ADAMSON UNIVERSITY

INTERMEDIATE ACCOUNTING 1
RECEIVABLE FINANCING - ASSIGNMENT
USE THE FOLLOWING INFORMATION FOR NOS. 1 AND 2
Rapture Company received from a customer a one-year P500,000 note bearing annual interest of 8%.
After holding the note for six months, Rapture discounted the note at the bank at an effective interest of
10%.

1. What amount of cash was received from the bank?

a. 540,000
b. 523,810
c. 513,000
d. 495,238

2. What is the loss on notes receivable discounting?

a. 20,000
b. 13,000
c. 7,000
d. 0

Compute for the Maturity Value of the note

Principal 500,000

Add: Interest on the note (500,000 X 8%) 40,000

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Maturity Value of the note 540,000

Compute for the Discount

Discount is computed by multiplying the Maturity Value of the note by the Discount Rate
and the Discount Period (from the time the note was discounted until the maturity date of
the note), over 12 months, or, P540,000 X 10% X 6/12 = P27,000
Compute for the Net Proceeds from Discounting
Maturity Value of the note 540,000

Less: Discount 27,000

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Net Proceeds from Discounting 513,000

Compute for the Carrying Value of the note at the time it was discounted
Principal 500,000

Add: Accrued Interest on the note (500,000 X 8% X 6/12) 20,000

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Carrying Value of the note at the time it was discounted 520,000

Compute for any Gain or Loss on Discounting

If the Net Proceeds from Discounting is GREATER THAN the Carrying Value of the note
at the time it was discounted, recognize a GAIN

If the Net Proceeds from Discounting is LESS THAN the Carrying Value of the note at the
time it was discounted, recognize a LOSS

Net Proceeds from Discounting 513,000

Less: Carrying Value of the note at the time it was discounted 520,000

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Loss on Discounting (7,000)

JOURNAL ENTRY
Cash 513,000

Loss on Discounting 7,000

Notes Receivable 500,000

Interest Income 20,000

USE THE FOLLOWING INFORMATION FOR NOS. 3 TO 5

On December 1, 2020, Solution Corporation assigned specific accounts receivable amounting
P5,000,000 as collateral on a P4,000,000 12% note from South West Bank. Solution will continue to
collect the assigned accounts receivable. In addition to the interest on the note, South West also
charged a 5% finance fee deducted in advance.

The December collections of assigned accounts receivable amounted to P2,000,000 less cash discount
of P200,000.

Solution accepted sales returns of P100,000 on the assigned accounts receivable and wrote off assigned
accounts of P300,000
On December 31, 2020, Solution remitted the collections to the bank in payment for the notes payable
and the interest accrued on December 31, 2020.

3. What amount of cash was received from the assignment of accounts receivable on December 1,
2020?
a. 4,000,000
b. 3,800,000
c. 4,750,000
d. 3,750,000

To identify the assigned accounts, Solution will

12/01/20 Accounts Receivable - ASSIGNED 5,000,000

Accounts Receivable 5,000,000

To record the loan, Solution will

12/01/20 Cash 3,800,000

Service Charge 200,000

Notes Payable 4,000.000

Amount of Loan 4,000,000

Less: Finance Charge (4,000,000 X 5%) 200,000

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Loan Proceeds 3,800,000

4. What is the carrying amount of the notes payable on December 31, 2020?
a. 1,840,000
b. 2,140,000
c. 2,240,000
d. 2,200,000

The December collections of assigned accounts receivable amounted to P2,000,000 less cash
discount of P200,000.
Cash 1,800,000
Sales Discount 200,000

Accounts Receivable – ASSIGNED 2,000,000

Solution accepted sales returns of P100,000 on the assigned accounts receivable

Sales Returns and Allowances 100,000

Accounts Receivable – ASSIGNED 100,000

and wrote off assigned accounts of P300,000

Allowance for Doubtful Accounts 300,000

Accounts Receivable – ASSIGNED 300,000

On December 31, 2020, Solution remitted the collections to the bank in payment for the notes
payable and the interest accrued on December 31, 2020.

12/31/20 Notes Payable 1,800,000

Interest Expense 40,000

Cash 1,840,000

The debit to the account “Notes Payable” in this journal entry is based on the total
collection for the month of December

Interest Expense for December is based on unpaid loan balance, P4,000,000 X 12% X
1/12, or P40,000

At month-end, Solution’s General Ledgers for “Accounts Receivable – Assigned” and

“Notes Payable” shall show the following posting:

Accounts Receivable - ASSIGNED

12/01/2020 5,000,000 Collections 2,000,000

Returns 100,000
 Written Off 300,000

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5,000,000 2,400,000

Notes Payable

12/31/2020 1,800,000 12/01/2020 4,000.000

5. What amount should be disclosed as the equity of Solution in assigned accounts on December 31,
2020?
a. 260,000
b. 400,000
c. 360,000
d. 760,000

Solution’s equity in the assigned accounts receivable as at December 31, 2020 is:
Balance of Accounts Receivable – ASSIGNED

(5,000,000 – 2,300,000) 2,600,000

LESS: Balance of Notes Payable

(4,000,000 – 1,800,000) 2,200,000

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Equity in assigned accounts receivable 400,000

USE THE FOLLOWING INFORMATION FOR NOS.6 TO 8.
Foxtrot Company factored P6,000,000 of accounts receivable to a finance entity at the beginning of
2020. The factor accepted the accounts receivable subject to recourse for non-payment. The fair value
of the recourse obligation is P100,000. The factor assessed a factoring fee of 3% and retained a
holdback equal to 5% of the accounts receivable. In addition, the factor charged 15% interest on the
accounts receivable’s time to maturity of 54 days.

6. What is the amount of cash initially received from the factoring?

a. 5,296,850
b. 5,386,850
c. 5,476,850
d. 5,556,850

To compute for the cash initially received by Foxtrot

Amount of receivable factored 6,000,000

Less: Factor’s holdback (5% of P6,000,000) (300,000)

Less: Factoring fee (3% of P6,000,000) (180,000)

Less: Interest (P6,000,000 X 15% X 54/365) (133,150)

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Cash initially received for factoring 5,386,850

Foxtrot shall record the following journal entries for the factoring:
Cash 5,386,850

Due from Factor 300,000

Factoring Fee 180,000

Interest Expense 133,150

Accounts Receivable 6,000,000

To record cash initially received for factoring

Loss on Recourse Obligation/Liability 100,000

Recourse Obligation/Liability 100,000

To set up recourse obligation/liability

Note: Recourse obligation/liability is initially recorded as a loss on factoring

7. If all accounts are collected, what is the loss on factoring of accounts receivable?
a. 313,150
b. 180,000
c. 433,150
d. 633,150

If all accounts are collected, Foxtrot should REVERSE its recognition of loss
Recourse Obligation/Liability 100,000

Loss on Recourse Obligation/Liability 100,000

Reversal of recourse obligation/liability previously set up

Hence, its loss in factoring is as follows:

Factoring fee (3% of P6,000,000) 180,000

Interest (P6,000,000 X 15% X 54/365) 133,150

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Total Initial Loss 313,150

8. If all accounts are not collected, what is the loss on factoring?

a. 713,150
b. 100,000
c. 413,150
d. 313,150

If all accounts are not collected, Foxtrot should SETTLE its obligation to the factor
Recourse Obligation/Liability 100,000

Cash 100,000

To record settlement of obligation/liability

And this shall account as an additional loss on the part of Foxtrot. Thus, P413,150.
9. Why would an entity factor its accounts receivable?
a. To improve the quality of credit granting process
b. To accelerate access to amount collected
c. To comply with customer agreements
d. To limit its legal liability

10. Which of the following is used to account for probable sales discounts, sales returns and
allowances in a factoring arrangement?
a. Factor holdback
b. Recourse liability
c. Both a and b
d. Neither a nor b