2016?
a. 104,973 b. 105,364 c. 106,339 d. 136,661

A
Solution:
The initial carrying amount of the loan is computed as follows:
Principal amount 1,000,000
Direct origination cost 88,394
Origination fee (1,000,000 x 2.5%) (25,000)
Initial carrying amount of loan receivable 1,063,394

The effective interest is computed as follows:

We know that there is premium because the initial carrying amount of the financial
instrument is more than the face amount. Accordingly, the effective interest rate must
be less than the nominal rate of 12%. Using trial and error, let us try 10%.

Future cash flows x PV factor @ x% = Present value of note

First trial (using 10%):

(1,000,000 X PV of 1 @10%, n=3) + (120,000 x PV of ordinary annuity @12%, n=3) =
1,063,394
(1,000,000 x 0.68301) + (120,000 x 3.16987) = 1,063,394
(683,010 + 380,384) = 1,063,394 equals 1,063,394

Conclusion: the effective interest rate is 10%.

The amortization table is prepared as follows:

Date Collections Interest income Amortization Present value
1/1/15 1,063,394
1/1/16 120,000 106,339 13,661 1,049,733
1/1/17 120,000 104,973 15,027 1,034,707
1/1/18 120,000 103,471 16,529 1,018,177
1/1/19 120,000 101,818 18,182 999,995

32. “Day 1” difference

Use the following information for the next two questions:
On January 1, 2021, ABC Co. extended a ₱500,000, zero-interest loan to one of its
directors. The loan matures in lump sum on January 1, 2019. The prevailing interest
rate for this type of loan is 12%.

If the loan proceeds extended to the director is equal to the present value of the loan
receivable, the net effect of the loan to ABC’s 2021 profit (loss) is
a. (182,240) b. (144,109) c. 38,131 d. 0

If the loan proceeds extended to the director is equal to the face amount of the loan
receivable, the net effect of the loan to ABC’s 2021 profit (loss) is
a. (182,240) b. (144,109) c. 38,131 d. 0
C
Solution:
The present value of the loan receivable is determined as follows:
Future cash flow 500,000
Multiply by PV of ₱1 @12%, n=4 0.63552
Present value of loan receivable 317,760

Face amount 500,000

Present value of loan receivable (317,760)
Unearned interest income 182,240

The entry on January 1, 20x1 is as follows:

Jan. 1, Loan receivable 500,000
20x1 Cash in bank 317,760
Unearned interest 182,240

The net effect to ABC’s 20x1 profit (loss) is determined as follows:

Interest income (317,760 x
12%) 38,131

B
Solution:
(See computations for present value and unearned interest income above.)

The entry on January 1, 20x1 is as follows:

Jan. 1, Loan receivable 500,000
20x1 Unrealized loss – “Day 1” difference 182,240
Cash in bank 500,000
Unearned interest 182,240
The net effect to ABC’s 20x1 profit (loss) is determined as follows:
Interest income (317,760 x 12%) 38,131
Unrealized loss - "Day 1" difference (182,240)
Net decrease in profit (144,109)

33. Impairment of receivable

Use the following information for the next two questions:
On January 1, 2021, ABC Bank extended a ₱900,000 loan to XYZ, Inc. Principal is due
on December 31, 2019 but 12% interest is due annually starting December 31, 2021.

On December 31, 2017, XYZ, Inc. was delinquent and it was ascertained that the loan is
impaired. ABC Bank assessed that interests accruing on the loan will not be collected;
however, the principal is expected to be received in three equal annual installments
starting on December 31, 2018. Accrued interest receivable on December 31, 2017
amounted to ₱100,000. The current market rate on December 31, 2017 is 14%.

How much is the balance of allowance for impairment loss on December 31, 2017
immediately after impairment testing?
a. 279,460 b. 303,510 c. 203,510 d. 179,460
How much is the interest income in 2019?
a. 86,465 b. 60,481 c. 60,841 d. 0
D
Solution:
The present value of estimated future cash flows is computed as follows:
Estimated future cash flows (900K ÷ 3 equal annual installments) 300,000
Multiplied by: PV of ordinary annuity at 12%, n= 3 2.4018
Present value of estimated future cash flows 720,540

Present value of estimated future cash flows 720,540

Carrying amount before impairment (900K + 100K) (1,000,000)
Impairment loss (279,460)

The impairment loss is recorded under the allowance method as follows:

Allowance
Dec. 31, 20x3

Impairment loss 279,460

Interest receivable
100,000
Allowance for impairment
179,460

C
Solution:
The amortization table prepared after the impairment is as follows:
Date Collections Interest income Amortization Present value
12/31/x3 720,540
12/31/x4 300,000 86,465 213,535 507,005
12/31/x5 300,000 60,841 239,159 267,845
12/31/x6 300,000 32,141 267,859 (13)

34. Interest not accrued because of loss event

Use the following information for the next two questions:
On January 1, 2021, ABC Co. received a ₱1,000,000 note receivable from XYZ, Inc.
Principal payments of ₱200,000 and interest at 12% are due annually at the end of each
year for 5 years. The first payment starts on December 31, 2021.

XYZ, Inc. made the required payments during 2021 and 2016. However, during 2017
XYZ, Inc. began to experience financial difficulties, requiring ABC Co. to reassess the
collectibility of the note. Because of the loss event, ABC Co. did not accrue the interest
on December 31, 2017. The current rate of interest on December 31, 2017 is 10%. ABC
Co. made the following cash flow projections on December 31, 2017:
Date of expected Amount of cash
receipt flow
January 1, 2018 200,000
 January 1, 2019 150,000
January 1, 2020 150,000

How much is the impairment loss recognized in 2017?

a. 146,492 b. 195,082 c. 139,669 d. 181,518

How much is the interest income in 2018?

a. 54,421 b. 30,421 c. 16,071 d. 0
A
Solution:
Amount of Present
Date PV of 1 @12%, n=0, 1 and 2
cash flow value
Jan. 1, 20x4 200,000 1.00 200,000
Jan. 1, 20x5 150,000 0.89285714286 133,929
Jan. 1, 20x6 150,000 0.79719387755 119,579
453,508

Present value 453,508

Carrying amount (1M - 200K - 200K) (600,000)
Impairment loss (146,492)

B
Solution:
Dates Collections Interest income Amortization Present value
12/31/x3 453,508
1/1/x4 200,000 - 200,000 253,508
1/1/x5 150,000 30,421 119,579 133,929
1/1/x6 150,000 16,071 133,929 -

35. Reversal of impairment loss

On January 1, 2021, ABC Bank extended a 3-year, 12%, ₱1,000,000 loan to XYZ, Inc. at
a price that yields an effective interest rate of 10%. Principal is due at maturity but
interest is due annually every December 31.

On December 31, 2021, XYZ was delinquent and it was ascertained that the loan was
impaired. The loan was restructured as follows:
Only the principal amount of ₱1,000,000 shall be collected from the loan. This is due on
December 31, 2019.
ABC Co. waived the collection of interest.

On December 31, 2016, XYZ’s credit rating has improved and the loan was again
restructured as follows:
Aside from the principal amount of ₱1,000,000, which is due on December 31, 2017, a
14% interest will also be collected.
The new terms shall be applied prospectively.
How much is the gain on impairment reversal on December 31, 2016? (Do not round-off
present value factors)
a. 109,091 b. 112,561 c. 134,341 d. 141,323
A
Solution:
The issue price of the loan at a yield rate of 10% is computed as follows:
Present
Future cash flows PV factors @ 10%, n=3 value
Principal 1,000,000 PV of 1 0.75131480090 751,315
Interest 120,000 PV of ord. annuity 2.48685199098 298,422
1,049,737

The original amortization table prepared on January 1, 20x1 is as follows: (Table #1)
Date Collection Interest income Amortization Present value
1/1/x1 1,049,737
12/31/x1 120,000 104,974 15,026 1,034,711
12/31/x2 120,000 103,471 16,529 1,018,182
12/31/x3 120,000 101,818 18,182 1,000,000

The carrying amount of the restructured loan on December 31, 20x1 is computed as
follows:
Future cash flow 1,000,000
PV of 1 @10%, n=2 0.8264463
New carrying amount - 12/31/x1 826,446

The amortization table prepared on December 31, 20x2, after impairment, is as

follows: (Table #2)

Date Interest income Unearned int. Present value

ED
IGNOR

12/31/x1 826,446
12/31/x2 82,645 909,091
12/31/x3 90,909 1,000,000

The carrying amount of the restructured loan on December 31, 20x2 is computed as
follows:
Future cash flow [1M + (1M X 14%)] 1,140,000
PV of 1 @10%, n=1 0.9090909
Recoverable amount - 12/31/x2 1,036,364

Amounts taken from the amortization tables above are placed on the graph below (the
new recoverable amount is given in the problem):
           
Recoverabl
d
e amount -
1,036,3 Dec. 31,
  64 20x2
 
 CA had no IL been
c
recognized previously
1,018,1 - Dec. 31, 20x2
  82 (Table #1)
 
b

909,0 Carrying amount - Dec. 31, 20x2

  91 (Table #2)
             

The gain on impairment reversal is computed as follows:

Carrying amount had no impairment loss been
recognized previously (c) 1,018,182
Carrying amount after previous impairment (b) (909,091)
Gain on reversal of impairment loss 109,091

36. Evaluation of transfers

Use the following information for the next four questions:
ABC Co. transferred loans receivables with carrying amount of ₱900,000 and fair value
of ₱1,000,000 to XYZ, Inc. for cash amounting to ₱1,000,000.

If ABC Co. transfers substantially all the risks and rewards of ownership of the loans
receivable, how much of the transferred receivables is derecognized?
a. 1,000,000 b. 900,000 c. 100,000 d. 0
B – the carrying amount

If ABC Co. is obligated to repurchase the transferred loans at a future date for the fair
market value of the instrument at repurchase date plus 10% interest, how much of the
transferred receivables is derecognized?
a. 1,000,000 b. 900,000 c. 100,000 d. 0
D

If ABC Co. is obligated under the terms of the transfer to repurchase any individual loan
but the aggregate amount of loans that could be repurchased could not exceed
₱100,000, how much of the transferred receivables is retained in the books and not
derecognized?
a. 1,000,000 b. 900,000 c. 100,000 d. 0
C

If ABC Co. retains only a right of first refusal to repurchase the transferred asset at fair
value if XYZ, Inc. subsequently sells it, how much of the transferred receivables is
derecognized?
a. 1,000,000 b. 900,000 c. 100,000 d. 0
B
37. Transfer of financial asset
Fact pattern
ABC Co. transfers loans receivable with a fair value of ₱500,000 and carrying amount of
₱420,000. ABC Co. obtains an option to purchase similar loans and assumes a recourse
obligation to repurchase similar loans. ABC Co. also agrees to provide a floating rate of
interest to the transferee company. The assets and liabilities received as consideration
for the transfer are listed below:

Assets received & liabilities

assumed Fair values
Cash proceeds 250,000
Interest rate swap 120,000
Call option 60,000
Recourse obligation 120,000

How much is the gain (loss) on the derecognition of the financial asset?
a. 30,000 b. 7,500 c. (110,000) d. (135,000)
C
Solution:
Date Cash on hand 250,000
Interest rate swap 120,000
Call option 60,000
Loss on transfer of loans (squeeze) 110,000
Loans receivable (carrying amount) 420,000
Recourse obligation 120,000

38. Servicing of a financial asset

Use the information in the immediately preceding problem except that ABC Co. agreed
to service the loans without explicitly stating the compensation. The fair value of the
service is ₱25,000.

How much is the gain (loss) on the derecognition of the financial asset?
a. 30,000 b. 7,500 c. (110,000) d. (135,000)
D
Solution:
Date Cash on hand 250,000
Interest rate swap 120,000
Call option 60,000
Loss on transfer of loans (squeeze) 135,000
Loans receivable (carrying amount) 420,000
Recourse obligation 120,000
Liability on service obligation 25,000

39. Assignment
On March 1, 2021, ABC Co. assigned its ₱1,000,000 accounts receivable to Piggy Bank
in exchange for a 2-month, 12%, loan equal to 75% of the assigned receivables. ABC
Co. received the loan proceeds after a 2% deduction for service fee based on the
assigned notes. During March, ₱500,000 were collected from the receivables. Sales
returns and discounts amounted to ₱150,000. How much net cash is received from the
assignment transaction on March 1, 2021?
a. 735,000 b. 730,000 c. 1,230,000 d. 1,235,000
B
Solution:
Assigned accounts receivable 1,000,000
Multiply by: 75%
Principal amount of loan 750,000
Service fee (2% x 1M) (20,000)
Net proceeds 730,000

40. Factoring: Without recourse

The next three questions are based on the following information:
Fact pattern
ABC Co. factored ₱100,000 accounts receivable to XYZ Financing Corp. on a without
recourse basis on January 1, 2021. XYZ charged a 4% service fee and retained a 10%
holdback to cover expected sales returns. In addition, XYZ charged a 12% interest
computed on a weighted average time to maturity of the receivables of 73 days based
on 365 days.

How much proceeds is received from the factoring on January 1, 2021?

a. 100,320 b. 85,600 c. 83,600 d. 88,300

How much is the cost of factoring assuming all of the receivables have been collected?
a. 6,400 b. 2,400 c. 16,400 d. 12,400
C
Solution:
Requirement (a): Proceeds from factoring
The proceeds from the factoring is computed as follows:
Account receivable factored 100,000
Service charge (100,000 x 4%) (4,000)
Factor’s holdback (100,000 x 10%) (10,000)
Interest charge (100,000 x 12% x 73/365) (2,400)
Proceeds from factoring 83,600

A
Service charge (100,000 x 4%) 4,000
Interest charge (100,000 x 12% x 73/365) 2,400
Cost of factoring 6,400

41. Factoring: With recourse

Use the same information in the preceding illustration except that ABC Co. factored the
receivables on a with recourse basis. ABC Co. determines that the recourse obligation
has a fair value of ₱3,000. How much is the loss on sale of receivables recognized on
January 1, 2021 assuming the factoring was made on a casual basis?
a. 3,000 b. 9,400 c. 19,400 d. 6,400

B
Jan. 1, Cash (see previous solution) 83,600
20x1 Factor’s holdback 10,000
Loss on factoring (squeeze) 9,400
Account receivable 100,000
Liability on recourse obligation 3,000
51. Discounting - Without recourse
On October 1, 2021, ABC Co. discounted a ₱600,000, one-year, 12% note, received
from a customer on January 1, 2021, with a bank at 14% on a without recourse basis.
How much is the loss on discounting?
a. 4,960 b. 5,250 c. 4,690 d. 5,520
D
Solution:
Maturity value = 600,000 + (600,000 x 12%)
Maturity value = 672,000

Discount period = full term – expired term

Discount period = 12 months – 9 months (Jan. 1 to Oct. 1)
Discount period = 3 months

Discount = Maturity value x Discount rate x Discount period

Discount = 672,000 x 14% x 3/12
Discount = 23,520

Net proceeds = Maturity value - Discount

Net proceeds = 672,000 – 23,520
Net proceeds = 648,480

Interest income = accrued interest as of date of discounting

Interest income = 600,000 x 12% x 9/12
Interest income = 54,000

The entry to record the discounting is as follows:

Oct. Cash on hand (equal to net proceeds) 648,480
1, Loss on discounting (squeeze) 5,520
20x1 Note receivable 600,000
Interest income 54,000

42. Dishonored note

On July 1, 2021, ABC Co. discounted an ₱800,000, 90-day, 12% note, received from a
customer on June 1, 2021, with a bank at 16% on with recourse basis. The discounting
is treated as conditional sale. The bank uses 365 days per year in computing for
discounts. On August 30, 2021 (maturity date), the maker of the note defaulted and the
bank charged ABC Co. the maturity value of the note plus a ₱3,000 protest fee. How
much is transferred to accounts receivable due to the dishonor and before impairment
testing?
a. 826,671 b. 823,671 c. 827,000 d. 862,671
A
Solution
Maturity value [800K + (800K x 12% x 90/365)] 823,671
Protest fees 3,000
Amount transferred to accounts receivable 826,671

53. Discounting of “own” note

On July 1, 2021, ABC Co. discounted its own note of ₱200,000 to a bank at 10% for one
year. How much was the net proceeds received by ABC from the transaction?
a. 180,000 b. 190,000 c. 200,000 d. 0

A (200,000 x 90%)

43. Assignment
Geary Co. assigned P400,000 of accounts receivable to Kwik Finance Co. as security for
a loan of P335,000. Kwik charged a 2% commission on the amount of the loan; the
interest rate on the note was 10%. During the first month, Geary collected P110,000 on
assigned accounts after deducting P380 of discounts. Geary accepted returns worth
P1,350 and wrote off assigned accounts totaling P2,980.

The amount of cash Geary received from Kwik at the time of the transfer was
a. P301,500. b. P327,000. c. P328,300. d. P335,000.

Entries during the first month would include a

a. debit to Cash of P110,380. b. debit to Bad Debt Expense of
P2,980.
c. debit to Allowance for Doubtful Accounts of P2,980. d. debit to Accounts
Receivable of P114,710.

c €335,000 – €6,700 = €328,300.

130. c

44. Factoring
On February 1, 2021, Henson Company factored receivables with a carrying amount of
P300,000 to Agee Company. Agee Company assesses a finance charge of 3% of the
receivables and retains 5% of the receivables. Relative to this transaction, you are to
determine the amount of loss on sale to be reported in the income statement of Henson
Company for February.

Assume that Henson factors the receivables on a without guarantee (recourse) basis.
The loss to be reported is a. P0. b. P9,000. c. P15,000. d. P24,000.

Assume that Henson factors the receivables on a with guarantee (recourse) basis. The
amount of cash received is a. P285,000. b. P276,000. c. P291,000.
d. P300,000.
b €300,000 × .03 = €9,000.

b €300,000 – (€300,000 × .08) = €276,000.

45. Factoring
Maxwell Corporation factored, with guarantee (recourse), P100,000 of accounts
receivable with Huskie Financing. The finance charge is 3%, and 5% was retained to
cover sales discounts, sales returns, and sales allowances. What amount of cash would
Maxwell receive on the sale of receivables?
a. P97,000 b. P95,000 c. P92,000 d. P100,000

c $100,000 – ($100,000 × .08) = $92,000.