Accountancy Review Center (ARC)

of the Philippines Inc.

One Dream, One Team

FINANCIAL ACCOUNTING AND REPORTING CABARLES/SAGOT/CAYETANO

FAR 207 – Receivable Financing October 2021 CPALE REVIEW

LEARNING OBJECTIVES:
1. Pledging of receivable
2. Net proceeds from assignment
3. Balance of accounts receivable – assigned
4. Balance of loans payable – from assignment
5. Equity portion of accounts receivable – assigned
6. Loss from casual factoring
7. Net proceeds from factoring with continuing agreement
8. Net proceeds from discounting
9. Gain or loss (or interest expense) from discounting
10. Receivable from dishonored notes

REVIEW NOTES:

Receivable Financing: Is the financial flexibility or capability of an entity to raise money out of its receivable by
either selling the receivable or using the receivable as a collateral from a loan. Form of Receivable Financing:

Using as collateral Sale of receivable

1. Pledge 1. Factoring
2. Assignment 2. Discounting

1. Pledge (a.k.a. hypothecation): Allows you to go to a lender and receive a loan using your accounts receivable
as collateral. Pledge is also known as general assignment of receivable, because the pledged account is not
separated to other accounts receivable.

With respect to the pledged account, no entry would be necessary. The pledged account receivable will be
retained in the company’s balance sheet. It is sufficient that disclosure thereof is made in a note to financial
statement.

2. Assignment: The borrower (the company) transfers right in specific accounts receivable to a lender (the
bank or financial institution) in consideration for a loan. Assignment is also known as specific assignment,
because the account assigned is separated from other receivable.

Usually, loan received from the bank is only a portion (example 75%, 80% or 90%) of accounts receivable
assigned, because the assigned account may not be fully realized due to sales discount, sales return and
default of customers.

The lender usually charge interest to the borrower and normally paid once a remittance is made.
Remittance is not applied to interest unless otherwise stated in the problem.

Pledge Assignment
Any of the receivable maybe taken by the lender Only specific receivable maybe taken by the
upon non-payment of the loan lender upon non-payment of the loan

Collection of any of the receivable may or may Collection of accounts receivable-assigned is

not be remitted to the lender required to be remitted to the lender

Receivable pledge will be retained in the Receivable pledge will be retained in the
company’s balance sheet company’s balance sheet

lender has limited rights to inspect the lender will make an investigation of the specific
borrower’s records to achieve assurance that receivables that are being proposed for
the receivables do exist; assignment and will approve those that are
deemed worthy to be held as collateral security.

Page 1 of 12
Two types of assignment:

1. Non-notification basis – the customer whose account is assigned is not notified that his account was
assigned. Therefore, the customer will still pay to the company and the company will remit the
collection to the bank.

2. Notification basis – the customer is notified that his account is assigned to the bank. In this case, the
customer will pay directly to the bank.

Regardless of the type of assignment, the balance of accounts receivable – assigned, loans payable and
equity portion is not affected.

Journal Entries:
To separate the accounts receivable assigned:
Dr. Accounts receivable – assigned XX
Cr. Accounts receivable XX

To record the receipt of loan

Dr. Cash XX
Cr. Loans payable XX

To record the sales return from the customer whose account is assigned:

Dr. Sales return XX

Cr. Account receivable – assigned XX

To record the write of accounts receivable – assigned:

Dr. Allowance for bad debt XX

Cr. Account receivable – assigned XX

For non-notification:
To record the collection from customer:

Dr. Cash XX
Dr. Sales discount (if any) XX
Cr. Accounts receivable – assigned XX

To record the remittance to the bank and payment of interest:

Dr. Loans payable XX

Dr. Interest expense XX
Cr. Cash XX

For notification:
To record the collection and direct remittance to the bank and payment of interest:

Dr. Loans payable XX

Dr. Sales discount XX
Dr. Interest expense XX
Cr. Accounts receivable - assigned XX

Page 2 of 12
 COMPUTATIONS:

a. Net proceeds from assignment:

Face amount of AR-assigned P XX

Times: Percentage loaned (e.g., 80%) x%
Less: Service charged ( XX)
Net proceeds P XX

b. Accounts receivable – assigned balance:

Face amount of AR-assigned P XX

Less: Collection ( XX)
Less: Sales return ( XX)
Less: Sales discount ( XX)
Less: Write off ( XX)
AR – assigned balance P XX

c. Loans payable – balance:

Amount of loan P XX
Less: Remittance made ( XX)
Loans payable – balance P XX

d. Equity portion of AR – assigned:

AR – assigned balance (see No. 3) P XX

Less: Loans payable balance (see No. 4) ( XX)
Equity portion – Disclose in notes P XX

3. 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.

Factoring differs from an assignment in that an entity actually transfers ownership of the accounts receivable
factored. Thus, account factored should be removed from the company’s balance sheet.

Two types of factoring:

a. Casual factoring – factoring is unusual in the company’s operation. The company sells it receivable
below the face amount. Normally in casual factoring, no service charge and interest are charged since
the bank already bought the accounts receivable at a discounted price.

COMPUTATIONS – Casual Factoring:

I. Gain or loss on factoring:

Selling price of accounts factored P XX

Less: NRV of accounts receivable factor ( XX)
Loss on sale P XX
Add: Fair value of recourse obligation(*) XX
Total loss on factoring P XX

II. Net proceeds:

Selling price of accounts factored P XX

Less: Factor’s holdback ( XX)
Net proceeds P XX

Page 3 of 12
 b. Factoring as a continuing agreement: Factoring is part of the company’s regular operation. In case type
of factoring, the factored account is usually sold at face amount but service charge (a.k.a. commission
or assessment fee), interest is charged by the bank.

The bank may also request for factor’s holdback in case the account is not fully realized due to sales
returns and discount. Factor’s holdback is recognized as receivable.

If absence of information, the selling price is equal to the face amount of account factored.

COMPUTATIONS – Factoring as continuing agreement:

I. Net proceeds from factoring:

Face amount of accounts factored P XX

Less: Service fee, commission, assessment ( XX)
Less: Interest charge (use 365 days) ( XX)
Less: Factor’s holdback ( XX)
Net proceeds P XX

II. Loss on factoring:

Service fee, commission, assessment P XX

Add: Interest charge (use 365 days) XX
Add: Fair value of recourse obligation (*) XX
Total loss on factoring P XX

Fair value of course obligation (*):

§ If during the year, the accounts factored is not yet collected by the bank – fair value of recourse
obligation should be included in the total loss on factoring.

§ If the account factored is collected during the year – the amount should be excluded.

§ If the problem is silent, it is assumed not collected.

4. Discounting: Is a form of receivable financing where the company sold notes receivable to a bank or financial
institution. The company will transfer the promissory note to the bank in exchange for cash equal to the
maturity value less discount charge by the bank.

On the maturity date, the maker of the note (the customer) will pay directly to the bank (equal to the “maturity
value”). In this disposition transaction, the company will recognize the gain or loss from sale of its asset.

If the discounting is with recourse – the company will be liable to the bank if the maker dishonors the note.

If the discounting is without recourse – the company avoids any future liability to the bank even if the maker
refuses to pay the bank on maturity date.

If the problem is silent, it is assumed that discounting is with recourse.

COMPUTATIONS:

a. Interest for the whole term of NR:

Face amount of NR P XX
Times: Nominal rate XX
Times: Term of the note over 12 mos. X/12
Interest for whole term P XX

b. Maturity value:

Face amount of NR P XX
Add: Interest for the whole term (see no. 1) XX
Maturity value P XX

Page 4 of 12
 c. Discount charge by the bank:

Maturity value (see no. 2) P XX

Times: Discount rate XX
Times: Remaining term over 12 mos. X/12
Discount charge P XX

d. Net proceeds:

Maturity value P XX
Times: Discount charge by the bank (see no. 3) ( XX)
Net proceeds P XX

e. Total carrying amount of receivable sold:

Face amount of NR P XX
Times: Nominal rate XX
Times: Mos. the company hold the NR over 12 X/12
Interest receivable sold P XX
Add: Face amount of NR XX
Total carrying amount of receivable P XX

f. Gain or loss on discounting:

Net proceeds (see no. 4) P XX

Less: Total carrying amount of note (see no. 5) ( XX)
Gain or loss on discounting P XX

Types of Discounting:

1. Without recourse – the company will derecognize the NR from its record. The company is free from
any liability in case the note is dishonored. Journal entry:

Dr. Cash (net proceeds, see no. 1) XX

Dr. Loss on discounting (see no. 6) XX
Cr. Notes receivable (face amount) XX
Cr. Interest receivable (IR sold, see no. 5) XX

2. With recourse conditional sale – the transaction recognized as sale with the condition that the note
will be collected successfully otherwise it will be recognized as borrowings. Contingent liability is
recognized in the notes to financial statement.

Dr. Cash (net proceeds, see no. 1) XX

Dr. Loss on discounting (see no. 6) XX
Cr. Notes receivable – discounted (face) XX
Cr. Interest receivable (IR sold, see no. 5) XX

Notes receivable – discounted account is deducted from the total notes receivable when preparing
the financial statement. In other words, it is a contra-asset account.

3. With recourse secured borrowing – In this type of discounting, the note is not actually sold but instead
it is used as a collateral for a bank loan. This there is no disposition of asset, no gain or loss to be
recognized, instead it will be recorded as interest expense.

Dr. Cash (net proceeds, see no. 1) XX

Dr. Interest expense (see no. 6) XX
Cr. Loans payable – (face) XX
Cr. Interest receivable (IR sold, see no. 5) XX

Notes Dishonored:

Page 5 of 12
If the discounting is with recourse – conditional sale and the note is dishonored, the company is required
to pay the bank the maturity value of the note plus protest fee.

The company will go after the maker/customer and may collect the amount paid to the bank plus additional
interest for the period of delay.

COMPUTATION:

1. Total payment to the bank by the company:

Maturity value XX
Add: Protest fee XX
Total payment to the bank XX

2. Amount collectible to the maker/customer:

Total payment to the bank (see no. 1) XX

Times: Nominal interest rate x%
Times: Mos. from maturity date to collect. date X/12
Additional interest XX
Add: Total payment to the bank XX
Amount collectible to the maker/customer XX

Page 6 of 12
 DISCUSSION QUESTIONS

1. How to generate cash from the receivables without collecting them?

a. Sell the receivables.
b. Use the receivables as collateral.
c. Either a or b.
d. Neither a nor b.

2. Why would a company sell receivables to another company?

a. To improve the quality of its credit granting process.
b. To limit its legal liability.
c. To comply with customer agreements.
d. To accelerate access to amounts collected.

3. If financial assets are exchanged for cash or other consideration, but the transfer does not meet the
criteria for a sale, the transferor and the transferee should account for the transaction as a

Secured borrowing Pledge of collateral

a. Yes Yes
b. Yes No
c. No Yes
d. No No

4. All but one of the following are required before a transfer of receivables can be recorded as a sale.
a. The transferred receivables are beyond the reach of the transferor and its creditors.
b. The transferor has not kept effective control over the transferred receivables through a repurchase
agreement.
c. The transferor maintains continuing involvement.
d. The transferee can pledge or sell the transferred receivables.

5. Accounts receivable hypothecated against borrowing should be

a. Disclosed in the notes
b. Excluded from the total receivable, with disclosure
c. Excluded from the total receivables, with no disclosure
d. Excluded from the total receivables and a gain or loss is recognized

6. Which of the following is not a valid comparison between pledging and assignment of accounts
receivable?
a. Under pledge, all accounts receivables are set as collateral security for borrowings; under
assignment only specific receivables are set as collateral security.
b. In pledging, the lender has limited rights to inspect the borrower’s records to achieve assurance
that the receivables do exist; in assignment the lender will make an investigation of the specific
receivables that are being proposed for assignment and will approve those that are deemed
worthy to be held as collateral security.
c. No journal entry is made for the pledged receivables; an entry is made for the assigned
receivables.
d. Pledged accounts receivable remain the assets of the borrower and continue to be presented in
its financial statements, with appropriate disclosure of the pledge transaction; assigned
receivables are assets of the lender/assignee but the assignment is disclosed in the financial
statements of the borrower/assignor.

7. Cadiz, Inc., assigned P10,000 to a finance company, receiving an advance of 90% less a service
charge of P400. Later P2,000 of these receivables were collected and remitted to the finance company
with an additional P200 of interest. Given this information, which entry would not be made?
a. Cash 8,600
Assignment Service Charge expense 400
Accounts Receivable 9,000
b. Note Payable 2,000
Interest Expense 200
Cash 2,200
c. Cash 2,000
Accounts receivable Assigned 2,000
d. Accounts Receivable Assigned 10,000
Accounts Receivable 10,000

Page 7 of 12
Numbers 8-10
On December 1, 2025, Camille company assigned on a non-notification basis accounts receivable of
P5,000,000 to a bank in consideration for a loan of 80% of the account less a 5% service fee on the
account assigned. The entity signed a note for the bank loan.

On December 31, 2025, the entity collected assigned accounts of P2,000,000 less discount of P200,000.
The entity remitted the collections to the bank in partial payment for the loan. The bank applied first the
collection to the interest and the balance to the principal.

The agreed interest is 1% per month on the loan balance. The entity accepted sales returns of P100,000
on the assigned accounts and wrote off assigned accounts totaling P300,000.

8. What is the balance of accounts receivable assigned on December 31, 2025?

a. 3,000,000 c. 2,400,000
b. 2,600,000 d. 2,900,000

9. What is the carrying amount of the note payable on December 31, 2025?
a. 2,240,000 c. 4,000,000
b. 2,000,000 d. 2,200,000

10. What is the equity of the assignor in assigned accounts on December 31, 2025?
a. 2,600,000 c. 360,000
b. 2,240,000 d. 0

11. Which of the following is true when accounts receivable are factored without recourse?
a. The transaction may be accounted for either as a secured borrowing or as a sale.
b. The receivables are used as collateral for a promissory note issued to the factor.
c. The factor assumes the risk of collectibility and absorbs any credit losses in collecting the
accounts receivable.
d. The financing cost should be recognized ratably over the collection period.

12. Factoring of receivable is usually done on a

a. With recourse, notification basis
b. Without recourse, notification basis
c. With recourse, non-notification basis
d. Without recourse, non-notification basis

13. It is a predetermined amount withheld by a factor as a protection against customer returns, allowances
and other special adjustments
a. Equity in assigned accounts
b. Service charge
c. Factor’s holdback
d. Loss on factoring

14. Otter Company sold receivables with recourse for P530,000. Otter received P500,000 cash
immediately from the factor. The remaining P30,000 will be received once the factor verifies that none
of the receivables is in dispute. Control was surrendered by Otter.

The receivables had a face amount of P600,000; Otter had previously established an Allowance for
Bad Debts of P25,000 in connection with these receivables.

The fair value of the recourse obligation is P13,000.

The loss on factoring to be recognized by Otter Company is

a. 88,000 c. 45,000
b. 58,000 d. 83,000

Page 8 of 12
Numbers 15-17
Thunder Company factored P5,000,000 of accounts receivable. Control was surrendered by Thunder.
The transaction met the criteria to be accounted for as sale but subject to recourse for nonpayment. The
fair value of the recourse obligation is P250,000.

The finance company assessed a fee of 6% and retained a holdback equal to 10% of the accounts
receivable. In addition, the finance company charged 12% interest computed on a weighted average time
to maturity of the accounts receivable for 30 days.

15. What amount was initially received from the factoring of accounts receivable?
a. 4,500,000 c. 4,700,685
b. 4,200,000 d. 4,150,685

16. What total amount should be recognized initially as loss on factoring?

a. 349,315 c. 755,000
b. 849,315 d. 599,315

17. What amount should be reported as loss on factoring assuming the accounts are fully collected by
the factor?
a. 349,315 c. 500,000
b. 300,000 d. 299,315

18. If a note receivable is discounted without recourse

a. Note receivable should be credited
b. Liability for note receivable discounted should be credited
c. The transaction should be accounted for as a secured borrowing as opposed to a sale
d. The contingent liability may be disclosed in either a contra receivable or a note to the FS

Numbers 19-21
On July 31, 2020, Clear Company discounted at the bank a customer’s P600,000 interest-bearing note,
6-month, 10% note receivable dated May 31, 2020. The bank discounted the note at 12%.

19. The net proceeds from this discounted note is

a. 564,000 c. 604,800
b. 576,000 d. 617,400

20. How much gain or loss should be recognized if the discounting is without recourse?
a. 25,200 c. 22,500
b. 5,200 d. 0

21. How much gain or loss should be recognized if the discounting is with recourse?

Conditional Secured Borrowing

Sale
a. 25,200 25,200
b. 25,200 5,200
c. 0 5,200
d. 5,200 0

22. A loss on discounting of notes receivable is recorded when of discounting is made.

a. With recourse
b. Without recourse
c. A secured borrowing
d. With or without recourse

23. A note receivable bearing a reasonable interest rate is sold to a bank with recourse. The notes
receivable discounted account should be reported as a
a. Contra-asset account for the proceeds from the discounting transactions
b. Contra-asset account for the face amount of the note
c. Liability account for the proceeds from the discounting transactions
d. Liability account for the face amount of the note

Page 9 of 12
Numbers 24-26
On April 1, 2025, Vivien Company discounted with recourse a 9-month, 10% note dated January 1, 2025
with face of P6,000,000. The bank discount rate is 12%. The discounting transaction is accounted for as
a conditional sale with recognition of contingent liability.

On October 1, 2025, the maker dishonored the note receivable. The entity paid the bank the maturity value
of the note plus protest fee of P50,000.

On December 31, 2025, the entity collected the dishonored note in full plus 12% annual interest on the
total amount due.

24. What amount was received form the note discounting on April 1, 2025?
a. 6,063,000 c. 6,150,000
b. 6,450,000 d. 5,963,000

25. What amount should be recognized as loss on note discounting?

a. 450,000 c. 87,000
b. 387,000 d. 63,000

26. What is the total amount collected from the customer on December 31, 2025?
a. 6,450,000 c. 6,695,000
b. 6,500,000 d. 6,662,500

Page 10 of 12
 PRACTICE SET
Use the following information for the next four (4) questions:
On November 1, 2022, Shine Company assigned on a non-notification basis accounts receivable of P4,000,000
to a bank in consideration for a 24% interest bearing loan. The loan value was 80% of the receivables assigned
and a 5% service fee on the accounts assigned was charged by the finance company.

Shine Company collected assigned accounts of P1,500,000 and P1,000,000 on November and December,
respectively, and remitted the collections to the finance company on a monthly basis in partial payment for the
loan. The finance company applied first the collection to the interest and the balance to the principal.

1. The journal entry of Shine Company on November 1, 2022 does not include:
A. Debit Cash for P3,000,000
B. Credit Loans payable for P3,200,000
C. Debit Finance cost expense for P200,000
D. Credit Accounts receivable – assigned for P4,000,000

2. What is the balance of Accounts receivable – assigned as of December 31, 2022?

A. 700,000 C. 1,660,000
B. 1,500,000 D. 860,000

3. In its December 31, 2022 balance sheet, Shine Company should report note payable as a current liability at
A. 828,000 C. 798,000
B. 799,280 D. 860,000

4. What is the Equity portion of the Accounts receivable – assigned to be disclosed in the notes to financial
statement on December 31, 2022?
A. 672,000 C. 640,000
B. 832,000 D. 700,720

Use the following information for the next three (3) questions:
During 2022, Soksoksok Company sold accounts receivable with recourse with a face amount of P4,000,000. The
factor charged a service fee of 10% of the accounts factored and withheld 5% of the accounts factored as
protection against customer returns and other adjustments. The fair value of the recourse obligation is
determined to be P150,000. All of the accounts were fully collected by the factor.

On June 30, 2022, Soksoksok also discounted a customer’s note with recourse at a bank at a 10% discount rate.
The note is dated May 1, 2022, has a term of 90 days, a face value of P6,000,000 and an interest rate of 9%.
Soksoksok Company accounted this transaction as a secured borrowing. The customer paid the note to the bank
on maturity date.

5. What amount of loss on factoring should Soksoksok report for 2022?

A. 400,000 C. 750,000
B. 550,000 D. 600,000

6. What is the amount of proceeds from discounting the note on June 30, 2022?
A. 6,083,875 C. 6,000,000
B. 6,135,000 D. 6,103,875

7. What amount should be recognized as interest expense related to the note discounting?
A. 51,125 C. 6,125
B. 13,875 D. 0

Page 11 of 12
Use the following information for the next three (3) questions:
Cactus revealed the following transactions for the year 2021:

Cactus Company sold land with carrying amount of P1,500,000 in exchange for a 9-
January 1, 2022 month, 10% note with face value of P2,000,000. The 10% rate properly reflects the
time value of money for this type of note.

Cactus Company discounted the note with recourse. The bank discount rate is 12%.
On April 1, 2022
The discounting transaction is accounted for as a secured borrowing.

The maker dishonored the note receivable. Cactus Company paid the bank the
On October 1, 2022
maturity value of the note plus the protest fee of P10,000.

Cactus Company collected the dishonored note in full plus 10% annual interest on
On December 31, 2022
the total amount due.

8. What is the amount of proceeds received by Cactus Company from the discounting of note receivable?
A. 2,150,000 C. 2,050,000
B. 2,021,000 D. 1,921,000

9. What is the interest expense to be recognized by Cactus Company on April 1, 2022?

A. 50,000 C. 21,000
B. 29,000 D. 25,000

10. What is the amount collected by Cactus Company from the customer on December 31, 2022?
A. 2,150,000 C. 2,160,000
B. 2,224,800 D. 2,214,000

Page 12 of 12