Chapter 8 – Receivable Financing (Pledge, Assignment, and Factoring)

Problem 8 – 1

“Six month note”

Problem 8 - 2

Requirement 1

“One-year bank loan”

“The transaction starts Oct. 1”

“The loan was discounted at 10%”

- If the loan is discounted, in the ban parlance this means that the interest for the term of the loan is
deducted in advance

Entries:

2019

Oct. 1 Cash 3,600,000

Discount on note payable (10% x 4,000,000) 400,000

Note payable - bank 4,000,000

Interest expense (400,000 x 3/12) 100,000

Discount on note payable 100,000

2020

Oct. 1 Note payable 4,000,000

Cash 4,000,000
 Dec. 31 Interest expense (400,000 x 9/12) 300,000

Discount on note payable 300,000

Requirement 2

Current liabilities:

Note payable – bank (Note 3) 4,000,000

Discount on note payable (300,000)

Carrying amount 3,700,000

Note 3 – Note payable – bank

Problem 8 – 3

• Assignment of accounts receivable – nonnotification basis. (Si Company mangongolekta)

• Don’t compound the entry.

• A credit memo is a contraction of the term "credit memorandum," which is a document issued by the
seller of goods or services to the buyer, reducing the amount that the buyer owes to the seller under the
terms of an earlier invoice.

• Remit – send money as payment

• Interest is based on the balance of note payable bank

• Collections: Cash + Sales discount = Gross amount of Credit Sales. Wherein that gross amount of credit
will reduce the accounts receivable. Take note that it’s not only the collections reduces the accounts
receivable, but also the related sales discount.

• Where the final settlement was made with the bank, the portion of accounts receivable assigned will
be derecognize, and it turns backs to accounts receivable wherein unassigned.

Problem 8 – 4

• Assignment of accounts receivable – notification basis. (Na notify si debtor na sa banko na lang
bayaran. Si bank mangongolekta, at kapag nakakolekta, inonotify si assignor).
• In notifaction basis, the “accounts receivable – assigned account” is decreased when the debtor pays
the obligation. Because, the debtor pays directly to the bank. Not necessarily that the Company will
remitted to the bank wherein “debit note payable – bank and credit cash”.

• Always check the balance of notes payable – bank

• Cash remittance from bank

Collections by bank 500,000

Less: Payment of loan (1,125,000 – 800,000) (325,000)

Excess collection 175,000

Less: Interest (2% x 325,000) (6,500)

Cash remittance from bank 168,500

“In making the settlement by the bank, the bank directly deducted the interest charge for the
corresponding period.”

Entry:

Sept. 1 Note payable-bank (balance) 325,000

Accounts receivable - assigned 325,000

Interest expense (325,000 x 2%) 6,500

Accounts receivable – assigned 6,500

Cash (remittance from bank) 168,500

Accounts receivable – assigned 500,000

Accounts receivable 200,000

Accounts receivable – assigned 200,000

Problem 8 – 5

“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.”

Aug. 1 Cash 330,000

Accounts receivable – assigned 330,000

Interest expense (1% x 400,000) 4,000

Note payable – bank (330,000 – 4,000) 326,000

Cash 330,000

• “Interest expense per month on the unpaid balance at the beginning of the month”. Interest expense
is charged until the final settlement.

*Problem 8 - 6

Requirement b

The Accounts receivable – assigned with a balance of P500,000 should be classified as current asset and
included in trade and other receivables.

The note payable – bank of P343,000 should be classified and presented as a current liability.

The company should disclose the equity in assigned accounts as follows:

Accounts receivable – assigned 500,000

Note payable – bank (343,000)

Equity in assigned accounts 157,000

“The assignor (entity) should disclose its equity in the assigned accounts.”

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.

https://www.academia.edu/35459020/Receivable_Financing_CH14_by_Lailane.pptx

“Why do we need to disclose the equity in assigned accounts?”

Factor
- “Sell (one's receivable debts) to a factor”
- One who acts or transacts business for another. One that lends money to producers and dealers* (as
on the security of accounts receivable).

Dealer* - a person or business that buys and sells goods.

Initial transaction:

Cash 4,500,000

Allowance for doubtful accounts 200,000

Receivable from factor 600,000

Loss on factoring 700,000

Accounts receivable 6,000,000

AR factored 6,000,000

Factor’s holdback (10% x 6,000,000) (600,000)

Commission (15% x 6,000,000) (900,000)

Cash received 4,500,000

AR 6,000,000

Commission (900,000)

Net sales price 5,100,000

Carrying amount of AR (6,000,000 – 200,000) 5,800,000

Loss on factoring (700,000)

“ The entity had previously established an allowance for doubtful accounts of P200,000 for these
accounts”

Commission is an expense account, thus, it reduces the amount of accounts receivable due to the
payment of commission.
Selling price – Carrying amount = Gain or loss

No adjustments were made. Hence, Factor’s hold back on initial transaction is fully collected.

“Final settlement of the factor’s holdback is made after the factored receivables have been fully
collected.”

Receivable from factor account is not an expense account, it is part of the proceeds of the sale.

Factoring
Factoring is a sale of accounts receivable on a without recourse, notification basis.

In a factoring arrangement, an entity sells accounts receivable to a bank or finance entity called a factor.

Accordingly, a gain or loss is recognized for the difference between the proceeds received and the net
carrying amount of the receivables factored.

Factorings may take the form of the following:

b. Factoring as continuing agreement

In this setup, before a merchandise is shipped to a customer, the selling entity requests the factor’s
credit approval.

If it is 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 factor.

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 protection against customer returns
and allowances and other special adjustments.

The factor’s holdback is actually a receivable from factor and classified as current asset.

Final settlement of the factor’s holdback is made after the factored receivables have been fully
collected.
Problem 8 – 10

Regarding for sales discount given on factoring - Net method

“Terms: 2/10, n/30”

Granted the customer a credit allowance of P50,000 for damage in the shipment.

June 9 Sales return and allowances 50,000

Sales discount (2% of P50,000) 1,000

Receivable from factor 49,000

“2% discount of P50,000 wherein part of P500,000 is derecognized”

Problem 8 – 12

“Following balances on December 31”

[1,000,000 + 300,000] x 5 % = 65,000 – 30,000 recorded = 35,000 needs to record.

Problem 8 – 13

2.

Cash 250,000

Receivable from factor 250,000

Accounts receivable factored 3,000,000

Collections by factor 2,500,000

Balance – December 31 500,000

Receivable from factor per book 300,000

Required holdback (10% x 500,000) (50,000)

Remittance from factor 250,000

“Free Company 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% unpaid receivables
(P2,500,000) at the end of the month.”

Books of Freeway Company (factor)

1. Accounts receivable 3,000,000

Cash 2,250,000

Clients retainer 300,000

Commission income 450,000

2. Cash 2,500,000

Accounts receivable 2,500,000

3. Clients retainer 20,000

Allowance for doubtful accounts (4% x 500,000) 20,000

“Experience has led Freeway Company to establish an allowance for doubtful accounts of 4% of all
unpaid accounts receivable purchased.”

Problem 8 – 14

Question 1

“5% finance fee deducted in advance on the assigned accounts”

Question 2

Note payable 4,000,000

Principal payment:

Remittance 1,800,000

Interest (4,000,000 x 12% x 1/12) (40,000) ________

Note payable – December 31 1,760,000

Problem 8 -15

“The transaction met the condition to be considered as sale but subject to recourse for nonpayment. The
factor estimated recourse obligation at P50,000”.

Cash 1,700,000

Receivable from factor 200,000

Loss on factoring ([ 2,000,00 x 5% or 100,000] + 50,000) 150,000

Accounts receivable 2,000,000

Recourse liability 50,000

2,000,000 + 50,000 – 1,700,000 – 200,000 = 150,000 (Loss on factoring)

Problem 8 – 18

“The entity factored P1,500,000 accounts receivable and assigned P5,000,000 accounts receivable.”

“Not stated that 2% finance charge is based on accounts. Hence, 2% is based on the P2,500,000 cash.”