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Intermediate
Accounting 1
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Receivable Financing
by: Prof. Ernie D. Tano, CPA, MBA
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Concept of receivable financing is

the financial flexibility or capability
of an entity to raise money out of its
receivables
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Forms of receivable financing

The common forms of receivable financing are:

a. Pledge of accounts receivable

b. Assignment of accounts receivable
c. Factoring of accounts receivable
d. Discounting of notes receivable
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Forms of receivable financing

a. Pledge of accounts receivable

When loans are obtained from the bank or any lending

institution, the accounts receivable may be pledged as
collateral security for the payment of the loan.
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Pledge of Accounts Receivable

Illustration:
On November 1, 2020, an entity borrowed P1,000,000 from Philippine National Bank and
issued a promissory note for the same.

The term of the loan is one year and discounted at 12%. The entity pledged accounts
receivable of P2,000,000 to secure the loan.

On Nov. 1, 2020, the journal entry to record the loan is:

Cash 880,000
Discount on note payable 120,000
Note payable - bank 1,000,000
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Pledge of Accounts Receivable

If the loan is discounted, in the banking parlance this means that the interest for the term
of the loan is deducted in advance.

Face value of loan 1,000,000

Interest deducted in advance (1,000,000 x 12%) (120,000)
Net proceeds 880,000
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Pledge of Accounts Receivable

Statement presentation

On December 31, 2020, using the straight line method, the discount on the note payable is
amortized as interest expense for two months from Nov. 1 to Dec. 31.

Interest expense (120,000 x 2/12) 20,000

Discount on note payable 20,000
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Pledge of Accounts Receivable

At this point, if a statement of financial position is prepared on Dec. 31, 2020, the note
payable-bank and the discount on note payable are presented as follows:

Current liabilities:
Note payable - bank 1,000,000
Discount on note payable ( 100,000)
Carrying amount 900,000
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Pledge of Accounts Receivable

Disclosure

A note to financial statement may appear as follows:

“The note payable to bank matures on November 1, 2021 and is secured by accounts
receivable with face value of P2,000,000.”
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Pledge of Accounts Receivable

On November 1, 2021, the payment of the bank loan is recorded.

Note payable - bank 1,000,000

Cash 1,000,000

And the discount on note payable is finally amortized

Interest expense 100,000

Discount on note payable 100,000
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Forms of receivable financing

b. Assignment of accounts receivable

Assignment of accounts receivable means that a borrower

called the assignor transfers rights in some accounts
receivable to a lender called the assignee in consideration
for a loan.
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Forms of receivable financing

b. Assignment of accounts receivable

Assignment is specific because specific accounts

receivable serve as collateral security for the loan.
Pledging is general because all accounts receivable serve
as collateral security
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Forms of receivable financing

b. Assignment of accounts receivable

Assignment may be done either on a nonnotification or

notification basis. On notification basis, customers are
informed that their account are assigned while in
nonnotification, customers are not notified.
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Forms of receivable financing

b. Assignment of accounts receivable

In nonnotification basis, customers continue to make payments

to the assignor, who in turn remits the collections to the assignee.

The assignee usually charges interest for the loan that it makes
and requires a service or financing charge or commission for the
assignment agreement
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Assignment of A/R
Illustration: nonnotification basis
April 1. An entity assigned P700,000 of A/R to a bank under a nonnotification arrangement.
The bank advances 80% less a service charge of P5,000.

To separate the assigned accounts:

Accounts receivable-assigned 700,000
Accounts receivable 700,000

To record the loan:

Cash (560,000 – 5,000) 555,000
Service charge 5,000
Note payable-bank 560,000
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Assignment of A/R
Illustration: nonnotification basis
April 5. Issued a credit memo for sales return to a customer whose account was assigned,
P20,000

Sales return 20,000

Accounts receivable-assigned 20,000

April 10. Collected P300,000 of the assigned accounts less 2% discount

Cash 294,000
Sales discount (2% x 300,000) 6,000
Accounts receivable-assigned 300,000
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Assignment of A/R
Illustration: nonnotification basis

April 30. Remitted the total collections to the bank plus interest for one month.

Note payable-bank 294,000

Interest expense (1% x 560,000) 5,600
Cash 299,600

May 7. Assigned account of P15,000 proved worthless.

Allowance for doubtful accounts 15,000

Accounts receivable-assigned 15,000
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Assignment of A/R
Illustration: nonnotification basis

May 20. Collected P300,000 of the assigned accounts.

Cash 300,000
Accounts receivable-assigned 300,000

May 30. Remitted the total amount due the bank to pay off the loan balance plus interest for
one month.

Note payable-bank (560,000-294,000) 266,000

Interest expense (1% x 266,000) 2,660
Cash 268,660
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Assignment of A/R
Illustration: nonnotification basis

To transfer the remaining balance of assigned accounts to accounts receivable:

Accounts receivable 65,000

Accounts receivable-assigned 65,000

Total accounts receivable-assigned 700,000

Less: Collections (294,000 + 300,000) 594,000
Sales discount 6,000
Sales return 20,000
Worthless accounts 15,000 635,000
Balance 65,000
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Assignment of A/R
Illustration: notification basis

July 1. An entity assigned P1,000,000 of A/R to a bank under a notification arrangement.

The bank loans 80% less 4% service charge on the gross amount assigned.
The entity signed a promissory note that provides for 1% interest per month on the unpaid
loan balance.

Accounts receivable-assigned 1,000,000

Accounts receivable 1,000,000

Cash (800,000 – 40,000) 760,000

Service charge (4% x 1,000,000) 40,000
Note payable - bank 800,000
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Assignment of A/R
Illustration: notification basis

July 31. Received notice from bank that P600,000 of the assigned accounts were collected
less 2% discount. A check was sent to the bank for the interest due.

Note payable-bank 588,000

Sales discount (2% x 600,000) 12,000
Accounts receivable-assigned 600,000

Interest expense (1% x 800,000) 8,000

Cash 8,000
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Assignment of A/R
Illustration: notification basis
Aug. 31. Received notice from bank that P300,000 of the assigned accounts were collected.
Final settlement was made by the bank for the excess collections together with the
uncollected assigned accounts of P100,000.

Cash 85,880
Interest expense 2,120
Note payable-bank 212,000
Accounts receivable-assigned 300,000

Accounts receivable 100,000

Accounts receivable-assigned 100,000
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Assignment of A/R
Computation:

Loan from bank 800,000

Less: July collection by bank 588,000
Balance due the bank 212,000

August collection by bank 300,000

Less: Loan balance 212,000
Excess collection 88,000
Less: Interest (1% x 212,000) 2,120
Remittance from bank 85,880
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Assignment of A/R
Statement presentation
An entity provided the following accounts at year-end:
Accounts receivable-unassigned 4,000,000
Accounts receivable-assigned 1,000,000
Allowance for doubtful accounts 100,000
Note payable-bank (related to assignment) 400,000

Accounts receivable-unassigned 4,000,000

Accounts receivable-assigned 1,000,000
total 5,000,000
Allowance for doubtful accounts (100,000)
Net Realizable value 4,900,000
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Assignment of A/R
The net realizable value of P4,900,000 is included in the caption “trade
and other receivables”.

Equity in assigned accounts

Moreover, the entity shall disclose its equity in the assigned accounts
determined as follows:
Accounts receivable-assigned 1,000,000
Notes payable - bank 400,000
Equity in assigned accounts 600,000
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Forms of receivable financing

c. Factoring of accounts receivable

Factoring is a sale of accounts receivable on a without recourse,

notification basis

In a factoring arrangement, an entity sells accounts receivable to

a bank or finance entity called a factor
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Forms of receivable financing

c. Factoring of accounts receivable

A gain or loss is recognized for the difference between the

proceeds received and the net carrying amount of the receivables

Factoring ownership of AR transfer to Factor, while in

assignment, the assignor retains ownership.
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Forms of receivable financing

c. Factoring of accounts receivable

1. Casual Factoring

2. Factor as a continuing agreement

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Factoring of A/R
Illustration: Casual factoring
For example, an entity factored P100,000 of accounts receivable with an allowance for
doubtful accounts of P5,000 for P80,000.

Journal entry to record the sale

Cash 80,000
Allowance for doubtful accounts 5,000
Loss on factoring 15,000
Accounts receivable 100,000
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Factoring of A/R
Illustration: Factoring as a continuing agreement

An entity factored accounts receivable of P500,000 with credit terms of 2/10, n/30
immediately after shipment of the goods to the customer.

The factor charged a 5% commission based on the gross amount of the receivables factored.

In addition, the factor withheld a 20% of the amount of the receivables factored to cover
sales return and allowances.
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Factoring of A/R
Illustration: Factoring as a continuing agreement

Cash 365,000
Sales discount 10,000
Commission 25,000
Receivable from factor 100,000
Accounts receivable 500,000

Gross amount 500,000

Less: Sales discount (P 500,000 x 2%) 10,000
Commission (P 500,000 x 5%) 25,000
Factor’s holdback (P 500,000 x 20%) 100,000 135,000
Cash received from factoring 365,000
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Factoring of A/R
If the customer is subsequently allowed a credit of P50,000 for damaged merchandise, the
journal entry is:
Sales return and allowance 50,000
Sales discount (2% x 50,000) 1,000
Receivable from factor 49,000

When all the receivables factored are collected by the factor with no further return and
allowances, the final settlement with the factor is recorded as follows:

Cash (100,000 -49,000) 51,000

Receivable from factor 51,000
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End of Presentation.
Reference:
Intermediate Accounting 1a, 2019 Edition
by: Zeus Vernon B. Millan

Intermediate Accounting 1, 2020 Edition by:

Conrado T. Valix, et.al