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    Notes Receivable Discounting

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    Kristia Anagap
    - Notes receivable represent claims from sales on credit that are supported by a promise to pay, usually in the form of a negotiable promissory note. Notes receivable discounting involves transferring a note to a third party like a bank before the note's maturity date. - Discounting can be done with or without recourse. Without recourse means the transferor has no liability if the note is unpaid at maturity. With recourse means the transferor remains contingently liable. - Key terms include maturity value, discount, discount rate, discount period, and net proceeds which is the cash received from discounting the note. Journal entries are made to record discounting and subsequent payments or non-payments.

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    Notes Receivable Discounting

    Uploaded by

    Kristia Anagap
    153 views33 pages
    - Notes receivable represent claims from sales on credit that are supported by a promise to pay, usually in the form of a negotiable promissory note. Notes receivable discounting involves transferring a note to a third party like a bank before the note's maturity date. - Discounting can be done with or without recourse. Without recourse means the transferor has no liability if the note is unpaid at maturity. With recourse means the transferor remains contingently liable. - Key terms include maturity value, discount, discount rate, discount period, and net proceeds which is the cash received from discounting the note. Journal entries are made to record discounting and subsequent payments or non-payments.

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    all about accounting.

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    - Notes receivable represent claims from sales on credit that are supported by a promise to pay, usually in the form of a negotiable promissory note. Notes receivable discounting involves transferring a note to a third party like a bank before the note's maturity date. - Discounting can be done with or without recourse. Without recourse means the transferor has no liability if the note is unpaid at maturity. With recourse means the transferor remains contingently liable. - Key terms include maturity value, discount, discount rate, discount period, and net proceeds which is the cash received from discounting the note. Journal entries are made to record discounting and subsequent payments or non-payments.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    153 views33 pages

    Notes Receivable Discounting

    Uploaded by

    Kristia Anagap
    - Notes receivable represent claims from sales on credit that are supported by a promise to pay, usually in the form of a negotiable promissory note. Notes receivable discounting involves transferring a note to a third party like a bank before the note's maturity date. - Discounting can be done with or without recourse. Without recourse means the transferor has no liability if the note is unpaid at maturity. With recourse means the transferor remains contingently liable. - Key terms include maturity value, discount, discount rate, discount period, and net proceeds which is the cash received from discounting the note. Journal entries are made to record discounting and subsequent payments or non-payments.

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    of 33

    –Notes Receivable

    Discounting
    –NOTES RECEIVABLE
    – Claims supported by a formal
    promise to pay usually in the
    form of notes.
    – Represents only claims arising
    from sale of merchandise or
    service in the ordinary course of
    business.

    – NEGOTIABLE PROMISSORY NOTE


    – Written contract in which one
    person, known as the maker,
    promises to pay another person,
    known as the payee, a definite
    sum of money.

    – NOTES RECEIVABLE DISCOUNTING


    – It is a transfer or endorsement of
    promissory note by the payee in
    favor of another party, usually a
    bank.
    – BEFORE MATURITY
    – NR DISCOUNTING

    –NOTES RECEIVABLE
    DISCOUNTING
    WITHOUT RECOURSE
    If the notes were discounted and
    were dishonored at maturity, the
    transferor recognizes no amount of
    liability and pays nothing to financial
    institution.
    The sale is absolute and no contingent
    liability.

    – JOURNAL ENTRY
    WITHOUT RECOURSE
    Cash xxx
    Loss on note receivable discounting
    xxx
    Note receivable xxx
    Interest income xxx
    –NOTES RECEIVABLE
    DISCOUNTING

    WITH RECOURSE
    The transferor recognizes an
    accounting liability and pays the
    financial institution the maturity
    value plus any amount charged
    as protest fee.
    When silent, it is assumed to
    be with recourse.
    – JOURNAL ENTRY
    WITH RECOURSE (Conditional Sale)
    Cash xxx
    Loss on note receivable discounting
    xxx
    Note receivable discounted
    xxx
    Interest income xxx

    – JOURNAL ENTRY
    SUBSEQUENT ENTRY (CONDITIONAL SALE)

    Payment was made by the maker at


    maturity date No payment was
    made by the maker
    Note receivable discounted xxx
    Accts. Receivable xxx
    Note receivable xxx
    Cash xxx

    Note receivable
    discounted xxx
    Note receivable xxx

    – JOURNAL ENTRY
    WITH RECOURSE (SECURED BORROWING)
    Cash xxx
    Interest Expense xxx
    Liab. for note receivable discounted xxx
    Interest income xxx
    – TERMS TO REMEMBER
    • Net proceeds – refer to the
    discounted value of the
    note received by the
    endorser from the
    endorsee.
    Net proceeds =
    maturity value – discount

    • Maturity value – amount


    due on the note at the
    date of maturity.
    Maturity value =
    principal + interest

    • Maturity date – the date on which the


    note should be paid.
    • Principal – amount appearing on the
    face of the note. Also referred
    to as face value.
    • Interest – amount of interest for the
    full term of the note
    Interest = principal x rate x time

    • Interest rate– rate appearing on the face of


    the note.
    • Time – period within which interest shall
    accrue. For discounting purposes, it is
    the period from the date of note to
    maturity date. In other words, the
    term “time” is the entire period or full term
    of the note.

    • Discount – amount of interest deducted by


    the bank in advance.
    Discount = maturity value x discount rate x
    discount period
    • Discount rate – rate used by the bank in
    computing the discount. If no discount rate is
    given, the interest rate is safely assumed as
    the discount rate.
    • Discount period – period of time from the
    date of discounting to maturity date. It is the
    unexpired term of the note.
    Discount period = term of the note – the
    expired portion up to the date of
    discounting.

    – Illustration:
    Moxie Company received from a
    customer a one-year P500,000 note,
    bearing annual interest of 8%. After
    holding the note for six months, Moxie
    discounted the note without recourse at
    EZ bank at an effective interest rate of
    10%. What amount of cash did Moxie
    Co. receive from the bank?

    WITHOUT RECOURSE
    Cash 513,000
    Loss on note receivable discounting
    7,000 Note receivable
    500,000
    Interest income
    20,000

    WITH RECOURSE (dishonored by maker)


    – Cash 513,000
    Loss on note receivable discounting
    7,000 Note receivable
    discounted 500,000
    Interest income
    20,000
    – Accounts Receivable 500,000
    Cash
    500,000
    – Notes Receivable Discounted
    500,000
    Notes Receivable 500,000

    – QUIZ
    1. If the notes were discounted and
    were dishonored at maturity, the
    transferor recognizes no amount of
    liability and pays nothing to financial
    institution.
    • It is a transfer or endorsement of
    promissory note by the payee in favor
    of another party, usually a bank.
    • The unexpired term of the note.
    • The discounted value of the note
    received from the endorsee.
    5. An amount of interest deducted by
    the bank in advance.
    • Morni
    ngsta
    r
    Comp
    any
    accep
    ted
    from
    a
    custo
    mer
    P1,00
    0,000
    face
    amou
    nt, 6-
    mont
    h, 8%
    note
    dated
    April
    15,
    2016.
    On
    the
    same
    date,
    the
    entity
    disco
    unted
    the
    note
    witho
    ut
    recou
    rse at
    10%
    disco
    unt
    rate.
    What
    is the
    loss
    on
    note
    receiv
    able
    disco
    untin
    g?
    2. A note with a principal
    amount of P500,000 was
    discounted on November 30,
    2015 at a bank for a discount
    rate of 15% and proceeds
    worth P521,406.25. Maturing
    on August 31, 2016, this note
    was issued on March 1, 2015.
    How much is the interest rate
    of the note?
    3. What is the discount charged by
    the bank on a P27,000 , 12%, 90-
    day note receivable dated March 5,
    that was discounted at 15% on April
    24?
    4. Tony Stark discounted his 120-day, 8
    %, P750,000 note to the bank for 15%
    discount after holding it for 40 days. How
    much cash did Tony received from
    discounting the note? (5.) How much is
    the loss from discounting the note?

    –SOLUTIONS
    – Morningstar Company accepted from a
    customer P1,000,000 face amount, 6-
    month, 8% note dated April 15, 2016. On
    the same date, the entity discounted the
    note without recourse at 10% discount rate.
    What is the loss on note receivable
    discounting?
    MV = 1M + (1M* 8% * 6/12) = 1,040,000
    Bank Discount = 1,040,000 * 10% * 6/12 = 52,000
    Net proceeds = 1,040,000 – 52,000 = 988,000

    Net proceeds = 988,000


    Less: CA = 1,000,000 (bec discounted on the same day)
    Loss: (12,000)
    – A note with a principal amount of P500,000 was
    discounted on November 30, 2015 at a bank for a
    discount rate of 15% and proceeds worth P521,406.25.
    Maturing on August 31, 2016, this note was issued on
    March 1, 2015. How much is the interest rate of the
    note?
    –Proceeds = MV – Discount
    – = MV – (MV x DR x DP)

    –521,406.25 = MV x (1 – DR xDP)
    –521,406.25 = MV x (1 – 0.15x9/12)
    –521,406.25 = MV x 0.8875
    – MV = 587,500
    – What is the discount charged by the
    bank on a P27,000 , 12%, 90-day note
    receivable dated March 5, that was
    discounted at 15% on April 24?
    MV = 27,000 + (27,000 x 12% x 90/360)
    = 27,000 + 810
    = 27,810

    Discount Period = Term of Note – Expired Portion of Note


    = 90 – 50
    = 40 days
    Discount = MV x DR x DP
    =27,810 x 15% x 40/360
    = 463.5
    – 4. Tony Stark discounted his 120-day, 8 %,
    P750,000 note to the bank for 15% discount
    after holding it for 40 days. How much cash did
    Tony received from discounting the note? (5.)
    How much is the loss from discounting the
    note?
    MV = Principal + Interest
    = 750,000 + (750,000 x 8% x 120/360)
    = 750,000 + 20,000
    = 770,000
    Discount = MV x Disc Rate x Disc Period
    = 770,000 x 15% x 80/360
    = 25,666.67
    Proceeds = MV – Discount
    = 770,000 – 25,666.67
    = 744,333.33

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