HAND-OUT NO.

3: RECEIVABLE FINANCING
Brian Christian S. Villaluz, CPA
FINANCIAL ACCOUNTING AND REPORTING
HAND-OUT NO. 3: Receivable Financing

Receivable Financing – the financial flexibility or capability of a company to raise money out of its receivables.

Forms of receivable financing

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

Pledge of accounts receivable

 Under pledge transactions, receivables are used as collateral security for loans. Pledge does not qualify as
transfer of financial assets for derecognition because the pledgor/borrower retains control over the pledged
receivables. Therefore, receivables pledged are neither derecognized nor specifically identified from other
receivables.
 Pledge is treated as secured borrowing.
 No entry would be necessary with respect to the pledged accounts. Note disclosure in the notes to financial
statements is sufficient.
 Also known as general assignment of accounts receivable or hypothecation because all accounts receivable
serve as collateral security for the loan.

Problem 1: (Pledge)
On September 1, 2018, ABC Co. borrowed P100,000 from a bank and pledged all of its P200,000 accounts receivable as
security.

1. Prepare all necessary entries on September 1, 2018 to record the foregoing transaction.

Assignment
 Under this form of receivable financing, a borrower (assignor) transfers rights in some accounts receivable to a
lender (assignee) in consideration for a loan. It is a formal type of pledging of accounts receivable. It is also
known as specific assignment because specific accounts receivable serve as collateral security for the loan.
 Assignment is also treated as secured borrowing. However, an entry is needed to specifically identify the
assigned receivables from other receivables. The assignor retains ownership of the accounts assigned.
 This may be done either on a non-notification or notification basis.
o When accounts are assigned on a non-notification basis, customers are not informed that their accounts
have been assigned. Therefore, the customers continue to make payments to the assignor, who in turn
remits the collections to the assignee.
o When accounts are assigned on a notification basis, customers are notified to make their payments to
the assignee.

PRESENTATION AND DISCLOSURE

 Assigned receivables are presented in the statement of financial position as regular receivables which is included
under the line item “trade and other receivables”. However, the equity in the assigned accounts shall be disclosed
in the notes.
 The assigned receivable and the related loan are presented separately in the statement of financial position and
are not offset.

Problem 2: (Assignment of Receivables)

On December 1, 2018, Echo Company assigned specific accounts receivable totaling P4,000,000 as collateral on a
P3,000,000, 12% note from Metrobank. In addition to the interest on the note, Metrobank also charged a 5% finance fee
deducted in advance on the P3,000,000 value of the note. The December collections of assigned accounts receivable
amounted to P2,000,000 less cash discounts of P100,000. The company accepted sales returns of P150,000 on the
assigned accounts and wrote off assigned accounts of P200,000.

1. Prepare the journal entries to record the foregoing assuming the assignment is on a:
(a) Non-notification basis
(b) Notification basis
2. What amount of cash was received from the assignment of accounts receivable on December 1, 2018?
3. What is the carrying amount of note payable on December 31, 2018?
4. What is the balance of accounts receivable – assigned on December 31, 2018?
5. What amount should be disclosed as the equity of Echo Company in assigned accounts on December 31, 2018?

Factoring of accounts receivable

 A sale of accounts receivable to a factor (i.e., bank, financial institution) on a without recourse, notification basis.
 It differs from an assignment in that a company actually transfers ownership of the accounts receivable to the
factor. Thus, the factor assumes responsibility for uncollectible factored accounts.

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 HAND-OUT NO. 3: RECEIVABLE FINANCING
Brian Christian S. Villaluz, CPA
Problem 3: (Factoring on a non-recourse basis)
RX Company factored P2,000,000 of accounts receivable with a bank. The finance charge is 3% and 5% was retained to
cover sales discounts, sales returns and allowances.

1. What amount of cash was received on the factoring of accounts receivable?

2. What amount should be recognized as loss on factoring?

Problem 4:
VZ Company sold accounts receivable without recourse for P5,300,000. The company received P5,000,000 cash
immediately from the factor.

The remaining P300,000 will be received once the factor verifies that none of the accounts is in dispute.

The accounts receivable had a face amount of P6,000,000. The company had previously established an allowance for
uncollectible accounts of P250,000 in connection with such accounts.

1. What amount of loss on factoring should be recognized?

Problem 5: (Discounting on a without recourse basis)

BV Company accepted from a customer P1,000,000 face amount, 6-month, 8% note dated April 15, 2018. On the same
date, the company discounted the note without recourse at a 10% discount rate.

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

2. What is the loss on note receivable discounting?

Discounting with recourse

If the note is discounted on a with recourse basis, the holder is held liable in case the maker fails to pay. The discounting
is accounted for in either of the following:
a. Conditional sale of note receivable – a contingent liability equal to the face amount of the note discounted is
disclosed only in the notes; or
b. Secured borrowing – a liability equal to the face amount of the note discounted is recognized on the discounting.

Problem 6: (Discounting on a recourse basis)

On November 1, 2018, Katana Co. discounted a P1,000,000, 90-day 12% note, received from a customer on September
15, 2018, with a bank at 16% on with recourse basis. The bank uses 365 days per year in computing for discounts.

1. Provide the entry to record the discounting assuming the discount is treated as:
(a) Conditional sale
(b) Secured borrowing
2. Provide the entry at maturity date if the bank is able to collect from the maker the full amount of the note assuming
the discounting is treated as:
(a) Conditional sale
(b) Secured borrowing

DISHONORED NOTES
 Notes receivable not collected at maturity are considered dishonored notes.
 Dishonored notes are transferred to accounts receivable. The amount transferred to accounts receivable is the
maturity value of the note plus any costs directly attributable to the dishonor.

Problem 7: (Dishonored note)

On April 1, 2018, Choco Flakes Company discounted with recourse a 9-month, 10% note dated January 1, 2018 with face
of P6,000,000. The bank discount rate is 12%. The discounting transaction is accounted for as a conditional sale with
recognition of contingent liability.

On October 1, 2018, the maker dishonored the note receivable. The company paid the bank the maturity value of the note
plus protest fee of P50,000.

On December 31, 2018, the company collected the dishonored note in full plus 12% annual interest on the total amount
due.
1. Provide all the journal entries.
2. What amount was received from the note discounting on April 1, 2018?
3. What amount should be recognized as loss on note discounting?
4. What is the total amount collected from the customer on December 31, 2018?

FINANCIAL ACCOUNTING THEORIES

1. Pledge transactions
A. Are disclosed only.
B. Are accounted for by segregating the pledged receivables from the other receivables through a journal entry.
C. Need not be disclosed if the related loan does not require any collateral security
D. A and B

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 HAND-OUT NO. 3: RECEIVABLE FINANCING
Brian Christian S. Villaluz, CPA

2. Assignment of receivables
A. Are disclosed only
B. Are recognized by debiting accounts receivable-assigned
C. Give rise to receivables from factor
D. B and C

3. When specific accounts receivables are set up as collateral security for borrowings, the accounts receivable are
A. Pledged
B. Assigned
C. Factored
D. Discounted

4. It involves the outright sale of receivables to a financing institution known as a factor.

A. Pledging
B. Assignment
C. Factoring
D. Selling

5. What is "recourse" as it relates to selling receivables?

A. The obligation of the seller of the receivables to pay the purchaser in case the debtor fails to pay.
B. The obligation of the purchaser of the receivables to pay the seller in case the debtor fails to pay
C. The obligation of the seller of the receivables to pay the purchaser in case the debtor returns the product related
to the sale.
D. The obligation of the purchaser of the receivables to pay the seller if all of the receivables are collected.

6. A company factored accounts receivable without recourse with a bank. The company received cash as a result of
this transaction which is best described as
A. Bank loan collaterized by the company’s accounts receivable.
B. Bank loan to be repaid by the proceeds from the entity’s accounts receivable.
C. Sale of the company’s accounts receivable to the bank with the risk of uncollectible accounts retained by the
company.
D. Sale of the company’s accounts receivable to the bank with the risk of uncollectible accounts transferred to the
bank.

END OF HANDOUT

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