ACT112 – Intermediate Accounting I

nd
2 Semester – Academic Year 2022-2023

Classroom Activity
Receivable Financing

ABSTRACTION – PLEDGING

Points to remember in accounting procedures

PLEDGING

To record the loan proceeds.

Cash xx
Discount of N/P xx
N/P xx

To record the periodic interest paid

Interest expense xx
Cash xx

To record the amortization of discount of N/P

Interest expense xx
Discount of N/P xx

To record payment/ periodic payment of principal

N/P xx
Cash xx

For PLEDGING or A/R, disclose such in the notes.

Activity: CASE I – Pledging

ABC Company provided the following information in connection with a bank loan:

Date Transaction
June 1 ABC borrowed P2,000,000 from BDO on a 6-month note carrying an interest of 15% per year.
Accounts of P3,500,000 are pledged to secure the loan.
July 1 Pledged accounts of P1,800,000 are collected less 1% discount.
September 1 The remaining pledged accounts are collected.
December 1 The bank loan is repaid plus accrued interest.

Prepare the journal entries:

Month Day Particulars PR Debit Credit

June 1
 Month Day Particulars PR Debit Credit

ABSTRACTION – ASSIGNMENT

Points to remember in accounting procedures

Company A

Sales on Account to B

A/R xx Company A becomes a creditor of B.

Sales xx
A engages with a receivable financing
transaction with a bank thru assignment
transferring it rights to a particular A/R
to the lender (assignee).

A/R-Assigned xx
A/R xx

Cash xx Company A becomes an assignor to lender.

Expense (charges) xx
N/P xx

Assignment

With Notification Without notification

Client is notified that its account Client doesn't know that its account
is being assigned. is assigned to a lender.

The client will pay its account The client will continue paying its
directly to the assignee. account to the company/ assignor.

The company/ assignor will The company will record the following.
prepare an entry ipon receipt of 1. The collection of accounts receivable.
information from the assignee. 2. The payment/ remittance of the company/
assignor to the assignee.
 Assignment

With Notification Without notification

Collection No entry yet because the bank has made Collection Cash xx
the collection. A/R xx

Notice Only upon receipt of notice shall the Remittance Another entry shall be made by the
assignor will prepare an entry. assignor to pay its obligation to assignee

N/P xx N/P xx
Int. Exp xx Int. Exp. xx
A/R Assigned xx Cash xx

In any of the circumstances, you should keep track of the balances of both NOTES PAYABLE account
and ACCOUNTS RECEIVABLE-ASSIGNED account.

Any difference between the Accounts receivable - Assigned account and Notes Payable account needs
disclosure. The difference is called EQUITY in ASSIGNED ACCTS.

Activity: CASE II – Assignment

ABC provided the following transactions:

Date Transaction
June 1 ABC assigned P900,000 of accounts receivable to A Bank in consideration for a loan.

A cash advance of 80% less service charge of P25,000 was made by the bank.

It was agreed that interest of 3% a month is to be made and that the assignor continues to make the
collections. The entity signed a promissory note for the loan.

Month Day Particulars PR Debit Credit

June 1

5 The entity issued a credit memo to a customer for returned merchandise, P40,000. The account is one
of the assigned accounts.

Month Day Particulars PR Debit Credit

June 5

10 Collections of P400,000 of the assigned accounts were made less 5% discount.

Month Day Particulars PR Debit Credit

June 10

July 1 Remitted the collections to the bank including 2% interest. The interest for the month is satisfied first
and the remaining amount will be applied to the outstanding obligation.
 Month Day Particulars PR Debit Credit
July 1

7 Assigned accounts of P10,000 proved to be worthless.

Month Day Particulars PR Debit Credit

July 7

20 Collection of P400,000 for the account assigned were made.

Month Day Particulars PR Debit Credit

July 20

Aug 1 Final settlement was made with the bank. ABC accordingly remitted the total amount due to the bank
to pay off the loan plus interest charge.

Month Day Particulars PR Debit Credit

Aug 1

Activity: CASE III– Assignment

ABC assigned certain accounts receivable to a bank for a loan on the following basis: 80% cash advance, 3%
service charge on gross accounts assigned, 2.5% interest per month is to be charged, and the bank makes the
collection. The entity signed a promissory note for the loan.

Date Transaction
June 1 Received remittance upon the specific assignment of P2,000,000 in accounts to the bank.

Month Day Particulars PR Debit Credit

June 1

July 1 Received notice from bank that P1,000,000 from the assigned accounts were collected. A check was
sent to the bank for one month interest charge.

Month Day Particulars PR Debit Credit

July 1
 Aug 1 Received notice from bank that assigned accounts of P800,000 were collected and the remaining
P200,000 were being returned. Accordingly, a check was received from the bank in settlement of the
assigned contract. In making the settlement, the bank deducted the interest charge for the
corresponding period.

Month Day Particulars PR Debit Credit

Aug 1

ABSTRACTION – FACTORING

Points to remember in accounting procedures

FACTORING

sale of A/R without recourse

with notification

Company A

Sales on Account to B

A/R xx Company A becomes a creditor of B.

Sales xx
A engages with a receivable financing
transaction with a bank thru FACTORING
transferring it rights to a particular A/R
to a FACTOR

Cash xx
ABD xx
Loss on factoring xx
A/R xx

Casual As a continuing agreement

factor some or all of it’s a/R at a needs factor's credit approval b4 shipment
substantial discount of goods to customers

Loss is recognized immediately as the factor assumes the credit and collection
the difference between the CV of A/R functions.
and proceeds from factoring.
facoring fee is charged
Cash xx
ABD xx Factor's holdback as a protection against
Loss on factoring xx returns and special adjustments
A/R xx ("receivable from factor") - Current assets

Cash xx
Sales discount xx
Commission xx
Receivable from factor xx
A/R xx

Sales returns xx
Sales discount xx
Receivable from factor xx
if loan is fully extinguished from the
Cash xx
payment of client, the excess will be
Receivable from factor xx
 Activity: CASE IV - Factoring

ABC provided the following information with respect to factoring of accounts receivable.

Date Transaction
Jan 1 Factored P1,000,000 of accounts receivable without recourse with a bank on notification basis. The
bank charged a factoring fee of 5% of the amount of accounts receivable factored and withheld 10%
of the accounts receivable factored to cover sales return and allowances.

Month Day Particulars PR Debit Credit

Jan 1

Jan 15 Received notice from the bank that factored accounts are fully collected less sales return and
allowances of P40,000.

Month Day Particulars PR Debit Credit

Jan 15

Jan 31 Received a check from the bank as a final settlement of the factoring contract.

Month Day Particulars PR Debit Credit

Jan 31

ABSTRACTION – DISCOUNTING

Points to remember in accounting procedures

Discounting

Own Note Customer's Note

Compan's own promissory main problem: computation of proceeds

note is discounting
Use the ff for the illustration:
Cash xx Instrument date Oct-01
Discount on NP xx Term 90 days
N/P xx Amount 100,000
Interest rate 10%
Expiration Dec-30
Date of discounting Nov-01
Discount rate 12%

STEPS!

1 Computation of Maturity Value.

(Principal + Full term Interest)

Principal xx 100,000.00
+ Interest xx (I=PxRxT) 2,500.00 (90/360)
Maturity Value xx 102,500.00

2 Computation of Discount
D=MV x DR x Discount Period (DP)

MV xx 102,500.00
less Discount xx D=MVxDRXDP 2,050.00 (60/360)
Net Proceeds xx 100,450.00

Term 90
Days expired 30 (Oct 2 to Nov 1 = 30 days)
Discount period 60

with recourse without recourse

if with recourse , the entity (endorser) shall pay the bank
Cash 100,450.00
(new payee) the maturity value + any charges.
Loss of NR dis. 383.33
N/R 100,000.00
 less Discount xx D=MVxDRXDP 2,050.00 (60/360)
Net Proceeds xx 100,450.00

Term 90
Days expired 30 (Oct 2 to Nov 1 = 30 days)
If the discounting is
Discount period 60

with recourse without recourse

if with recourse , the entity (endorser) shall pay the bank
Cash 100,450.00
(new payee) the maturity value + any charges.
Loss of NR dis. 383.33
N/R 100,000.00
II 833.33
Conditional sale Secured borrowing

Cash 100,450.00 Cash 100,450.00

Loss of NR dis. 383.33 Interest expense 383.33
N/R-discounted 100,000.00 Liab on N/R discounted 100,000.00
II 833.33 II 833.33

N/R discounted is a contra N/R account.

If the maker paid the new payee

N/R-discounted 100,000.00 Liab on N/R discounted

100,000.00
N/R 100,000.00 N/R 100,000.00

If the maker has not able to pay the new payee, the note is dishonored'

AR 102,500.00 AR 102,500.00
Cash 102,500.00 Cash 102,500.00

N/R-discounted 100,000.00 Liab on N/R discounted

100,000.00
N/R 100,000.00 N/R 100,000.00

From the time the maturity value was paid by the endorser, the interest on the total amount of A/R
will accrued to the entity (endorser). Upon collection the entry will be as follows:

Cash 104,000.00 Cash 104,000.00

AR 102,500.00 AR 102,500.00
II 1,500.00 II 1,500.00

Activity: CASE V - Discounting

The notes receivable account of ABC consisted of the following:

• 60-day note of P10,000 dated May 15 with a 9% interest rate, discounted at the bank on June 8 at 12%.
• 120-day note of P100,000 (face amount) dated October 1, with no stated interest rate and a market rate
of 9% interest discounted at the bank on November 30 at 12%. This note was received from the sale of
equipment.

1. The proceeds from discounting of the 60-day note amount to

Amount
Principal Given
Add: Interest I=PxRxT
Maturity value Principal + Interest
Less: Discount D = MV x DR x DP
Proceeds Proceeds = MV - Discount

2. Entry assuming with recourse – discounting as a conditional sale

Month Day Particulars PR Debit Credit
June 8

3. Entry assuming with recourse – discounting as a secured borrowing

Month Day Particulars PR Debit Credit
June 8
 4. How much was received by the company from the discounting of the 120-day note?
Amount
Principal Given
Add: Interest I=PxRxT
Maturity value Principal + Interest
Less: Discount D = MV x DR x DP
Proceeds Proceeds = MV – Discount

5. Entry assuming without recourse

Month Day Particulars PR Debit Credit
Nov 30

Activity: CASE VI - Discounting

On July 31, X old merchandise to ABC for P150,000 and accepted an 8%, 6-month note. 8% is an appropriate
rate for this type of note. On September 30, X discounted the ABC note at the bank without recourses at 12%.

1. How much was received by the company from the discounting of the 120-day note?
Amount
Principal Given
Add: Interest I=PxRxT
Maturity value Principal + Interest
Less: Discount D = MV x DR x DP
Proceeds Proceeds = MV – Discount

2. Entry assuming without recourse

Month Day Particulars PR Debit Credit
Sept 30