Department of Accounting Education

Mabini Street, Tagum City

Davao del Norte
Telefax: (084) 655-9591, Local 116

Big Picture in Focus: ULOc. Apply concepts in accounting for

receivable financing.

Metalanguage
In this section, the most essential terms relevant to the study of receivable financing
and to demonstrate ULOc will be operationally defined to establish a common frame of
reference as to how the texts work in your chosen field or career. You will encounter these
terms as we go through the intermediate accounting. Please refer to these definitions in
case you will encounter difficulty in the understanding accounting concepts.
Please proceed immediately to the “Essential Knowledge” part most of the essential terms
you will encounter in this lesson are also defined in the next section.

Essential Knowledge

VI. RECEIVABLE FINANCING

RECEIVABLE FINANCING
Receivable financing is the financial flexibility of capability of an entity to raise money out of
its receivable.

Forms of receivable financing

1. Pledge of accounts receivable
2. Assignment of accounts receivable
3. Factoring of accounts receivable
4. Discounting of notes receivable

I. PLEDGE OF ACCOUNTS RECEIVABLE

This refers to the use of receivables as collateral for a loan. The only entry required
in the books would record the loan obtained from the finance company or bank.
The accounts receivable, in any manner, is not affected by the pledging. However,
disclosures should be made in the notes to financial statements.

Illustration:
On November 1, 2019, an entity borrowed P1,000,000 from Philippine National
Bank and issue 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.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Solution:
On November 1, 2019, the only entry to be made is for the loan acquired. No
entry in establishing the pledged accounts receivable but need to be disclosed.
Journal entry will be:
Cash 880,000
Discount on notes payable 120,000
Note payable – bank 1,000,000

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

Face value of the note 1,000,000

Less: Interest deducted in advance (1,000,000 x 12%) 120,000
Net cash proceeds 880,000

II. ASSIGNMENT OF ACCOUNTS RECEIVABLE

This is a more formal borrowing arrangement in which the receivables are used as
security. The borrower (assignor) pledges the receivables to a lender (assignee)
and signs a promissory note payable. Assignment may be done on a notification
or non-notification basis.

When accounts are assigned on a nonnotification basis, customers are not

informed that their accounts have been assigned. As a result, the customers
continue to make payments to the assignor, who in turn remits the collections to
the assignee.

When accounts are assigned on a notification basis, the customers are notified to
make their payments directly to the assignee. The assignee usually lends only a
certain percentage of the accounts assigned. For example, out of the P1,000,000
accounts receivable assigned, only 90% if it is allowed by the assignee as loanable
amount. That means, the amount of borrowed by the assignor is only P900,000.
The assignee may also charge service or finance charge or commission fee for
collecting the said receivables on behalf of the assignor.

Illustration – nonnotification basis

April 1

An entity assigned P700,000 of accounts receivable to a bank under a

nonnotification arrangement. The bank advances 80% less a service charge of
P5,000. The entity signed a promissory note that provided for interest of 1% per
month on the unpaid loan balance.

To separate the assigned accounts:

Accounts receivable – assigned 700,000
Accounts receivable 700,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

To record the loan:

Cash [(700,000 x 80%) – 5,000] 555,000
Service charge 5,000
Note payable – bank 560,000

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% cash discount.
Cash 294,000
Sales discount (300,000 x 2%) 6,000
Accounts receivable – assigned 300,000

April 30
Remitted the total collection to the bank plus interest for one month.
Note payable – bank 294,000
Interest expense (560,000 x 1%) 5,600
Cash 299,600

May 7
Assigned accounts of P15,000 proved worthless.
Allowance for doubtful accounts 15,000
Accounts receivable – assigned 15,000

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 of loan balance plus interest for one
month.
Note payable – bank (560,000 – 294,000) 266,000
Interest expense (266,000 x 1%) 2,660
Cash 268,660

To transfer the remaining balance of assigned accounts receivable to account

receivable general:
Accounts receivable 65,000*
Accounts receivable – assigned 65,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Total accounts receivable – assigned 700,000

Less: Collection (294,000 + 300,000) 594,000
Sales discount 6,000
Sales return 20,000
Worthless accounts 15,000 635,000
Balance 65,000

Illustration – notification basis

July 1
An entity assigned P1,000,000 of accounts receivable 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 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 (1,000,000 x 4%) 40,000
Note payable – bank (1,000,000 x 80%) 800,000

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

Note payable – bank (600,000 -12,000) 588,000

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

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

Cash 8,000

August 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 (212,000 x 1%) 2,120
Note payable – bank (800,000 – 588,000) 212,000
Accounts receivable – assigned 300,000

Accounts receivable 100,000

Accounts receivable - assigned 100,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

III. FACTORING
This is a sale of receivables since the transfer of these receivables is without
recourse. The factor company (finance company) assumes the risk of collection
and generally handles the billing and collection function. As in any sale of assets,
a gain or loss is recognized for the difference between the proceeds received and
the net carrying amount of the receivables factored.

Factoring may take the form of the following:

a. Casual factoring
b. Factoring as a continuing agreement

A. Casual factoring
If an entity finds itself in a critical cash position, it may be forced to factor some or
all of its accounts receivable at a substantial discount to a bank or a finance entity
to obtain the much needed cash.

For example, an entity factored P100,000 of accounts receivable with an allowance

for doubtful accounts of P5,000 for P80,000.

Journal entry:
Cash 80,000
Allowance for doubtful accounts 5,000
Loss on factoring 15,000
Accounts receivable 100,000

B. Factoring as a continuing agreement

In this setup, a finance entity purchases all of the accounts receivable of a certain
entity. Before a merchandise is shipped to a customer, the selling entity requests
the factor’s credit approval. Once approved, the account is sold immediately to the
factor after shipment of the goods. The factor then assumes the credit function as
well as the collection function.

For compensation, typically the factor charges a commission or factoring fee of 5%

to 20% for its services of credit approval, billing, collecting and assuming
uncollectible factored accounts. Moreover, the factor may withhold a
predetermined amount as a projection against customer returns and allowances
and other special adjustments. This amount withheld is known as the “factor’s
holdback”. This factor’s holdback is actually a receivable from factors and classified
as current asset.

Illustration:
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 receivable factored. In addition, the
factor withheld 20% of the amount of the receivables factored to cover sales return
and allowances.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Journal entry to record the factoring:

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

Computation:
Gross amount 500,000
Less: Sales discount (500,000 x 2%) 10,000
Commission (500,000 x 5%) 25,000
Factor’s holdback (500,000 x 20) 100,000 135,000
Cash received from factoring 365,000

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 (50,000x2%) 1,000
Receivable from factor 49,000

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

Cash 51,000
Receivable from factor 51,000
(100,000 – 49,000)

IV. DISCOUNTING OF NOTES RECEIVABLE

This is in essence selling the note to the bank with recourse. In this setup, the
payee endorses the prior to its maturity date. The payee becomes an endorser and
the bank becomes an endorsee.

Endorsement

Endorsement is the transfer of right to a negotiable instrument by simply signing at

the back of the instrument. Endorsement may be with recourse which means that
the endorser shall pay the endorsee if the maker dishonors the note.

In the legal parlance, this is the secondary liability of the endorser. In the
accounting parlance, this is the contingent liability of the endorser.

Endorsement may be without recourse which means that the endorser avoids
future liability even if the maker refuses to pay the endorsee on the date of maturity.

In the absence of any evidence to the contrary, endorsement is assumed to be with

recourse.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Terms related to discounting of note

1. Net proceed – refers to the discounted value of the note received by the
endorser from the endorsee.
Net proceeds = Maturity value - Discount

2. Maturity value – the amount due on the note at the date of maturity.
Maturity value = Principal + Interest

3. Maturity date – the date on which the note should be paid.

4. Principal – the amount appearing on the face of the note. It is also referred to
as face value.

5. Interest – the amount of interest for the full term of the note
Interest = Principal x rate x time

6. Interest rate – the rate appearing on the face of the note.

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

8. Discount – the amount of interest deducted by the bank in advance.

Discount = Maturity value x discount rate x discount period

9. Discount rate – the rate used by the bank in computing the discount the discount
rate should not be confused with the interest rate. The discount rate and interest
rate are different from each other. If no discount rate is given, the interest rate
is safely assumed as the discount rate.

10. Discount period – the period of time from date of discounting to maturity date.
The discount period is the unexpired portion of the note. Simply computed:
Discount period = Time (term of the note) – expired portion up to
the date of discounting
Illustration
A P1,000,000, 180-day, 12% note dated July 1 was received from a customer and
discounted without recourse on August 30 at 15% discount rate.
Computation:

✓ Interest = Principal x rate x time

= 1,000,000 x 12% x 180 days/360 days per year
= 60,000

✓ Maturity value = Principal + Interest

= 1,000,000 + 60,000
= 1,060,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

✓ Discount = Maturity value x discount rate x discount period

= 1,060,000 x 15% x 120* days/360 days per year
= 53,000

* Term of the note 180 days

Less: Days expired from 7/1 to 8/31 60 days
Discount period – unexpired term 120 days

✓ Net proceeds = Maturity value – Discount

= 1,060,000 – 53,000
= 1,007,000

✓ Carrying amount of the note discounted

Principal 1,000,000
Accrued interest (1M x 12% x 60/360) 20,000
Carrying amount 1,020,000

✓ Gain or loss on discounting:

Net proceeds from discounting 1,007,000
Less: Carrying amount 1,020,000
Loss on discounting (13,000)

✓ Accounting for note receivable discounted without recourse

In a discounting without recourse, the sale of the note is absolute

therefore there is no contingent liability. The note receivable account
is credited directly because the sale of the note receivable is without
recourse or absolute. The interest income is credited for the actual
interest earned on the date of discounting.

Journal entry:

Cash 1,007,000
Loss on note receivable discounting 13,000
Note receivable 1,000,000
Interest income 20,000

✓ Accounting for note receivable discounted with recourse

If the discounting is with recourse, the transaction is accounted for as

either of the following:
a. Conditional sale of note receivable – a contingent liability should be
recognized.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Journal entry:

Cash 1,007,000
Loss on note receivable discounting 13,000
Note receivable discounted* 1,000,000
Interest income 20,000

* The note receivable discounted account is deducted from the total

note receivable when preparing the statement of financial position with
disclosure of the contingent liability.

Subsequent accounting:

If note is paid by the maker – the contingent liability is extinguished as

follows:

Note receivable discounted 1,000,000

Note receivable 1,000,000

If note is dishonored by maker – the note becomes payable on

demand thus, reclassified to accounts receivable. The total amount
reclassified included the maturity value plus other charges. Assuming,
aside from the maturity value of the note of P1,060,000, the entity
demands another P30,000 as protest fee and other bank charges.
Consequently, the total collectible from the maker is P1,090,000.

To record the payment to the bank:

Accounts receivable 1,090,000
Cash 1,090,000

To cancel the contingent liability:

Note receivable discounted 1,000,000
Note receivable 1,000,000

b. Secured borrowing – the note receivable is not derecognized but

instead an accounting liability is recorded at an amount equal to the
face amount of the note receivable discounted.

Journal entry:

Cash 1,007,000
Interest expense 13,000
Liability for note receivable discounted 1,000,000
Interest income 20,000

There is no gain or loss on discounting in a secured borrowing

discounting instead, such amount shall be recognized as interest
expense. The interest expense can be “netted” with interest income
resulting to a net interest expense of P15,000.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Subsequent accounting:
If note is paid by the maker – the liability of the note receivable
discounted and note receivable are derecognized.

Liability for note receivable discounted 1,000,000

Note receivable 1,000,000

If note is dishonored by maker – the note becomes payable on

demand thus, reclassified to accounts receivable. The total amount
reclassified included the maturity value plus other charges. Assuming,
aside from the maturity value of the note of P1,060,000, the entity
demands another P30,000 as protest fee and other bank charges.
Consequently, the total collectible from the maker is P1,090,000.

To record the payment to the bank:

Accounts receivable 1,090,000
Cash 1,090,000

To derecognize the liability for note receivable discounted and note

receivable:
Liability for note receivable discounted 1,000,000
Note receivable 1,000,000
Summary:

DISCOUNTING
With recourse
Treatment Without recourse
Conditional sale Secured borrowing
note discounted Note receivable Note receivable Liability for note
account is discounted is receivable
derecognized credited equal to the discounted is
(eliminated) face amount credited equal to the
(contingent liability) face amount
loss on discounting Loss on note Loss on note Interest expense
receivable receivable
discounting discounting

Self Help: You can also refer to the sources below to help you
further understand the lesson.

Valix, C., Peralta, J. F., & Valix, C. A. M. (2020). Intermediate Accounting. (2019 ed., Vol. 1).
Manila, Philippines: GIC enterprises & Co., Inc.
Valix, C., Peralta, J. F., & Valix, C. A. M. (2017). Financial accounting- first part. (2017 ed.,
Vol. 1). Manila, Philippines: GIC enterprises & Co., Inc.
Edmonds, T., Edmonds, C. McNair, F. & Olds, P. (2016). Fundamental financial accounting
concepts. (9th ed.). New York, NY: McGraw-Hill Education.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Let’s Check

Activity 1. Multiple choice questions.

1. It is a financing arrangement that is usually done on a without recourse, notification
basis
a. pledge b. assignment c. factoring d. discounting

2. If accounts receivable are pledged against borrowings, the amount of accounts

receivable pledged should be
a. excluded from total receivables with disclosure
b. excluded from total receivables without disclosure
c. included in total receivables with disclosure
d. included in total receivables without disclosure.

3. When accounts receivable are factored

a. accounts receivable should be credited c. payable to factor is credited
b. the factoring is accounted for as borrowing d. a contingent liability

4. Note receivable discounted with recourse should be

a. excluded from total receivables without disclosure of the contingent liability
b. excluded from total receivables with disclosure of the contingent liability
c. included in total receivables without disclosure of the contingent liability
d. included in total receivables with disclosure of the contingent liability

5. Gar Company factored its receivables without recourse with Rose Bank. Gar received
cash as a result of this transaction which is best described as a
a. Loan from Rose collateralized by Gar’s accounts receivable
b. Loan from Rose to be repaid by the proceeds from Gar’s accounts receivable.
c. Sale of Gar’s accounts receivable to Rose, with the risk of uncollectible accounts
retained by Gar.
d. Sale of Gar’s accounts receivable to Rose, with the risk of uncollectible accounts
transferred to Rose

Let’s Analyze
Multiple choice problem solving.
1. On December 1,2006, M &M Company assigned on a non notification basis accounts
receivable of 3,000,000 to a bank in consideration for a loan of 80% of the receivables
less a 5% service fee on the accounts assigned. The interest rate of the loan is 12% per
annum. The company collected assigned accounts of 2,000,000 and 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 interest rate is 1% per month on the
outstanding balance of the loan. In its December 31, 2016 balance sheet, what amount
of note payable should M&M report as current liability?
a. 0 b. 400,000 c. 424,000 d. 1,024,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

2. On October 31, 2016, Bundle Company engaged in the following transactions:

Obtained a 500,000 sic month loan from City Bank, discounted at 12%. The company
pledged 500,000 of accounts receivable as security for the loan. Factored P1,000,000 of
accounts receivable without recourse on a non notification basis with Help Company. Help
charged a factoring fee of 2% of the amount of receivables factored and withheld 10% of
the amount factored.
What is the total cash received from the financing of receivables?
a. 1,320,000 b. 1,350,000 c. 1,380,000 d. 1,470,000

3. On July 1, 2015, Olive Corp sold equipment to Popeye Co. for 250,000. Olive accepted
a 10% note receivable for the entire sales price. This note is payable in two equal
installments of 125,000 plus accrued interest on December 31, 2015, and December 31,
2016. Olive discounted the note at a bank at an interest rate of How much was Olive’s
proceeds from the discounted note?
a. 121,000 b. 123,375 c. 125,875 d. 129,250

On February 1, 2016, New York Corporation factored receivables with carrying amount of
2,000,000 to Chicago Corporation. New York Corporation assesses a finance charge of
3% of the receivables and retains 5% of the receivables.

4. Relative to this transaction, you are to determine the amount of loss on sale to be
reported in the income statement of New York Corporation for February.
a. 60,000 b. 0 c. 100,000 d. 160,000

5. Assume the New York Corporation factors the receivables on a recourse basis. The
recourse obligation has a fair value of 30,000. The loss to be reported should be
a. 60,000 b. 120,000 c. 90,000 d. 150,000

Bruno received from a customer a one year, 375,000 note bearing annual interest of 8%.
After holding the note for six months. Bruno discounted the note at Super Bank at an effective
interest rate of 10%.

6. How much did Bruno receive from the bank?

a. 371,428.50 b. 384,750.00 c. 392,857.50 d. 405,000.00

7. If the discounting is treated as a sale. What amount of loss on discounting should Bruno
recognize?
a. 0 b. 5,250 c. 9,750 d. 20,250

8. If the discounting is treated as a borrowing. What amount of loss on discounting should

Bruno recognize?
a. 0 b. 5,250 c. 9,750 d. 20,250

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Comprehensive problem:
I. The Genius Company requires additional cash for its business. Genius has decided to use
its accounts receivable to raise the additional cash as follows:
a. On June 30, 2019, Genius assigned P200,000 of accounts receivable to the Jet
Finance Company. Genius received an advance from Jet of 85% of the assigned
accounts receivable, less a commission on the advance of 3%. Prior to December 31,
2019, Genius collected P150,000 on the assigned accounts receivable and remitted
P160,000 to Jet, P10,000 of which represented interest on the advance from Jet.
b. On December 1, 2019, Genius sold P300,000 of net accounts receivable of the Factor
Company for P260,000. The receivables were sold outright on a nonrecourse basis.
c. On December 29, 2019, Genius received an advance of P100,000 from the Domestic
Bank by pledging P120,000 of Genius’ accounts receivable. Genius’ first payment to
Domestic is due on January 31, 2020.

Required: Give all journal entries that Alta Company should make for the term of the note,
June 30, 2019 through December 31, 2019.

II. Determine the proceeds from each of the following discounted customer notes:
a. An P8,000, 60-day, non-interest bearing note discounted after 15 days at 12%.
b. A P12,000, 12%, 60-day note discounted after 30 days at 14%.
c. A P6,000, 10%, 90-day note discounted after 30 days at 12%.
d. A P10,000, 12%, 120-day note discounted after 45 days at 15%.

In a Nutshell

Write atleast five important lessons that you have learned in this topic.

1. ___________________________________________________________________
___________________________________________________________________
____________________________________________________

2. ___________________________________________________________________
___________________________________________________________________
____________________________________________________

3. ___________________________________________________________________
___________________________________________________________________
____________________________________________________

4. ___________________________________________________________________
___________________________________________________________________
____________________________________________________

5. ___________________________________________________________________
___________________________________________________________________
____________________________________________________

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Q&A List

Do you have any question for clarification? Write them here.

Questions/Issues Answers

1.

2.

3.

4.

5.

Keywords

Receivable financing
Pledging
Assignment
Discounting

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