RECEIVABLE FINANCING

Generating cash by selling the receivables or using it as a

collateral
 DERECOGNIZE OR NOT?
1. Secured borrowing (receivables as collateral) –
risk and rewards are not substantially transferred, thus retain the asset
(receivables)
a. Pledging
b. Assignment
c. Discounting of notes receivable with recourse

2. Sale of receivables –
risk and rewards are substantially transferred, thus gain or loss is recognized.
a. Discounting of notes receivable without recourse
b. Factoring
 QUESTION 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
 QUESTION 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 arrangements.
d. To accelerate access to amounts collected.
 QUESTION 3:
An entity shall derecognize a financial asset when, and only when?

a. The contractual rights to the cash flows from the financial

assets expire.
b. The entity transfers the financial asset and the transfer
qualifies for derecognition
c. Either a or b
d. Neither a nor b
 QUESTION 4:
An entity transfers a financial asset if, and only if, it

a. Transfers the contractual rights to receive cash flows of the

financial asset.
b. Retains the contractual rights to receive the cash flows of the
financial asset, but assumes a contractual obligation to pay
the cash flows to one or more recipients in an arrangement
that meets the “pass-through” conditions.
c. Either a or b
d. Neither a nor b
 QUESTION 5:
When an entity retains the contractual rights to receive the cash flows of a financial
asset (the original asset), but assumes a contractual obligation to pay those cash
flows to one or more entities (the eventual recipients), the entity treats the
transaction as a transfer of a financial asset if, and only if, certain conditions are met
including

a. The entity has no obligation to pay amounts to the eventual recipients unless
it collects equivalent amounts from the original asset.
b. The entity is prohibited by the terms of the transfer contract from selling or
pledging the original asset other than as security to the eventual recipients
for the obligation to pay them cash flows.
c. The entity has a obligation to remit any cash flows it collects on behalf of the
eventual recipients without material delay.
d. All of these.
 QUESTION 6:
How is transfer of risk and rewards evaluated?

a. By comparing the entity’s exposure, before and after

the transfer, with the variability in the amounts and
timing of the net cash flows of the transferred assets
b. By determining the transferee’s ability to sell the asset
c. Either a or b
d. Neither a nor b
 QUESTION 7:
An entity has not retained control of a transferred asset if

a. The transferee has the practical ability to sell the

transferred asset.
b. The transferee does not have the practical ability to sell the
transferred asset.
c. The entity retains an option to repurchase the transferred
asset and the transferee cannot readily obtain the transferred
asset in the market if the entity exercise its option.
d. A put option or guarantee constrains the transferee from
selling the transferred asset.
 QUESTION 8:
Silay Corporation sells a financial asset with a carrying amount of P
100,000 for P143,000. On that date of sale, the entity enters into an
agreement with the buyer to repurchase the asset in three
months for P 145,000. How much should be recognized as gain on
sale?

a. P 45,000 b. P 2,000 c. P 43,000 d. P 0

 See the previous questions and answes pertaining to the derecognition of receivables.
 QUESTION 9:
Which statement is incorrect regarding transfers that do not qualify for
derecognition because the entity has retained substantially all the risk and
rewards of ownership of the transferred asset?

a. The entity shall continue to recognize the transferred asset to the

extent of its continuing involvement.
b. The entity shall recognize a financial liability for the consideration received.
c. In subsequent periods, the entity shall recognize any income on the
transferred asset.
d. In subsequent periods, the entity shall recognize any expense incurred on
the financial liability.
 QUESTION 10:
Examples of when an entity has retained substantially all the risks
and rewards of ownership of transferred financial asset include

a. A sale and repurchase transaction where the repurchase price is a

fixed price or the sale price plus a lender’s return.
b. A sale of financial asset together with a total return swap that
transfers the market risk exposure back to the entity.
c. A sale of short-term receivables in which the entity guarantees to
compensate the transferee for credit losses that are likely to occur.
d. All of the above.
 QUESTION 11:
Avent Company sells a financial asset with a carrying amount of P
500,000 for P 600,000 and simultaneously enters into a total return
swap with the buyer under which the buyer will return any increases in
value to Avent and Avent will pay the buyer interest plus compensation
for any decreases in the value of the investment. Avent expects the fair
value of the financial asset to decrease by P 40,000. How much should
Avent recognize as gain on sale of financial asset?

a. P600,000 b. P 100,000 c. P 60,000 d. P 0

 See previous questions and answers pertaining to “risk and rewards”; It

retains the risk and rewards of the receivable.
 QUESTION 12:
Talisay Corporation sells a portfolio of short-term accounts receivable
carried on its book at P 2,100,000 for P 2,000,000 and promises to
pay up to P 60,000 to compensate the buyer if and when any
default occur. Expected credit losses are significantly less than P
60,000, and there are no other significant risks. How much should be
recognized as loss on sale of receivables?

a. P 160,000 b. P 100,000 c. P 40,000 d. P 0

See previous questions and answers pertaining to “risk and rewards”; It

retains the risk and rewards of the receivable.
 QUESTION 13:
Which of the following is a method to generate cash from accounts
receivable?
Assignment Factoring
a. Yes Yes
b. Yes No
c. No Yes
d. No No
 PLEDGING OF ACCOUNTS
RECEIVABLE
• A business (borrower) may borrow money from the bank using all of its
accounts receivable as a collateral;
• When approved by the bank, the borrower will issue promissory note and
record the transactions in its book as follows:

Cash xxx (proceeds of the loan)

Discount on notes payable xxx (interest deducted in advance)
Notes payable xxx (loaned amount)
• To record the accrued interest at the end of the accounting period:

Interest expense xxx

Discount on notes payable xxx
 PLEDGING OF ACCOUNTS
RECEIVABLE
• When the payment is made:

Notes payablexxx
Cash xxx

• Balance sheet presentation:

Note Payable Bank xxx

Less: Updated discount xxx
Carrying amount xxx

• Disclosure shall be made that receivables used as a collateral; also terms and
conditions attached to the loan.
 QUESTION 14:
Which statement is incorrect regarding PLEDGE of account
receivable?

a. New receivables can be substituted for the ones collected.

b. The accounts pledged are not transferred to a special ledger control
account.
c. No special accounting for the borrowing needed.
d. Does not require notes disclosures relating to details of
transactions.
 ASSIGNMENT OF ACCOUNTS
RECEIVABLE
• Specific receivables are used as collateral for the entity to borrow money
from the bank; the entity issued a promissory note.

• There’s no transfer of receivables, hence, takes the risk in collecting the

receivables; customers may either be notified or not notified of the
assignment; but most of the time it is made in a non – notification basis.

• Disclosure shall be made that a specific receivables are assigned.

 ASSIGNMENT OF ACCOUNTS
RECEIVABLE
To separate the assigned accounts:
Accounts receivable – assigned xxx
Accounts receivable xxx
To record the loan:
Cash (proceeds of the loan) xxx
Service charge xxx
Note payable – bank xxx
To record the sales returns:
Sales return xxx
Accounts receivable assigned xxx
 ASSIGNMENT OF ACCOUNTS
RECEIVABLE
To record the collection of the assigned accounts:
Cash xxx
Sales discount (if any) xxx
Accounts receivable – assigned xxx

To record the remittance to the bank:

Note payable – bank xxx
Interest expense xxx
Cash xxx
 ASSIGNMENT OF ACCOUNTS
RECEIVABLE
To record the written off:
Allowance for doubtful accounts xxx
Accounts receivable assigned xxx

To transfer the remaining balance of the assigned accounts to accounts

receivable:
Accounts receivable xxx
Accounts receivable – assigned xxx
 ASSIGNMENT OF ACCOUNTS
RECEIVABLE
Balance sheet presentation:
Accounts receivable – unassigned xxx
Accounts receivable – assigned xxx
Allowance for doubtful accounts (xx)
NRV (part of trade and other receivables) xxx

Accounts receivable assigned xxx

Note payable – bank (xx)
Equity in assigned accounts (disclosure) xxx
 QUESTION 15:
Use the following information for the next two questions (15 and 16):

Sipalay Co. assigned P 500,000 of accounts receivable to Hinigaran Finance

Co. as security for a loan of P 420,000. Hinigaran charged a 2% commission
on the amount of the loan; the interest rate on the note was 10%. During the
first month, Sipalay collected P 110,000 on assigned accounts after
deducting P380 of discounts. Sipalay accepted returns worth P1,350 and
wrote off assigned accounts totaling P3,700.

The amount of cash Sipalay received from Hinigaran at the time of the
transfer was
a. P 378,000 b. P 411,600 c. P 410,000 d. P 420,000
 ANSWER QUESTION 15
Entries:
Accounts receivable – assigned 500,000
Accounts receivable 500,000

Cash (420,000 – 8,400) 411,600 (#1)

Commission (420,000 x 2%) 8,400
Note payable – bank 420,000
 QUESTION 16:
Use the following information for the next two questions (15 and 16):

Sipalay Co. assigned P 500,000 of accounts receivable to Hinigaran Finance Co. as

security for a loan of P 420,000. Hinigaran charged a 2% commission on the amount of
the loan; the interest rate on the note was 10%. During the first month, Sipalay
collected P 110,000 on assigned accounts after deducting P380 of discounts. Sipalay
accepted returns worth P1,350 and wrote off assigned accounts totaling P3,700.

Entries during the first month would include a

a. debit to cash of P 110,380
b. debit to bad debts expense of P3,700
c. debit to allowance for doubtful accounts of P 3,700
d. debit to accounts receivable of P 115,430.
 ANSWER QUESTION 16

Cash 109,620
Sales discount 380
Accounts receivable – assigned 110,000

Sales returns and allowances 1,350

Allowance for doubtful accounts 3,700 (#2)
Accounts receivable – assigned 5,050
 QUESTION 17:
On November 30, accounts receivable in the amount of P 900,000 were
assigned to Kaban Finance Co. by Kalan as security for a loan of P750,000.
Kaban charged a 3% commission on the accounts; the interest rate on the
note is 12%. During December , Kaban collected P350,000 on assigned
accounts after deducting P560 of discounts. Kalan wrote off a P530
assigned account. On December 31, Kalan transmitted to Kaban the
amount collected plus the one month’s interest on the note.

How much is Kalan’s equity in the assigned accounts receivable as of

December 31?
a. P 149,470 c. P 141,410
b. P 141,970 d. P 148,910
 ANSWER QUESTION 17

Accounts receivable assigned P 900,000

Collection of A/R assigned (350,000)
Written off ( 530)
Note payable – bank
Amount loaned P 750,000
Payment ( 349,440) (400,560)
Equity in assigned accounts P148,910
 FACTORING OF ACCOUNTS
RECEIVABLE
• It is the transfer of accounts receivable without recourse, and is therefore
an outright of sale of receivables;

• The factor company (the buyer of the receivables) assumes all the risk in
collecting the receivables from customers;

• Gain or loss on sale (factoring) is recognized;

• Factor’s holdback (Receivable from factor) is also recognized for the

probable sales discounts, returns and allowances.
 FACTORING OF ACCOUNTS
RECEIVABLE
To record the sale:
Cash (Loan – charges = proceeds) xxx
Allowance for doubtful accounts xxx
Loss on factoring xxx
Factor’s holdback (if any)
Accounts receivable xxx

To compute for the loss or gain:

Carrying amount xxx
Proceeds xxx
Loss or gain xxx
 FACTORING OF ACCOUNTS
RECEIVABLE
To record the returns and allowances:
Sales return and allowance xxx
Sales discount (if any) xxx

To record the settlement of the factor’s holdback:

Cash xxx
Receivable from factor xxx
 QUESTION 18:
Use the following information for the next four questions:

Seller Corp. factored P400,000 of accounts receivable with Buyer, Inc. on a

without recourse basis. The factor charge was 1.75% of the amount of
receivables, and an additional 4% was retained to cover probable
adjustments. In addition to the factor charge, a finance charge was withheld
equal to 12% annually for any amounts advanced prior to the due dates of the
receivables. This charge was based on 100% of the face value. The average
credit term was 30 days from the date of transfer. According to the terms of
the factoring agreement, Seller was to handle returned goods, allowances,
and shipping disputes. Buyer was to collect the cash and acknowledge sales
discounts, but such discounts were to be charged to Seller. Credit losses were
to be absorbed by Buyer. Seller has recorded any bad debts expense related
to the factored receivables.
 QUESTION 18: CONTINUED…
The following transactions pertain to this factoring arrangement:

Aug. 1, The receivable records were transferred to Buyer.

Aug. 31, Buyer collected P234,000 during August after allowing for P 9,000
of sales discounts. Sales returns and allowances during August totaled
P2,400.
Sept. 20, Buyer wrote off a P 2,000 account after learning of the company’s
bankruptcy.
Sept. 30, Buyer collected P151,720 during September. Sales returns and
allowances during Sep. totaled P880.
Oct. 10, Seller and Buyer made a final cash settlement.
 QUESTION 18: CONTINUED…
18. This transaction is best described as a
a. Loan from Buyer collateralized by Seller’s accounts receivable.
b. Loan from Buyer to be repaid by the proceeds from Seller accounts
receivable.
c. Sale of seller’s accounts receivable to Buyer, with the risk of uncollectible
accounts retained by Seller.
d. Sale of Seller’s accounts receivable to Buyer with the risk of
uncollectible accounts transferred to Buyer.

19. What net cash proceeds did Seller ultimately realize from the factoring?
e. P 389,000 c. P 380,000
f. P 385,720 d. P 376,720 (373,000 + 3,720)
 QUESTION 18: CONTINUED…
20. What was the factor’s net income from the factoring?
a. P 11,000 c. P 9,000
b. P 3,280 d. P 2,000
21. 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, depending upon the substance of the transaction.
b. The receivables are used as collateral for a promissory note issued to the
factor by the owner of the receivables.
c. The factor assumes the risk of collectability and absorbs any credit
losses in collecting the receivables.
d. The financing cost (interest expense) should be recognized ratably over the
collection period of the receivables.
 ANSWER, Q18 TO 21
Book of seller: Loss:
Service Charge (400T x 1.75%)
7,000
TransferCash 373,000 Interest (400T x 12% x 1/12)
4,000
loss on factoring 11,000
Receivable from factor (400,000 x 4%) 16,000
Accounts receivable 400,000

SRA/SD Sales discount 9,000

Sales returns and allowances 3,280
Receivable from factor 12,280
Final Settlement Cash (16,000 – 12,280) 3,720
Receivable from factor 3,720
 ANSWER, Q18 TO 21
Book of buyer:
Transfer Accounts receivable 400,000
Cash373,000
Payable to Seller 16,000
Finance income 11,000
CollectionsCash 385,720
Accounts receivable 385,720
SD/ SRA Payable to Seller Co. 12,280
Accounts receivable 12,280
Written off Bad debts expense 2,000
Accounts receivable 2,000
Final settlement Payable to Seller 3,720
Cash 3,720
 QUESTION 22 & 23:
Use the following information for the next two questions:
Sleeping Corp. factored P600,000 of accounts receivable to Beauty Finance Co.
Control was surrendered by Sleeping. Beauty accepted the receivables subject to
recourse for nonpayment. Beauty assessed a fee of 3% and retains a holdback
equal to 5% of the accounts receivable. In addition, Beauty charged 15% interest
computed on a weighted average time to maturity of the receivables of 54 days.
The fair value of the recourse obligation is P9,000.
Sleeping will receive and record cash of
a. P 556,685 c. P 538,685
b. P 547,685 d. P 529,685
Assuming all receivables are collected, Sleeping’s cost of factoring the receivables
would be
c. P 31,315 c. P 61,315
d. P 40,315 d. P 70,315
 ANSWER 22 & 23:

Cash 538,685
Service Charge (600,000 x 3%) 18,000
Receivable from factor (600,000 x 5%) 30,000
Interest Expense (600,000 x 15% x 54/365) 13,315
Liability for factored receivables 600,000

Cost of factoring: 9,000 + 18,000 + 13,315 = 40,315

 DISCOUNTING OF NOTES
RECEIVABLE
• Promissory note is a promise by the maker to pay the payee the sum
amount in a fixed or determinable future time;

• The maker has the primary liability;

• Promissory notes may be negotiated by the payee through discounting; note

will be endorsed with recourse (secured borrowing) which means that
the endorser (payee) shall pay the endorsee (third party) if the maker
dishonors the note.

• The payee (endorser) shall a secondary liability.

 DISCOUNTING OF NOTES
RECEIVABLE
• Terms related to discounting:

1. Net Proceeds = Maturity value – Discount

2. Maturity value = Principal + Interest

3. Interest = Principal x interest rate x time (period)

4. Discount = Maturity value x discount rate x discount period

 DISCOUNTING OF NOTES
RECEIVABLE
• Terms related to discounting:

1. Discount rate – rate used by the bank; if not given use the interest rate;

2. Discount period – period of time from the date of discounting to maturity

date;

3. Time – period from the date of the note to maturity date.

 DISCOUNTING OF NOTES
RECEIVABLE (SECURED BORROWING)
To record the discounting:
Cash (proceeds) xxx
Interest expense xxx
Liability for note discounted xxx

To record the payment of the maker:

Liability for note discounted xxx
Note receivable xxx
 DISCOUNTING OF NOTES
RECEIVABLE (SECURED BORROWING)
To record the discounting:
Cash (proceeds) xxx
Interest expense xxx
Liability for note discounted xxx
Interest income xxx (up to the date of discounting)

To record the payment of the maker:

Liability for note discounted xxx
Note receivable xxx

• No gain or loss is recognized, because it is a secured borrowing. The interest expense

represent the loss on discounting.
 DISCOUNTING OF NOTES
RECEIVABLE (SECURED BORROWING)
To record the dishonor of the note by the maker:

Accounts receivable xxx

Liability for notes receivable discounted xxx
Cash xxx
Notes receivable xxx
 DISCOUNTING WITHOUT
RECOURSE?
To record the discounting:
Cash xxx
Loss on note receivable discountingxxx
Note receivable xxx
Interest income xxx

• Note receivable is credited instead of note receivable discounted.

• Gain or loss is recognized because there is derecognition of asset.
• Interest income instead of expense is credited for the actual interest earned on the
date of discounting.
• No recording of dishonor, because its already a sale of receivables.
 QUESTION 24:

The Hinoba-an Department Store wishes to discount two notes receivable arising
from the sale of merchandise in order to meet some manufacturing obligations.
Both notes have a face amount of P50,000 each and are due in one year. Note A is
a non-interest bearing note while Note B is to be paid with an interest of 12%. The
bank rate in discounting notes is 12%. Assuming that the notes were discounted
ten months prior to maturity, the proceeds from both notes discounted is

a. P 94,280 c. P 95,400
b. P 93,280 d. P 103,880
 ANSWER 24:
• Non – interest bearing (Note A): Entries:
Discount = P 50,000 x 12% x 10/12 = 5,000Cash 45,000
Interest Expense 5,000
Proceeds = P 50,000 – 5,000 = 45,000
Note receivable discounted 50,000

• Interest Bearing
Maturity Value = P 50,000 + (P 50,000 x 12%) = 56,000
Discount = P 56,000 x 12% x 10/12 = 5,600Entries:
Proceeds = P 56,000 – 5,600 = 50,400 Cash 50,400
Interest Exp. 4,600
Notes receivable discounted
• Total = 45,000 + 50,400 = 95,400 50,000
Interest income
5,000
 QUESTION 25:
On May 17, Sagay Co, accepted a P 6,500, 8%, 90 day note from a
customer. On June 11, the note was discounted at 10%. At maturity date,
the note was dishonored and the bank charged a P 25 protest fee. The
amount that Sagay Co. would debit to Notes receivable dishonored is:

a. P 6,655 c. P 6,535
b. P 6,525 d. P 6,130
 ANSWER 25:

Notes receivable discounted 6,500

Protest fee 25
Interest Expense (6,500 x 8% x 90/360) 130
Total receivables from the dishonored note 6,655