DISCOUNTING OF NOTE RECEIVABLE Conditional Sale Secured Borrowing
Entries: Concept of discounting Cash Cash Loss on NRD Int. Exp In promissory note: NR discounted Liability for NRD Original parties Int. Income Int. Income 1. Maker- one is liable No gain / loss on 2. Payee- entitles to payment on the discounting date of maturity Note is paid by maker in Maturity Date Note- negotiable payee may obtain cash NR discounted Liability for NDR before maturity date by discounting the NR NR note, payee must endorse it first. Payee- endorser *contingent liability *NRD and NR Bank- Endorsee is extinguished derecognized Note is dishonored by maker ENDORSEMNT transfer of right to a To record the payment. MV+fees negotiable instrument by simply signing at the AR AR back of the instrument Cash Cash To cancel the To derecognize the With Recourse Without Recourse contingent liability liability for NRD Endorser shall pay Endorser(payee) and NR the endorsee(bank) if avoids future the maker dishonors liability even of the NRD Liability for NRD the note maker refuses to NR NR pay the endorsee on the date of maturity Secondary liability Contingent liability PFRS 9 paragraph 3.2.3 Compute the ff. Derecognize a financial asset when either of the 1. NP the ff. criteria is met: 2. CA of NR= P+AIR(int. income) 1. The contractual rights to the cash flows 3. Gain or loss on note discounting = of the financial asset have expired. NP CA of NR 2. The financial asset has been transferred Entries: and the transfer of qualities for Cash (NP) derecognition based on the extent of Loss on NRD transfer of risk and rewards of ownership NR (P) Int. Inc (AIR) WITH RECOURSE Conditional Sale Secured borrowing Recognizing NR is not contingent liability derecognized but instead an acctg liability is recorded at the amount paid =Face amt. of the NRD Guidelines for derecognition based on transfer of Risk 10. Discount period period of time from and Reward of ownership. date of discounting to maturity date. Dp= Term of the note - expired FA-Derecognized FA-not be derecognized portion 1. Transferred 2. Retained substantially all substantially all Discounting own note risks and reward the risks and reward 1. NP=P-D(p.r) 3. Neither derecognition depends on whether the Amortized entity has retained control of the asset 2. Int. exp (Discount x p) Lost control of the asset Retained control over the asset Discount on NP 3. CA=Np- discount on NP NRD-with recourse-unexpired- does not apply in first criteria. NRD-with recourse-does not fall 2 nd criterion Discounting transaction: combination of the guidelines a. Substantially transfered all rewards b. Retained substantially all risk c. Lost control of the NR Terms: 1. Net Proceeds discounted value of note received by the endorser from the endorsee NP=MV-D 2. Maturity Value amount due on the nore at the date of maturity. MV=P+I 3. Maturity date date on which the note should be paid. 4. Principal Amount appearing on the face of the note (face value) 5. Interest amount of interest in full term of the note I=Prt 6. Interest rate rate appearing in the face of the note 7. Time period within in which interest shall accrue. (Maturity date) (entire period /full term of the note) 8. Discount amount deducted by the bank in advance. D=MV*Dr*Dp 9. Discount rate rate used by the bank in computing the discount