Receivable financing

- Financial flexibility or capability of an entity to

raise money out of its receivable
Pledging of Factoring of
Receivables Receivables

Assignment Discounting
of of
Receivable Receivables

Common Forms of
Receivable Financing
 LOANS

Collects the Receives the

pledged accounts collections as a
payment in
satisfaction of the
ACCOUNTS loan
RECEIVABLE

Pledge of Accounts
Receivable
 LOANS ACCOUNTS
RECEIVABLE
When the company made a loan from the bank:
Cash xx
Discount on note payable xx
NO ENTRY
Note payable – Bank xx

For subsequent payment of the loan: ONLY A DISCLOSURE IN

Note payable – Bank xx
NOTES TO FINANCIAL
Cash xx
Discount on note payable is amortized:
STATEMENT
Interest Expense xx
Discount on note payable xx

Pledge of Accounts
Receivable
 Provided the following information in connection with a bank
loan.
March 1 Pittance Company borrowed P2,000,000 from a
bank on a six-month note carrying an interest of
12% per annum. Accounts of P3,000,000 are
pledged to secure the loan.
April 1 Pledged accounts of P1,000,000 are collected
minus 2% discount.
July 1 The remaining pledged accounts are collected.
Sept. 1 The bank loan is repaid plus interest.

REQUIRED:
Prepare journal entries to record the transactions.

Pittance Company
2015
Mar. 1 Cash 2,000,000
Note payable – bank 2,000,000

Apr. 1 Cash 980,000

Sales Discount 20,000
Accounts Receivable 1,000,000

Jun. 1 Cash 2,000,000

Accounts Receivable 2,000,000

Sept. 1 Note payable – bank 2,000,000

Interest Expense 120,000
Cash 2,120,000
 Idealist Company secured a one-year bank loan of P4,000,000
on October 1, 2015. The loan was discounted at 10%.
The entity signed a note for the loan and pledged P5,000,000
of its accounts receivable as collateral for the same. The
accounting period of the entity ends on December 31.

REQUIRED:
1. Prepare Journal Entries, including adjustment from the date
of the loan up to the date of maturity.
2. Statement presentation of the bank loan with adequate
disclosure on December 31, 2015.

Idealist Company
Requirement 1:
2015
Oct. 1 Cash 3,600,000
Discount on note payable 400,000
Note payable – bank 4,000,000
Interest Expense 100,000
Discount on note payable 100,000

2016
Oct. 1 Note payable – bank 4,000,000
Cash 4,000,000
Dec. 31 Interest Expense 300,000
Discount on note payable 300,000
Requirement 2:
Idealist Company
Statement of Financial Position
As of the Year Ended 31 December, 2015

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities:
Note payable – bank (Note 3) 4,000,000
Less: Discount on note payable 300,000
Carrying Amount 3,700,000

Note 3: Note payable – bank

Accounts of P5,000,000 are pledged to secure the bank loan of P4,000,000.

 In form:
SUBSTANCE Secured borrowing evidenced by a
OVER FORM financing agreement and a promissory
note both of which the assignor signs.

In substance:
Assignor transfers its rights in some of
its accounts receivable to an Assignee in
consideration for a loan.

Assignment of Accounts
Receivable
• Assignment may be done either:
Buyer is not informed of the
Non-notification basis assignment and will continue to remit
its payment to the seller (assignor).

Buyer is informed of the assignment

Notification basis arrangement and will remit payment
directly to the assignee
• Bank or a finance entity analyzes the borrower’s account
receivable.
• Assignee charges interest for the loan, and required a
service or financing charge or commission for the
assignment agreement.

Features of Assignment
• Loan is at a specified percentage of the face value of the
collateral and the interest and service fees are charged to
the assignor (borrower).

• Assigned accounts are segregated from other accounts.

The notes payable should be deducted from the balance
of Accounts Receivable assigned to determine the equity
in assigned accounts receivable.

Features of Assignment
 Non- notification Notification
Accounts Accounts
Receivable - Receivable -
To separate the assigned xx assigned xx
assigned
accounts Accounts Accounts
Receivable xx Receivable xx
Cash xx Cash xx
Service Service
To record the Charge xx Charge xx
loan Notes payable - Notes
Bank payable -
xx Bank xx
Sales return xx Sales return xx
Issued credit
memo (e.g. sales Accounts Accounts
return) Receivable - Receivable -
xx xx

Pro-forma journal entries:

assigned assigned

Non-notification vs. Notification

 Non- notification Notification
Cash xx Note payable xx
- Bank
Sales xx Sales
To record Discount Discount xx
collection Accounts Accounts
Receivable - Receivable -
assigned xx assigned xx
Notes Interest
payable - Expense
To record Bank xx xx
remittance
Interest Cash
Expense xx xx
Cash xx

Pro-forma journal entries:

Non-notification vs. Notification
 Non- notification Notification
Allowance for Allowance for
Doubtful Doubtful
To record write- Accounts xx Accounts xx
off of accounts Accounts Accounts
assigned Receivable - Receivable
assigned xx - assigned xx
Accounts Accounts
To transfer the
Receivable Receivable
remaining xx xx
balance of A/R – Accounts Accounts
assigned to A/R - Receivable - Receivable
unassigned
assigned xx - assigned xx

Pro-forma journal entries:

Non-notification vs. Notification
Accounts Receivable – unassigned xx
Accounts Receivable – assigned xx
Total xx
Less: Allowance for Doubtful Accounts xx
Net Realizable Value xx

Included under the line item:

Trade and Other Receivables

Statement Presentation
Accounts Receivable – assigned xx
Less: Note payable – Bank xx
Equity in assigned accounts xx

The assignor (entity) should

disclose its equity in the
assigned accounts

Statement Presentation
 Docile company assigned certain accounts receivable to a bank
for a loan on the following basis: 75% cash advance, 4%
service charge on gross accounts assigned, 2% interest per
month is to be charged, and the bank makes the collections.
The entity signed a promissory note for the loan.

July 1 Received remittance upon the specific assignment of

P1,500,000 in accounts to the bank.

Aug. 1 Received notice from the bank that P800,000 of the

assigned accounts were collected. A check was sent
to the bank for one month interest charge.

Docile Company
Sept. 1 Received notice from the bank that assigned accounts of
P500,000 were collected in full and the remaining accounts of
P200,000 were being returned. Accordingly, a check was
received from the bank in settlement of the assignment
contract. In making the settlement, the bank deducted the
interest charge for the corresponding period.

REQUIRED:
Prepare journal entries on the books of the assignor.

Docile Company
2015
Jul. 1 Accounts Receivable – assigned 1,500,000
Accounts Receivable 1,500,000

Cash 1,065,000
Service Charge 60,000
Note payable – bank 1,125,000

Aug. 1 Note payable – bank 800,000

Accounts Receivable – assigned 800,000

Interest Expense 22,500

Cash 22,500
2015
Sept. 1 Cash 168,500
Interest Expense 6,500
Note payable – bank 325,000
Accounts Receivable – assigned 500,000

Accounts Receivable 200,000

Accounts Receivable – assigned 200,000

Computation:
Collection by bank 500,000
Payment of loan (1,125,000 – 800,000) 325,000
Excess collection 175,000
Interest (325,000 x 2%) 6,500
Cash Remittance from bank 168,500
Provided the following transactions:
July 1 The entity assigned P500,000 of accounts receivable
to its bank on a non-notification basis in
consideration for a loan. On this date, the bank
advanced P400,000 less a service charge of 2% of
the total accounts assigned, and the entity signed a
promissory note bearing interest of 1% per month on
the unpaid balance at the beginning of the month.

Aug. 1 Collected P330,000 on assigned accounts. The entity

remitted this amount to the bank in payment first for
the interest and the balance to the principal.

Grateful Company
Sept. 1 Collected the remaining balance of assigned
accounts. The entity paid off the remaining loan
balance.

REQUIRED:
Prepare journal entries to record the transactions.

Grateful Company
2015
Jul. 1 Accounts Receivable – assigned 500,000
Accounts Receivable 500,000

Cash 390,000
Service Charge 10,000
Note payable – bank 400,000

Aug. 1 Cash 330,000

Accounts Receivable – assigned 330,000

Interest Expense 4,000

Note payable – bank 326,000
Cash 330,000
Sept. 1 Cash 170,000
Accounts Receivable – assigned 170,000

Interest Expense 740

Note payable – bank 74,000
Cash 74,740
 Problem 14-18 Solvent Company
On December 1, 2015, Solvent Company assigned specific
accounts receivable totaling P5,000,000 as collateral on a
P4,000,000 12% note from a certain bank. The entity will
continue to collect the assigned accounts receivable. In
addition to the interest on the note, the bank also charged a 5%
finance fee deducted in advance on the assigned accounts.
The December collections of assigned accounts receivable
amounted to P2,000,000 less cash discount of P200,000. On
December 31, 2015, the entity remitted the collections to the
bank in payment for the interest accrued on December 31,
2015 and the note payable. The entity accepted sales returns of
P100,000 on the assigned accounts and wrote off assigned
accounts of P300,000
1. What amount of cash received from the assignment of accounts receivable
on December 31, 2015?
a. 4,000,000
b. 3,800,000 Note Payable 4,000,000
Finance fee ( 5,000,000 x 5%) (250,000)
c. 4,750,000 Cash Received on December 1 3,750,000
d. 3,750,000

2. What is the carrying amount of note payable on December 31, 2015?

a. 1,840,000
Note Payable 4,000,000
b. 2,140,000 Principal payment:
c. 2,240,000 Remittance 1,800,000
Interest(4Mx12%x1/12) (40,000) 1,760,000
d. 2,200,000
Cash Received on December 1 2,240,000

Accountsas
3. What amount should be disclosed Receivable – assigned
the equity 5,000,000
of Solvent Company in
Collections (1,800,000)
assigned accounts on December 31, 2015?
Sales Discounts (200,000)
a. 260,000 Sales Returns (100,000)
b. 400,000 Accounts Written off (300,000)
Balance of accounts – assigned 2,600,000
c. 360,000
Note Payable (2,240,000)
d. 760,000 Equity in assigned accounts 360,000
 Problem 14 – 22 Brawny Company

Brawny Company factored P8,000,000 of

accounts receivable to a finance entity at the
beginning of the current year. Control was
surrendered by Brawny Company. The factor
assessed a fee of 5% and retained a holdback
equal to 10% of the accounts receivable. In
addition, the factor charged 15% interest
computed on a weighted average time to maturity
of the accounts receivable of 30 days.
1. What amount was initially received by Brawny Company
from the factoring?
a. 6,701,370 Accounts receivable factored 8,000,000
b. 6,800,000 Interest (8,000,000x15%x30/365) (98,630)
Holdback (8,000,000 x 10%) (800,000)
c. 7,501,370 Finance fee ( 8,000,000 x 5%) (400,000)
Cash initially received from factoring 6,701,370
d. 6,700,000

2. Assuming all accounts receivable are collected, what is

the cost of factoring?
a. 400,000
b. 498,630 Interest (8,000,000x15%x30/365) 98,630
c. 898,630 Finance fee ( 8,000,000 x 5%) 400,000
Cost of factoring 498,630
d. 98,630
 Problem 14 – 23 Moody Company
At the beginning of the current year, Moody Company sold
P5,800,000 in accounts receivable for cash of P5,000,000.
The factor withheld 10% of the cash proceeds to allow for
possible customer returns and other adjustments. An
allowance for bad debts of P600,000 had previously been
established by Moody Company in relation to these
accounts. What was the loss on factoring recognized by
Moody Company?

a. 200,000 Cash received 5,000,000

Carrying amount of accounts receivable
b. 700,000 factored:
Accounts Receivable 5,800,000
c. 500,000 Allowance for Bad Debts (600,000) 5,200,000
d. 800,000 Loss on Factoring (200,000)