Notes receivable

Question 3
The Notes receivable account of Maria Co. has a debit balance of P239,200
on December 31, 2012. There was no balance at the beginning of the year.
Your analysis of the account reveals the following:
1
2
3
4
5
6

Notes amounting to P845,000 were received from customers during the

year.
Notes of P416,000 were collected on due dates and notes amounting to
P221,000 were discounted at the Metro Bank. The Notes receivable
account was credited for the notes discounted.
Of the P221,000 notes discounted, P104,000 was paid on maturity date
while a note for P31,200 was dishonored and was charged back to Notes
Receivable account.
Cash of P33,000 was received as partial payment on notes not yet due.
The amount received was credited to Liability on Partial Payments
account.
A note for P50,000 was pledged as collateral for a bank loan.
Included in the companys cash account balance is a 3 month note from
an officer amounting to P8,000 which is over a month past due.

Assuming that Maria Co. will use a Notes receivable Discounted account, the
adjusted balance of the Notes Receivable account on December 31, 2012, is
175,000 260,800 364,800 323,200

SOLUTION:
Unadjusted balance (845,000 - 416,000 - 221,000 + 31,200)
Partial collection recorded as a liability
Notes receivable discounted still outstanding (221,000 - 104,000 31,200)
Dishonored note
Adjusted balance

239,200
(33,000)
85,800
(31,200)
260,800

2.0 Financial Accounting and Reporting - Notes Receivable (Difficult)

Question 4
Note receivable discounted without recourse shall be

Excluded from total receivables without disclosure of contingent liability

Included in total receivables with disclosure of contingent liability
from total receivables with disclosure of contingent liability

Excluded

Included in total

receivables without disclosure of contingent liability

2.0 Financial Accounting and Reporting - Notes Receivable (Difficult)

Question 5
Note receivable discounted without recourse shall be
Included in total receivables with disclosure of contingent liability
Included in total receivables without disclosure of contingent liability
Excluded from total receivables without disclosure of contingent liability
Excluded from total receivables with disclosure of contingent liability

2.0 Financial Accounting and Reporting - Notes Receivable (Difficult)

Question 7
The Notes receivable account of Maria Co. has a debit balance of P239,200
on December 31, 2012. There was no balance at the beginning of the year.
Your analysis of the account reveals the following:
1
2
3

Notes amounting to P845,000 were received fromcustomers during the

year.
Notes of P416,000 were collected on due dates and notes amounting to
P221,000 were discounted at the Metro Bank. The Notes receivable
account was credited for the notes discounted.
Of the P221,000 notes discounted, P104,000 was paid on maturity date
while a note for P31,200 was dishonored and was charged back to Notes
Receivable account.

4
5
6

Cash of P33,000 was received as partial payment on notes not yet due.
The amount received was credited to Liability on Partial Payments
account.
A note for P50,000 was pledged as collateral for a bank loan.
Included in the companys cash account balance is a 3 month note from
an officer amounting to P8,000 which is over a month past due.

Assuming that Maria Co. will use a Notes receivable Discounted account, the
adjusted balance of the Notes Receivable account on December 31, 2012, is
323,200
364,800
260,800
175,000

SOLUTION:
Unadjusted balance (845,000 - 416,000 - 221,000 + 31,200)
Partial collection recorded as a liability
Notes receivable discounted still outstanding (221,000 - 104,000 31,200)
Dishonored note
Adjusted balance

239,200
(33,000)
85,800
(31,200)
260,800

2.0 Financial Accounting and Reporting - Notes Receivable (Difficult)

Question 9
In calculating the carrying amount of a loan receivable, the lender adds to the
principal
I
II
III

Direct loan origination cost incurred by the lender

Indirect loan origination cost incurred by the lender
Loan origination fees charged to the borrower

I and II only
I and III only
I only
I, II, and III

2.0 Financial Accounting and Reporting - Notes Receivable (Difficult)

Question 10
If there is evidence that an impairment loss on loan receivable has been
incurred, the amount of the loss is equal to the
Excess of the carrying amount of the loan receivable over the present
value of the cash flows related to the loan.
Excess of the present value of cash flows related to the loan over the
carrying amount of the loan receivable.
Excess of the principal amount of the loan over its carrying amount
Excess of the carrying amount of the loan over the principal amount of the
loan.
2.0 Financial Accounting and Reporting - Notes Receivable (Difficult)
Receivable financing

An entity factored its accounts receivable without recourse with a bank. The
entity received cash as a result of the transaction which is best described as

Loan from bank to be repaid by the proceeds from the entity's accounts
receivable
Loan from bank collateralized by the entity's accounts receivable.
Sale of the entity's accounts receivable to the bank with the risk of
uncollectible accounts retained by the entity
Sale of the entity's accounts receivable to the bank with the risk of
uncollectible accounts transferred to the bank.
2.0 Financial Accounting and Reporting - 4.1 Receivable Financing (Difficult)

Question 2
Amel Company provides financing to other entities by purchasing their
accounts receivable on a non recourse basis. Amel charges its clients a
commission of 15% on all receivables factored. In addition, Amel withholds
10% of receivables factored as protection against sales returns and other
adjustments. Amel credits the 10% withheld to Clients Retainer account and
makes payments to clients at the end of each month so that the balance in the
retainer is equal to 10% of unpaid receivables at the end of the month.
Experience has led Amel to establish an allowance for doubtful accounts of
4% of all unpaid receivables purchased.
On December 1, Amel purchased receivables from Motorway Company
totaling P3,000,000. Motorway had previously established an allowance for
doubtful accounts for these receivables at P 100,000. By December 31, Amel
had collected P2,500,000 on these receivables.
What is the loss on factoring to be recognized by Motorway Company?

450,000

750,000

650,000

350,000

SOLUTION:
Accounts receivable
Commission
Net sales price
Carrying value of accounts receivable (3,000,000100,000)

3,000,000
( 450,000)
2,550,000

Loss on factoring

( 350,000)

2,900,000

Actually, the entry on the books of Motorway Company on the dale of factoring
is:
Cash
Allowance for doubtful accounts
Loss on factoring
Due from factor
Accounts receivable

2,250,000
100,000
350,000
300,000
3,000,000

The entry on the books of the factor, Amel Company, is:

Accounts receivable
Cash
Commission income
Clients retainer

3,000,000
350,000

2,250,000
450,000
300,000

2.0 Financial Accounting and Reporting - 4.1 Receivable Financing (Difficult)

Question 3
Amel Company provides financing to other entities by purchasing their
accounts receivable on a nonrecourse basis. Amel charges its clients a
commission of 15% on all receivables factored. In addition, Amel withholds
10% of receivables factored as protection against sales returns and other
adjustments. Amel credits the 10% withheld to Clients Retainer account and
makes payments to clients at the end of each month so that the balance in the
retainer is equal to 10% of unpaid receivables at the end of the month.

Experience has led Amel to establish an allowance for doubtful accounts of

4% of all unpaid receivables purchased.
On December 1, Amel purchased receivables from Motorway Company
totaling P3,000,000. Motorway had previously established an allowance for
doubtful accounts for these receivables at P 100,000. By December 31, Amel
had collected P2,500,000 on these receivables.
What is the loss on factoring to be recognized by Motorway Company?
650,000
450,000
350,000
750,000

SOLUTION:
Accounts receivable
Commission
Net sales price
Carrying value of accounts receivable (3,000,000100,000)

3,000,000
( 450,000)
2,550,000

Loss on factoring

( 350,000)

2,900,000

Actually, the entry on the books of Motorway Company on the dale of factoring
is:
Cash
Allowance for doubtful accounts
Loss on factoring
Due from factor
Accounts receivable

2,250,000
100,000
350,000
300,000
3,000,000

The entry on the books of the factor, Amel Company, is:

Accounts receivable
Cash
Commission income
Clients retainer

3,000,000
350,000

2,250,000
450,000
300,000

2.0 Financial Accounting and Reporting - 4.1 Receivable Financing (Difficult)

Question 4
All but one of the following are required before a transfer of receivables can be
recorded as a sale?
The transferee can pledge or sell the transferred receivables.
The transferred receivables are beyond the reach of the transferor and its
creditors.
The transferor maintains continuing involvement
The transferor has not kept effective control over the transferred
receivables through a repurchase agreement.
2.0 Financial Accounting and Reporting - 4.1 Receivable Financing (Difficult)

Question 5
If financial assets are exchanged for cash and other consideration but the
transfer does not meet the criteria for a sale, the transferor and the transferee
should account for the transaction as (I) Secured borrowing and (II) Pledge of
collateral
Neither I nor II
I only
Both I and II

II only

2.0 Financial Accounting and Reporting - 4.1 Receivable Financing (Difficult)

Question 6
On January 1, 2014, Luther Company sold land with carrying amount of P
1,500,000 in exchange for a 9-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.
On April 1, 2014, Luther Company discounted the note with recourse. The
bank discount rate is 12%. The discounting transaction is accounted for as a
secured borrowing.
On October 1, 2014, the maker dishonored the note receivable. Luther
Company paid the bank the maturity value of the note plus protest fee of P
10,000.
On December 31, 2014, Luther Company collected the dishonored note in full
plus 12% annual interest on the total amount due.
What is the interest expense to be recognized by Luther Company on April 1,
2014?
50,000
21,000
25,000
29,000

SOLUTION:

Principal
Interest (2,000,000 x 10% x 9/12)
Maturity value
Discount (2,150,000 x 12% x 6/12)
Net proceeds
Principal
Accrued interest receivable (2,000,000 x 10% x
3/12)
Book value of note receivable
Net proceeds
Less: Book value of note receivable
Interest expense

2,000,000
150,000
2,150,000
129,000
2,021,000
2,000,000
50,000
2,050,000
2,021,000
2,050,000
( 29,000)

2.0 Financial Accounting and Reporting - 4.1 Receivable Financing (Difficult)

Question 7
If financial assets are exchanged for cash and other consideration but the
transfer does not meet the criteria for a sale, the transferor and the transferee
should account for the transaction as (I) Secured borrowing and (II) Pledge of
collateral
II only

I only

Neither I nor II

Both I and II

2.0 Financial Accounting and Reporting - 4.1 Receivable Financing (Difficult)

Question 8
During its second year of operations, Karen Company found itself in financial
difficulties. Karen decided to use its accounts receivable as a means of
obtaining cash to continue operations. On July 1, 2014, Karen sold
P1,500,000 of accounts receivable for cash proceeds of P1,390,000. No bad
debt allowance was associated with these accounts. On December 15, 2014,
Karen assigned the remainder of its accounts receivable, P5,000,000 as of
that date, as collateral on a P2,500,000,12% annual interest rate loan from
Finance Company. Karen received P2,500,000 less a 2% finance charge.
Additional information is as follows:

Allowance for bad debts before adjustment, 12/31/2014

Estimated uncollectible, 12/31/2014
Accounts receivable excluding factored and assigned
accounts, 12/31 /2014

65,000
3% of accounts
receivable
1,000,000

None of the assigned accounts had been collected by the end of the year.
Karen Company shall recognize bad debt expense for 2014 at
30,000
180,000
95,000
115,000

SOLUTION:
Accounts receivable - unassigned
Accounts receivable - assigned
Total accounts receivable
Required allowance - 12/31/2014 (3% x
6,000,000)
Allowance for bad debts before adjustment
Bad debt expense for 2014

1,000,000
5,000,000
6,000,000
180,000
65,000
115,000