Intermediate Accounting 1

by Empleo and Robles 2019 Edition

Chapter 2: Receivables
 Nature of Receivables
• Receivables represent any legitimate claim
from others for money, goods or services.
• Includes the ff:
1.Amounts collectible from customers and
others, most frequently arising from sales of
merchandise, claims for money lent, or the
performance of services.
2.Accrued revenues
3.Other items
Classification of Receivables according to Source
• Trade Receivables – Receivables arising from sale
of goods or services in the normal course of business.
• Non-trade Receivables – Receivables that arise from
sources other than from sale of goods or services in
the normal course of business. Examples: Loans to
officers and employees, Advances to affiliates,
Accrued interest and dividends, Deposits to
guarantee performance or payment or to cover
possible damages or losses, Subscriptions for the
entity’s equity securities, Deposit with creditors,
Claims for losses and damages, tax refunds or
rebates, and against common carriers for damages or
lost goods.
 Accounts Receivable - Issues
• Types of accounts receivable : current and
non-current : trade and non-trade
• Recognition of accounts receivable in the
financial statements - cash discounts / interest
• Valuation of accounts receivable : estimated
bad debts and net realizable value
• Disposition of receivable - transfers / sale
 Classification of receivables in the
Statement of Financial Position
Receivables
Did they arise from sale of
goods and services in the
normal course of business?
YES NO

Are they collectible within 12 months

from the end of the reporting period?
YES NO

Report as current assets Report as non- current assets

 Accounts Receivable: Initial
Recognition
• Trade receivables are initially recognized at
the transaction price.
• Transaction price, as defined by IFRS 15
Revenue from Contracts with Customers, is
the amount to which an entity expects to be
entitled in exchange for the transfer of
goods and services (par. 47, IFRS 15).
Accounting for Accounts Receivable
and Related Revenues
• Trade or volume or quantity discounts are
not recorded in books of account.
• Cash (sales) discounts are inducements to
customers for prompt payment
of amounts billed.
• Cash discounts are recorded in books as
reductions of sales revenue.
 Accounts Receivable: Recording Trade
Discounts
Example: Assume that on July 16, 2019, ABC
Manufacturing sells merchandise on account
with a list price of P100,000, less trade
discounts of 10%, 10% and 5%.
The entry for the sale transaction is:
Accounts Receivable 76,950
Sales 76,950
 Accounts Receivable: Recording Cash
Discounts
• There are three methods: Gross Price, Net and
Allowance Method
• Gross method records discounts when taken by
customers. It is the most popular because of its
convenience.
• Net method records discounts not taken by customers.
• Allowance method records accounts receivable at
gross sales price, the sales revenue is recorded at net
amount and the available cash discount is recorded as
a credit in the valuation account, Allowance for Sales
Discounts.
 Accounts Receivable: Recording Cash Discounts

GROSS method NET method

• Record revenue at • Record revenue at
gross amount of sales gross amount of sales
less cash discount
• When customer takes • When customer
the discount, record forfeits discount,
cash discounts record discounts not
taken.
• Cash discounts reduce • Report discounts
gross sales revenue forfeited as other revenue
 Accounts Receivable: Recording Cash
Discounts (Gross Price Method)
Example: On July 16, 2019, ABC Manufacturing sells
merchandise on account with a list price of P100,000,
less trade discounts of 10%, 10% and 5%. The credit
terms were 2/10; n/30, FOB shipping point and freight
paid to the shipper by ABC Manufacturing amounted to
P2,000. The sale is recorded as follows:
July 16 Accounts Receivable 78,950
Sales 76,950
Cash 2,000
 Accounts Receivable: Recording Cash
Discounts (Gross Price Method)
If the customer pays on or before July 26, 2019, which is
within the discount period of 10 days, the journal entry is
Cash 77,411
Sales Discount 1,539
Accounts Receivable 78,950

When the customer pays after July 26, which is beyond the
discount period, the journal entry is
Cash 78,950
Accounts Receivable 78,950
 Accounts Receivable: Recording Cash
Discounts (Net Price Method)
Example: On July 16, 2019, ABC Manufacturing sells
merchandise on account with a list price of P100,000,
less trade discounts of 10%, 10% and 5%. The credit
terms were 2/10; n/30, FOB shipping point and freight
paid to the shipper by ABC Manufacturing amounted to
P2,000. The sale is recorded as follows:
July 16 Accounts Receivable 77,411
Sales 75,411
Cash 2,000
 Accounts Receivable: Recording Cash
Discounts (Net Price Method)
If ABC is able to collect the account on or before July 26,
2019, which is within the discount period of 10 days, the
journal entry is
Cash 77,411
Accounts Receivable 77,411

If ABC collects the account after July 26, which is beyond

the discount period, the journal entry is
Cash 78,950
Sales Discounts Forfeited 1,539
Accounts Receivable 77,411
 Accounts Receivable: Recording Cash
Discounts (Allowance Method)
Example: On July 16, 2019, ABC Manufacturing sells
merchandise on account with a list price of P100,000,
less trade discounts of 10%, 10% and 5%. The credit
terms were 2/10; n/30, FOB shipping point and freight
paid to the shipper by ABC Manufacturing amounted to
P2,000. The sale is recorded as follows:
July 16 Accounts Receivable 78,950
Allowance for Sales Discount 1,539
Sales 75,411
Cash 2,000
 Accounts Receivable: Recording Cash
Discounts (Allowance Method)
The collection on or before July 26 is recorded as follows:
Cash 77,411
Allowance for Sales Discount 1,539
Accounts Receivable 78,950

The collection beyond the discount period is recorded as:

Cash 78,950
Allowance for Sales Discounts 1,539
Sales Discounts Forfeited 1,539
Accounts Receivable 78,950
 Credit Card Sales
Assume that SM Department Store has Citibank Visa
drafts/receipts that total P1,200,000 on December 20. The
entry to record the Citibank Visa sales would be
Accounts Receivable – Citibank Visa 1,200,000
Sales 1,200,000

Assuming a 2% service fees by the bank, the entry in the

books of SM is
Cash 1,176,000
Credit Card Service Charge 24,000
Accounts Receivable – Citibank Visa 1,200,000
 Valuation of Accounts Receivable

• Short term receivables are reported at their

net realizable value (NRV)
• The NRV is the net amount expected to be
collected
• The NRV is gross accounts receivable less
estimated uncollectible accounts.
 Accounting for Notes Receivable
• A note receivable is a formal claim against
another that is evidenced by a written promise,
called promissory note, or a written order to pay at
a later date, called time draft.
 Notes Receivable: Issues

• Recognition of Notes Receivable

1• issues at face value and issues not at
face value
2• issues for cash / non-cash considerations
• Valuation issues
• Disposition of notes receivable
 Notes Receivable: Initial
Recognition
• A note is initially recognized at the transaction price
based on the circumstance that gives rise to the receipt
of the note, which is any of the ff:
(a)The amount of cash given up in exchange for the note;
(b)The fair value of the non-cash consideration given up in
exchange for the note, or if such fair value cannot be
practically determined, the fair value of the note
received, which is the discounted cash flow of future
collections, based on an implicit interest rate.
 Recognition of Notes Receivable
Notes Receivable

Short term N/R Long term N/R

Record at face value Record at present value

less Allowance of cash expected to
be collected

Issues at par Issues not at par

 Recognition of Notes Receivable

• Notes receivable are issued at face value

when the stated rate of interest is the same
as the effective (market) rate.
• When the rates are unequal, a discount on
the note results.
• The discount is amortized to interest
revenue by the effective interest method.
 Recognition of Notes Receivable
Issues NOT at face value

Non interest bearing Interest bearing

1. Determine discount on 1. Determine discount on
notes receivable at notes receivable at
implicit rate of interest the effective rate of
2. The discount is interest.
amortized to interest 2. The discount is
revenue by the amortized to interest
effective interest revenue by the
method effective interest
method
 Illustration Problem for Interest-Bearing Notes
• Assume the following selected transactions
completed by ABC Corporation during 2019:
Aug. 5 Received a 60-day, 9%, P12,000
promissory note from X
Company for merchandise sold.
Oct. 4 Collected from X Company in settlement
of its note dated Aug. 5
10 Received a 30-day, 12%, P16,000
promissory note from Y Company in
settlement of an overdue
account.
 Illustration Problem for Interest-Bearing Notes
Nov. 6 Received a 120-day, 12%, P24,000
promissory note from Z Company in
settlement of an account.
9 Y Company dishonored its note on
maturity date.
30 Collected the amount due from Y
Company on account of its overdue note.
An additional charge for interest at 12%
on maturity value from maturity date is
also collected.
Dec. 31 Year-end adjustments are made.
 Case 1: Long-Term Interest-Bearing
Note with Realistic Interest Rate
On January 1, 2019, ABC
Manufacturing sells an equipment costing
P800,000 and with accumulated depreciation
of P450,000. The company receives as
consideration P100,000 cash and a 15%
interest-bearing note for P400,000 due on
December 31, 2021. The interest on the note
is payable annually every December 31.
 Case 1: Long-Term Interest-Bearing
Note with Realistic Interest Rate
• The entries relative to the note are:
2019
Jan. 1 Cash 100,000
Notes Receivable 400,000
Accumulated Depreciation-Equipment 450,000
Equipment 800,000
Gain on Sale of Equipment 150,000

Dec. 31 Cash 60,000

Interest Revenue 60,000
 Case 1: Long-Term Interest-Bearing
Note with Realistic Interest Rate
• The entries relative to the note are:
2020
Dec. 31 Cash 60,000
Interest Revenue 60,000

2021
Dec. 31 Cash 460,000
Notes Receivable 400,000
Interest Revenue 60,000
 Case 2: Long-Term Non-Interest-
Bearing Note
On January 1, 2019, ABC
Manufacturing sells an equipment costing
P800,000 with accumulated depreciation of
P450,000. The company receives as
consideration P100,000 cash and a non-
interest-bearing note for P400,000 due on
December 31, 2021. The prevailing interest
for a note of this type is 15%.
 Case 2: Long-Term Non-Interest-
Bearing Note
• The entries relative to the note are:
2019
Jan. 1 Cash 100,000

Notes Receivable 400,000

Accumulated Depreciation-Equipment 450,000
Equipment
800,000
Discount on Notes Receivable 137,000
Gain on Sale of Equipment 13,000
 Case 2: Long-Term Non-Interest-
Bearing Note
• The entries relative to the note are:
2019
Dec. 31 Discount on Notes Receivable 39,450
Interest Revenue 39,450
2020
Dec. 31 Discount on Notes Receivable 45,368
Interest Revenue 45,368
2021
Dec. 31 Cash 400,000
Discount on Notes Receivable 52,182
Notes Receivable 400,000
Interest Revenue 52,182
 Case 2: Long-Term Non-Interest-
Bearing Note

Amortization Table
Date Interest Revenue Amortized Cost
January 1, 2019 263,000
December 31, 2019 39,450 302,450
December 31, 2020 45,368 347,818
December 31, 2021 52,182* 400,000

*Adjusted; difference is due to rounding off.

 Case 3: Long-Term Non-Interest-
Bearing Installment Notes Receivable
On January 1, 2019, ABC Manufacturing
sells an equipment costing P800,000 with
accumulated depreciation of P450,000. The
company receives as consideration P100,000 cash
and a non-interest-bearing note for P300,000 due
in equal amounts of P100,000 every December
31, starting December 31, 2019. The prevailing
interest for a note of this type is 15%.
 Case 3: Long-Term Non-Interest-
Bearing Installment Notes Receivable
• The entries relative to the note are:
2019
Jan. 1 Cash 100,000
Notes Receivable 300,000
Accumulated Depreciation-Equipment 450,000 Loss
on Sale of Equipment 21,680
Equipment 800,000
Discount on Notes Receivable 71,680
 Case 3: Long-Term Non-Interest-
Bearing Installment Notes Receivable
• The entries relative to the note are:
2019
Dec. 31 Discount on Notes Receivable 34,248
Interest Revenue 34,248
31 Cash 100,000
Notes Receivable 100,000
2020
Dec. 31 Discount on Notes Receivable 24,385
Interest Revenue 24,385
31 Cash 100,000
Notes Receivable 100,000
 Case 3: Long-Term Non-Interest-
Bearing Installment Notes Receivable
• The entries relative to the note are:
2021
Dec. 31 Discount on Notes Receivable 13,047
Interest Revenue 13,047

31 Cash 100,000
Notes Receivable 100,000
 Case 3: Long-Term Non-Interest-
Bearing Installment Notes Receivable
Amortization Table
Date A B C D
Periodic Applied to Applied to Balance of
Payment Interest Principal Principal
(Previous D (A-B) (Previous D-C)
x 15%)
January 1, 2019 228,320
December 31, 100,000 34,248 65,752 162,568
2019
December 31, 100,000 24,385 75,615 86,953
2020
December 31, 100,000 13,047* 86,953 -
*Adjusted; difference is due to rounding off.
2021
Case 4: Long-Term Installment Note Receivable
(Stated Interest Rate is Lower than the Market
Rate of Interest)
On January 1, 2019, ABC Manufacturing
sold a tract of land that originally cost P400,000.
ABC received a P600,000 note as payment for the
land. The note is payable in three annual
installments of P200,000 beginning December 31,
2019 plus interest at the rate of 4% based on the
outstanding balance. At January 1, 2019, the
prevailing rate of interest for a similar obligation is
10%.
 Case 4: Long-Term Installment Note Receivable
(Stated Interest Rate is Lower than the Market
Rate of Interest)
The computation of the present value of the note on January 1, 2019 is as
follows:

Amortization Table
Due Date Principal Interest Total Present Present
(P) Due Due Amount Value Value, Jan.
(Balance Due Factor 1, 2019
of P x
4%)
12/31/19 200,000 24,000 224,000 0.90909 203,636
12/31/20 200,000 16,000 216,000 0.82645 178,313
12/31/21 200,000 8,000 208,000 0.75132 156,275
TOTAL P538,424
 Case 4: Long-Term Installment Note Receivable
(Stated Interest Rate is Lower than the Market
Rate of Interest)
• The entries relative to the note are:
2019
Jan. 1 Notes Receivable 600,000
Discount on Notes Receivable 61,576 Land 400,000
Gain on Sale of Land 138,424
Dec. 31 Cash 224,000
Discount on Notes Receivable 29,842 Notes Receivable
200,000
Interest Revenue 53,842
 Case 4: Long-Term Installment Note Receivable
(Stated Interest Rate is Lower than the Market
Rate of Interest)
• The entries relative to the note are:
2020
Dec. 31 Cash 216,000
Discount on Notes Receivable 20,827
Notes Receivable 200,000
Interest Revenue 36,827
2021
Dec. 31 Cash 208,000
Discount on Notes Receivable 10,907
Notes Receivable 200,000
Interest Revenue 18,907
 Case 4: Long-Term Installment Note Receivable
(Stated Interest Rate is Lower than the Market
Rate of Interest)

Amortization Table
Date Effective Nominal Discount Principal Note
interest Interest Amortization Payment Carrying
Value
01/01/19 538,424
12/31/19 53,842 24,000 29,842 200,000 368,266
12/31/20 36,827 16,000 20,827 200,000 189,093
12/31/21 18,907* 8,000 10,907* 200,000 -

*Adjusted; difference is due to rounding off.

Case 5: Long-Term Installment Note Receivable
(Stated Interest Rate is Higher than the Market
Rate of Interest)
On January 1, 2019, ABC Manufacturing
sold a tract of land that originally cost P400,000.
ABC received a P600,000 note as payment for this
transaction. The note is payable in three annual
installments of P200,000 beginning December 31,
2019 plus interest at the rate of 14% based on the
outstanding balance. At January 1, 2019, the
prevailing rate of interest for a similar obligation is
10%.
 Case 5: Long-Term Installment Note Receivable
(Stated Interest Rate is Higher than the Market
Rate of Interest)
The computation of the present value of the note on January 1, 2019 is as
follows:

Amortization Table
Due Date Principal Interest Total Present Present
(P) Due Due Amount Value Value, Jan.
(Balance Due Factor 1, 2019
of P x
14%)
12/31/19 200,000 84,000 284,000 0.90909 258,182
12/31/20 200,000 56,000 256,000 0.82645 211,571
12/31/21 200,000 28,000 228,000 0.75132 171,301
TOTAL P641,054
 Case 5: Long-Term Installment Note Receivable
(Stated Interest Rate is Higher than the Market
Rate of Interest)
• The entries relative to the note are:
2019
Jan. 1 Notes Receivable 600,000
Premium on Notes Receivable 41,054 Land 400,000
Gain on Sale of Land241,054
Dec. 31 Cash 284,000
Notes Receivable 200,000
Interest Revenue 64,105
Premium on Notes Receivable 19,895
 Case 5: Long-Term Installment Note Receivable
(Stated Interest Rate is Higher than the Market
Rate of Interest)
• The entries relative to the note are:
2020
Dec. 31 Cash 256,000
Notes Receivable 200,000
Interest Revenue 42,116
Premium on Notes Receivable 13,884

2021
Dec. 31 Cash 228,000
Notes Receivable 200,000
Interest Revenue 20,725
Premium on Notes Receivable 7,275
 Case 5: Long-Term Installment Note Receivable
(Stated Interest Rate is Higher than the Market
Rate of Interest)

Amortization Table
Date Effective Nominal Premium Principal Note
interest Interest Amortization Payment Carrying
Value
01/01/19 641,054
12/31/19 64,105 84,000 19,895 200,000 421,159
12/31/20 42,116 56,000 13,884 200,000 207,275
12/31/21 20,725 28,000 7,275* 200,000 -

*Adjusted; difference is due to rounding off.

 Measurement subsequent to initial
recognition
• Notes and accounts receivable meet the requirements in
IFRS 9 Financial Instruments for the financial assets to
be classified as subsequently measured at amortized
cost. The two conditions are:
(a)The financial asset is held within the enterprise’s
business model whose objective is to hold assets in order
to collect contractual cash flows; and
(b)The contractual terms of the financial asset give rise on
specified dates to cash flows that are solely payments of
principal and interest (SPPI).
 Impairment of Receivables/
Estimating uncollectible receivables
Methods

Direct Write-Off Allowance

1 Not based on the matching Based on the matching
principle principle
2 Accounts are written off Estimated bad debts are
when determined uncollectible matched against revenue
3 Appropriate only if Must be followed if
amounts are not material amounts are material
 Estimating uncollectible accounts:
the Direct write-off method
• The direct write-off method recognizes
impairment loss or bad debts expense by
crediting directly the receivables account. This
is the only method allowed for income tax
purposes. The entry to recognize is:
Bad Debts Expense xx
Accounts Receivable xx
(or Notes Receivable)
 Estimating uncollectible accounts:
the Direct write-off method
• To record recovery, the entries are:
Accounts Receivable xx
Bad Debts Recovery xx
Cash xx
Accounts Receivable xx
 Estimating uncollectible accounts:
the Allowance method
• The allowance method requires the use of
valuation account for the receivables. This
method recognizes the impairment of
receivables by a charge to Bad Debts Expense
or Impairment Loss and a credit to the
allowance account. The entry to recognize is:
Bad Debts Expense xx
Allowance for Bad Debts xx
 Estimating uncollectible accounts:
the Allowance method
• When an account considered to be definitely
uncollectible is written off, the entry is
Allowance for Bad Debts xx
Accounts Receivable xx
• When an account previously written off is recovered, the
entries are
Accounts Receivable xx
Allowance for Bad Debts xx
Cash xx
Accounts Receivable xx
 Allowance method: Example

Assume that on April 1, 2019, ABC Manufacturing wrote

off an account of its customer, Mr. X in the amount of
P25,000 which has been overdue for several years now.
Subsequently, on July 5, 2019, ABC recovered and
collected the account of Mr. X. Journal entries for the write
off and subsequent recovery of the account are as follows:
2019
Apr. 1 Allowance for Bad Debts 25,000
Accounts Receivable – Mr. X 25,000
 Allowance method: Example

Journal entries for the write off and subsequent recovery of

the account are as follows:
2019
July 5 Accounts Receivable – Mr. X 25,000
Allowance for Bad Debts 25,000

5 Cash 25,000
Accounts Receivable – Mr. X 25,000
 Receivable Financing/
Disposition of Accounts and Notes Receivable
• The holder of accounts or notes receivable may
transfer them for cash.
• The transfer may be:
• secured borrowing or
• a sale of receivables
• Holder retains ownership of receivables in a
secured borrowing transaction.
• Holder transfers ownership of receivables in a sale
(retaining risks of collection)
 Receivable Financing

I. Secured Borrowing
a. Pledging
b. Assignment
c. Discounting of notes receivable with
recourse
II. Sale of Receivables
a. Discounting of notes receivable without
recourse
b. Factoring
 Transfer of Receivables:
borrowing vs. sale treatment
Conditions
1. Are transferred assets isolated
from transferor? and
Yes Sale
2. Does transferee have right to
pledge or sell assets? and
3. Has transferor divested itself of
control through repurchase No Borrowing
agreement?
Accounting for Transfers of Receivables
Transfer of receivables
Substantial transfer of risks and rewards?
YES NO

Derecognize the asset Retain the asset in the books

and record gain or loss and record the transaction
as a secured borrowing
 Secured Borrowing (highlights)
• Transferor records a finance charge.
• Transferor collects accounts receivable.
• Transferor records sales returns and sales
discounts.
• Transferor absorbs bad debts expense.
• Transferor records interest expense on notes
payable.
• Transferor pays on the note periodically from
collections.
 Secured Borrowing : Pledging
• Pledging refers to the use of receivables as
collateral for a loan. Otherwise known as general
assignment of accounts receivable.
• The accounts receivable balance is not, in any
manner, affected by the pledging.
 Pledging : Example
• Assume that on December 1, 2019, ABC Manufacturing
borrowed P500,000 from Manila Bank by issuing a one-
year note, which the bank discounted at 12%. Accounts
receivable totaling P1,200,000 are pledged to secure the
loan. Entries relating to the notes payable, including
year-end adjustments follow:
2019
Dec. 1 Cash 440,000
Discount on Notes Payable 60,000
Notes Payable – Bank 500,000
31 Interest Expense 5,000
Discount on Notes Payable 5,000
 Secured Borrowing : Assignment
• Assignment of accounts receivable is a more
formal borrowing arrangement in which specific
receivables are identified and used as security for
a loan. This is also known as specific assignment
of accounts receivable.
• The assignor retains the credit risks and continues
collection efforts.
 Assignment : Example
• ABC Manufacturing entered into an assignment
arrangement with Easy Finance Company whereby the
assignee would advance 80% of all accounts assigned
less a P2,000 service charge. During the year, P400,000
of accounts receivable were assigned; P250,000
collections were made on outstanding accounts which
were remitted to Easy Finance Company to apply first to
P3,500 interest and the balance to principal. Sales
returns and allowances on assigned accounts amounted
to P5,000.
 Assignment : Example
The journal entries to record the foregoing are as follows:
Accounts Receivable Assigned 400,000
Accounts Receivable 400,000

Cash 318,000
Finance Charges 2,000
Notes Payable – Finance Company 320,000

Cash 250,000
Accounts Receivable Assigned 250,000
 Assignment : Example
The journal entries to record the foregoing are as follows:
Notes Payable – Finance Company 246,500
Interest Expense 3,500
Cash 250,000

Sales Returns and Allowances 5,000

Accounts Receivable Assigned 5,000
 Assignment : Example
Assume that during the year 2020, P100,000 of the
assigned accounts were collected and that the balance due
and additional interest charge of P395 were remitted to the
finance company. The entries are:
Cash 100,000
Accounts Receivable Assigned 100,000

Notes Payable – Finance Company 73,500

Interest Expense 935
Cash 74,435
 Assignment : Example
After the final settlement with the finance company, the
balance of Accounts Receivable Assigned shall be reverted
to Accounts Receivable, with the following entry:

Accounts Receivable 45,000

Accounts Receivable Assigned 45,000
Secured Borrowing : Discounting of
Notes Receivable with Recourse
• By discounting a note receivable, an entity is
endorsing a promissory note to a bank or a
financing company, the latter advancing the
maturity value of the note less a charge called
discount.
• A company that discounts a customer’s note
receivable at the bank is in essence selling the note
to the bank with recourse obligation.
Discounting of notes receivable with
recourse : Example
Assume that on December 21, 2019, ABC Manufacturing
discounted the 60-day, 15%, P800,000 note from Customer
F at National Bank. The note is dated December 1 and the
bank’s discount rate is 18%. The entry is:
2019
Dec. 21 Cash 803,600
Liability on Discounted Notes 803,600
31 Interest Receivable 10,000
Interest Revenue 10,000
31 Interest Expense 4,100
Interest Payable 4,100
Discounting of notes receivable with
recourse : Example
Assuming that the note matures without notice of protest, ABC
Manufacturing shall cancel both the assets and the liability in its
books, with the following entry:
2020
Jan. 30 Liability on Discounted Notes 803,600
Interest Expense 12,300 Interest Payable*
4,100
Interest Receivable 10,000
Interest Revenue 10,000
Notes Receivable 800,000
*assumes that no reversing entry was made on January 1, 2020.
Discounting of notes receivable with
recourse : Example
When Customer F fails to pay on maturity date, ABC
Manufacturing will be obliged to pay the maturity value of the
note plus protest fees and other bank charges. Assuming the
bank charged protest fees and other charges of P5,000, ABC
will prepare the following entries:
2020
Jan. 30 Liability on Discounted Notes 803,600
Interest Expense 12,300 Interest Payable
4,100
Interest Receivable 10,000
Interest Revenue 10,000
Notes Receivable 800,000
Discounting of notes receivable with
recourse : Example
2020
Jan. 30 Accounts Receivable 825,000
Cash 825,000
Payment of the maturity value and the
protest fees to the bank
 Sale of Receivables
• Transferor transfers ownership of receivables to
factor.
• Factor records the (transferred) accounts as assets
in its books.
• Transferor records any amount retained by
transferee as “due from factor”
• Transferor records loss on sale of receivables
• Transferor records any component liability (when
appropriate)
 Sale of Receivables: Discounting of
Notes Receivable without Recourse
• If discounting of a note is on a without recourse
basis, the endorser is relieved of the responsibility
for the note that is dishonored on maturity.
• The discounting is, therefore, treated as a sale and
the note would qualify for derecognition.
• In such a case, no liability on discounted note is
recorded by the seller
 Discounting of Notes Receivable
without Recourse: Example
• The entries, in the previous example would be
modified as follows:
2019
Dec. 21 Interest Receivable 6,667
Interest Revenue 6,667

Dec. 21 Cash 803,600

Loss on Sale of Notes Receivable 3,067
Notes Receivable 800,000
Interest Receivable 6,667
 Sale of Receivables: Factoring
• Factoring is the transfer of receivables without
recourse, and is, therefore, an outright sale of
receivables.
• The factor company (finance company) assumes the
risk of collection and generally handles the billing
and collection function.
• If the factor retains a portion of the purchase price
to cover probable sales discounts, returns, and
allowances (called factor’s holdback) such amount
is charged to a “Receivable from Factor” account.
 Factoring: Example
Assume that during December, ABC Manufacturing sold
goods priced at P200,000 with credit terms of n/30. These
were immediately factored to a finance company. The
factory fee was 10% of the receivables purchased. The
factor’s holdback is 5% of the purchase price. The entry to
record the factoring is as follows:
Cash 171,000
Loss from Factoring 20,000
Receivable from Factor 9,000
Accounts Receivable 200,000
 Factoring: Example
When customers whose accounts were factored make
returns, the transaction is recorded as
Sales Returns and Allowances xx
Receivable from Factor xx

When all the receivables factored are collected and no

returns, discounts or allowances are allowed, final
settlement with the factor is recorded as
Cash 9,000
Receivable from Factor 9,000
Questions?

Thank you!