Prepared by: Sherwin B.

Santos, CPA
E-mail Address: [email protected]________

Central Luzon State University

Science City of Muñoz 3120
Nueva Ecija, Philippines

Instructional Module for the Course

ACCTG 2105 / Intermediate Accounting 1

Module
TOPIC 9 (RECEIVABLE FINANCING)
I. Objectives

At the end of the module, the following are expected:

A. Identify the sources of financing through receivables.

B. Learn the accounting for pledge of accounts receivable, for assignment of accounts
receivable and factoring.

C. Understand the classification and presentation of pledged, assigned and factored

accounts receivable.

II. Learning Activities

RECEIVABLE FINANCING

Receivable financing is the capability to raise money out of its receivable. The
financing of receivable occurs when an entity experienced financial difficulties due to
business decline.

Because of weak financial condition, the receivables of an entity are used in

payments of its obligation or liabilities.
Common forms of receivable financing.

1. Pledging of accounts receivable

 2. Assignment of accounts receivable
3. Factoring of accounts receivable
4. Discounting of notes receivable

Pledge of account receivable

Pledge of account receivable is a form of receivable financing in which an entity

uses or pledged its existing account receivable as collateral to secure the payment of the
loan.

The collection of the pledge account receivable is normally done by the borrower
but may be required to turn over the collection to the bank.

The recognition of the loan is done by debiting the cash and discount on note
payable if the loan is discounted and crediting the note payable.

Illustration

On July 1, 2020, Lopez company borrowed P1,500,000 from a Bank and issued
promissory note for the loan.
The loan is discounted at 10% and it matures in one year. The Company pledged
its account receivable amounting to P2,000,000 as collateral for the loan.

Journal entry – July 1, 2020

Cash 1,350,000
Discount on notes payable 150,000
Note payable – bank 1,500,000

Note: There is no entry in the pledging of account receivable

The term discounted means that the interest is deducted from the loan in advance.

On December 31, 2020’s statement of financial position the note payable is

presented follows:

Note payable – bank 1,500,000

Discount on note payable (150,000 – 75,000) (75,000) Carrying amount
1,425,000
 The discount on note payable must be amortized as an interest expense for 6
months from July 1 to December 31.

Interest expense (150,000 x 6/12) Assignment of account receivable

Discount on note payable 75,000

July 1, 2020 journal entry 75,000

*Payment of the loan

Note payable –bank
Cash 1,500,000
1,500,000
*amortization of discount on notes payable
Interest expense
Discount on notes payable – bank 75,000
75,000

Assignment of account receivable is a more formal type of pledging of account

receivable, wherein the borrower (assignor) transfers the rights in some account
receivable to a lender (assignee) as collateral security for the loan.

Distinction of Assignment and Pledge

Pledge Assignment
*Less formal type *More formal type
*General *Specific

Pledge is general because all the account receivable serves as collateral.

Assignment is specific for the reason that it assigns specific account receivable as
collateral for the loan. The assignment is recorded by debiting the “Accounts receivable
– assigned” and crediting the accounts receivable.
Notification and Non-notification basis

Notification and non-notification basis are two ways on assigning account receivable.
 Notification basis Non-notification basis

*The customers are notified that *The customers are not aware of the
their account were assigned assignment of the
account.

*the obligation to collect is still in the

*The collections will go directly to the
assignee assignor side but later remits the
collection to the assignee

Illustration – Notification basis Transactions

January

1 Coffee company assigned P2,000,000 of its account receivable to a bank. The bank
loans 85% minus bank charge of 5% on gross amount of accounts receivable
assigned. The company signed a promissory note with 2% interest of the unpaid
loan balance per month.

31 The company receive notice from the bank that P1,000,000 of assigned account
were collected and 2% discount. The company made the payment of interest due.

February

28 The company receive notice from the bank that P900,000 of assigned account were
collected. Final settlement was made by the bank for excess collection and
uncollectible accounts assigned of P100,000.

Journal Entries
January 1
*To assign account receivable.
Accounts receivable- assigned 2,000,000
Accounts receivable 2,000,000
*To record the loan.
Cash 1,600,000
Service charge (2,000,000 x 5%) Note Payable – bank (2,000,000 x 85%)
January 31 100,000
*To record Accounts assigned collection 1,700,000

Note payable – bank 980,000

Sales Discount (1,000,000 x 2%) Accounts *To record interest payment
receivable – assigned 20,000
1,000,000

Interest expense (1,700,000 x 2%) 34,000 Cash 34,000

February 28
*To record collection, excess collection and interest expense.
Cash 165,600 Interest expense (720,000 x 2%) 14,400
Note payable – bank (1,700,000 – 980,000) *To record uncollected assigned account
Accounts receivable – assigned 720,000
900,000

Accounts receivable 100,000 Account receivable – assigned 100,000

Illustration - Non-notification basis

January

1 Coffee company assigned P2,000,000 of its account receivable to a bank. The bank
loans 85% minus bank charge of 5% on gross amount of accounts receivable
assigned. The company signed a promissory note with 2% interest of the unpaid
loan balance per month.

6 Issued credit memo to a customer whose account was assigned for return of
damaged merchandise amounting to P50,000.

15 The company collected P1,000,000 of the assigned account less discount of 2%.

31 The company remitted the collection of the assigned account to the bank plus the
interest payment for one month.

February
 2 The company determined that P20,000 of the assigned account is uncollectible or
worthless.

22 Collected P900,000 of the assigned account.

28 Remitted the amount due for the loan balance plus the monthly interest.

Journal Entries

January 1

*To assign account receivable.

Accounts receivable- assigned Accounts *To record the loan.
receivable 2,000,000
2,000,000

Cash 1,600,000
Service charge (2,000,000 x 5%) 100,000
Note Payable – bank (2,000,000 x 85%) 1,700,000
January 6

*To record the sales return and allowances

Sales return 50,000 Account receivable – assigned 50,000

January 15

*To record the collection of assigned account

Cash 980,000
Sales Discount (1,000,000 x 2%) *To record the remittance of the collection
Account receivable – assigned plus interest
20,000
January 31 1,000,000

Note payable – bank 980,000 Interest expense (1,700,000 x 2%) 34,000 Cash
1,014,000
 February 2

*To record the write off

Allowance for doubtful accounts 20,000 Accounts receivable – assigned
20,000

February 22

*To record collection

Cash 900,000 Accounts receivable – assigned 900,000

February 28

*To record the remittance of collection

Note payable – bank 720,000
Interest expense (720,000 x 2%) Cash 14,400
734,400
*To transfer the remaining balance of account receivable – assigned to account
receivable
Account receivable 10,000
Account receivable – assigned 10,000

Account receivable – assigned balance

=(2,000,000 -1,900,000 – 20,000 – 50,000 -20,000)

= 10,000

Factoring

Factoring of accounts receivable is a form of finance receivable wherein an entity

sells its accounts receivable to the bank called the factor on a without recourse,
notification basis.

ENTITY BANK

A gain or loss is recognized as the difference between the proceeds received and
the net carrying amount of the account factored.
 The difference of factoring and assigning is the ownership of the account
receivable. In assignment of account, the entity or the borrower retains the ownership
of the receivable.

On the other hand, in factoring the ownership is actually transferred to the factor
or the bank and the customers whose account are factored are notified.

Casual Factoring –ordinary sale of asset

In times of financial distress an entity may factor some or all its account
receivable to a bank to gain cash.

Journal entry on factoring

Cash xxx
Allowance for doubtful account xxx
Accounts receivable xxx

Note: If there is gain on factoring, the gain is recognized by debiting” gain on factoring”.
Loss is recognized by crediting “Loss on factoring”.

Factoring as a continuing agreement

In this agreement, before the shipment of the goods the seller (entity) requests
credit approval to the factor. If the request is approved, the account is sold to the factor
at the time after the shipment of the goods.

The factor may compensate a commission for the factoring services and he may
also withhold an amount for security in case of sales return and allowance occurs.

The amount withheld is called “factor’s holdback” that is recognized as

receivable from factor classified as current asset.

Illustration

Luck company factored account receivable amounting to P400,000 to a finance

entity with a term of 2/10, n/30.
The factor charged a 5% commission and withheld 10% of the accounts
receivable to cover sales return and allowances.

Journal entry
 Cash 332,000
Sales Discount (400,000 x 2%) 8,000
Commission (400,000 x 5%) 20,000
Receivable from factor (400,000 x 10%) 40,000
Account receivable 400,000

*If there is a sales return of P25,000, the entry would be:

Sales return and allowance 25,000
Sales Discount (25,000 x 2%) 500 Receivable from factor 24,500

*If all receivable factored are collected without further sales return, the entry
would be:
Cash (40,000 – 24,500) 15,500
Receivable from factor 15,500
Reference
Intermediate Accounting Volume 1, 2021 ed. by Valix, Peralta & Valix