RECEIVABLE FINANCING
Receivable Financing: Is the financial flexibility or capability of an entity to raise money out of its
receivable by either selling the receivable or using the receivable as a collateral from a loan. Form of
Receivable Financing:
PLEDGE (a.k.a. Hypothecation, General Assignment)
Allows you to go to a lender and receive a loan using your accounts receivable as collateral. Pledge is
also known as general assignment of receivable, because the pledged account is not separated to other
accounts receivable.
With respect to the pledged account, no entry would be necessary. The pledged account receivable will
be retained in the company's balance sheet. It is sufficient that disclosure thereof is made in a note to
financial statement.
ASSIGNMENT (a.k.a. Hypothecation, Specific Assignment)
The borrower (the company) transfers right in specific accounts receivable to a lender (the bank or
financial institution) in consideration for a loan. Assignment is also known as specific assignment,
because the account assigned is separated from other receivable.
Usually, loan received from the bank is only a portion (example 75%, 80% or 90%) of accounts receivable
assigned, because the assigned account may not be fully realized due to sales discount, sales return and
default of customers.
The lender usually charge interest to the borrower and normally paid once a remittance is made.
Remittance is not applied to interest unless otherwise stated in the problem.
PLEDGE VS. ASSIGMENT
Pledge Assignment
Any of the receivable maybe taken by the Only specific receivable maybe taken by the
lender upon non-payment of the loan lender upon non-payment of the loan
Collection of any of the receivable may or Collection of accounts receivable-assigned is
may not be remitted to the lender required to be remitted to the lender
Receivable pledge will be retained in the Receivable pledge will be retained in the
company's balance sheet company's balance sheet
Lender has limited rights to inspect the Lender will make an investigation of the
borrower's records to achieve assurance that specific receivables that are being proposed
the receivables do exist; for assignment and will approve those that
are deemed worthy to be held as collateral
security.
RECEIVABLE FINANCING
TWO TYPES OF ASSIGNMENT
1. Non-notification basis the customer whose account is assigned is not notified that his
account was assigned. Therefore, the customer will still pay to the company and the company
will remit the collection to the bank.
2. Notification basis-the customer is notified that his account is assigned to the bank. In this.
case, the customer will pay directly to the bank.
Regardless of the type of assignment, the balance of accounts receivable-assigned, loans
payable and equity portion is not affected.
RECEIVABLE FINANCING
ILLUSTRATION 1 (Assignment)
On December 1, 2022, Camille company assigned on a non-notification basis accounts
receivable of P10,000,000 to a bank in consideration for a loan of 80% of the account less a 5%
service fee on the account assigned. The entity signed a note for the bank loan.
On December 31, 2022, the entity collected assigned accounts of P4,000,000 less discount of
P400,000. The entity remitted the collections to the bank in partial payment for the loan. The
bank applied first the collection to the interest and the balance to the principal.
The agreed interest is 1% per month on the loan balance. The entity accepted sales returns of
P200,000 on the assigned accounts and wrote off assigned accounts totaling P600,000
Q1: What is the amount of net proceeds from the assignment on December 31, 2022?
A. 10,000,000 C. 7,500,000
B. 8,000,000 D. 9,500,000
RECEIVABLE FINANCING
Q2: What is the balance of accounts receivable assigned on December 31, 20227
A. 6,000,000 C. 4,800,000
B. 5,200,000 D. 5,800,000
Q3: What is the carrying amount of the note payable on December 31, 2022?
A. 4,480,000 C. 8,000,000
B. 4,000,000 D. 4,400,000
Q4: What is the equity of the assignor in the assigned account that will be disclosed in the notes
to Financial statement on December 31, 2022?
A. 5,200,000 C. 720,000
B. 4,480,000 D. 0
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.
Factoring differs from an assignment in that an entity actually transfers ownership of the
accounts receivable factored. Thus, account factored should be removed from the company's
balance sheet.
Two types of factoring:
a. Casual factoring - factoring is unusual (no regular activity) in the company's operation. The
company sells it receivable below the face amount. Normally in casual factoring, no service
charge and interest are charged since the bank already bought the accounts receivable at a
discounted price.
b. Factoring as a continuing agreement: Factoring is part of the company's regular operation.
In case type of factoring, the factored account is usually sold at face amount but service charge
(a.k.a. commission or assessment fee), interest is charged by the bank.
The bank may also request for factor's holdback in case the account is not fully realized due to
sales returns and discount. Factor's holdback is recognized as receivable. If absence of
information, the selling price is equal to the face amount of account factored.
RECEIVABLE FINANCING
Fair value of course obligation (*);
• If during the year, the accounts factored is not yet collected by the bank fair value of
recourse obligation should be included in the total loss on factoring.
• If the account factored is collected during the year-the amount should be excluded.
• If the problem is silent, it is assumed not collected.
ILLUSTRATION 2 (Factoring-Casual)
Otter Company has a receivable amounting to P1,200,000; Otter had previously established an
Allowance for bad debts of P50,000 in connection with these receivables.
Otter Company sold these receivables with recourse for P1,060,000. Otter received P1,000,000
cash immediately from the factor. The remaining P60,000 will be received once the factor
verifies that none of the receivables is in dispute. Control was surrendered by Otter. The fair
value of the recourse obligation is P26,000.
Q1: The loss on factoring to be recognized by Otter Company is
A. 176,000 B. 116,000
C 90,000 D. 166,000
RECEIVABLE FINANCING
ILLUSTRATION 3 (Factoring-Continuing Agreement)
Thunder Company factored P5,000,000 of accounts receivable. Control was surrendered by
Thunder. The transaction met the criteria to be accounted for as sale but subject to recourse
for nonpayment. The fair value of the recourse obligation is P250,000.
The finance company assessed a fee of 6% and retained a holdback equal to 10% of the
accounts receivable. In addition, the finance company charged 12% interest computed on a
weighted average time to maturity of the accounts receivable for 30 days.
Q1: What amount was initially received from the factoring of accounts receivable?
A. 4,500,000 C. 4,700,685
B. 4,200,000 D. 4,150,685
Q2: What total amount should be recognized initially as loss on factoring?
A. 349,315 C. 755,000
B. 849,315 D. 599,315
Q3: What amount should be reported as loss on factoring assuming the accounts are fully
collected
by the factor?
A. 349,315 C. 500,000
B. 300,000 D. 299,315
DISCOUNTING
Is a form of receivable financing, where the company sold notes receivable to a bank or
financial institution? The company will transfer the promissory note to the bank in exchange for
cash equal to the maturity value less discount charge by the bank.
On the maturity date, the maker of the note (the customer) will pay directly to the bank (equal
to the "maturity value"). In this disposition transaction, the company will recognize the gain or
loss from sale of its asset.
If the discounting is with recourse the company will be liable to the bank if the maker dishonors
the note.
If the discounting is without recourse-the company avoids any future liability to the bank even
if the maker refuses to pay the bank on maturity date. If the problem is silent, it is assumed that
discounting is with recourse.
RECEIVABLE FINANCING
GAIN OR LOSS FROM DISCOUNTING
First - Compute the total carrying amount of receivables sold. Two financial assets were sold,
the Note receivable itself and the interest receivable earned while the company holding the
Note.
The interest receivable sold is based on the nominal interest rate and based on the number of
months that the company's holding the note, that is from the issuance date until the date of
discounting. Usually in the problems, Note discounted are short-term note, thus, its carrying
amount is equal to face amount.
RECEIVABLE FINANCING
First - Compute the Gain or loss on discounting. This is the difference between the Net
proceeds and the carrying amount of the receivables sold.
TYPES OF DISCOUNTING
1. Without recourse the company will derecognize the NR from its record. The company is
free from any liability in case the note is dishonored. Journal entry:
2. With recourse conditional sale - the transaction recognized as sale with the condition
that the note will be collected successfully otherwise it will be recognized as borrowings.
Contingent liability is recognized in the notes to financial statement.
Notes receivable - discounted account is deducted from the total notes receivable when
preparing the financial statement. In other words, it is a contra-asset account.
3. With recourse secured borrowing - In this type of discounting, the note is not actually
sold but instead used as a collateral for a bank loan. This there is no disposition of asset,
no gain or loss to be recognized, instead it will be recorded as interest expense.
RECEIVABLE FINANCING
ILLUSTRATION 4 (Discounting)
On July 31, 2020, Clear Company discounted at the bank a customer's P600,000 interest-
bearing note, 6-month, 10% note receivable dated May 31, 2020. The bank discounted the note
at 12%.
Q1: The net proceeds from this discounted note is
A. 564,000 C. 604,800
B. 576,000 D. 617,400
Q2: How much gain or loss should be recognized if the discounting is without recourse?
A. 25,200 C. 5,200
B. 22,500 D. 0
Q3: How much gain or loss should be recognized if the discounting is with recourse?
DISHONORED NOTES
First - Compute the amount of payment to the buyer of Note receivable. If the discounting is
with recourse-conditional sale and the note is dishonored, the company is required to pay the
bank the maturity value of the note plus protest fee because the company assumes the liability
for non- payment
Second - Compute the amount to be collected from the Maker of the Note. The company will
go after the maker/customer and may collect the amount paid to the bank plus additional
interest for the period of delay.
If the problem is silent, the additional interest is based on the nominal rate stated in the note
and based on the period of delay. Period of delay is from the maturity date until the date of
collected from the debtor.
RECEIVABLE FINANCING
ILLUSTRATION 5 (Dishonored Notes)
Cactus Company show the following transaction during 2021:
• On January 1, 2021, Cactus Company sold land with carrying amount of P1,500,000 in
exchange for a 9- month, 10% note with face value of P2,000,000. The 10% rate properly
reflects the time value of money for this type of note.
• On April 1, 2021, Cactus Company discounted the note with recourse. The bank discount
rate is 12%. The discounting transaction is accounted for as a secured borrowing.
• On October 1, 2021, the maker dishonored the note receivable. Cactus Company paid
the bank the maturity value of the note plus the protest fee of P10,000.
• On December 31, 2021, Cactus Company collected the dishonored note in full plus 12%
annual interest on the total amount due.
Q1: What is the amount collected by Cactus Company from the customer on December 31,
2021?
A. 2,150,000 C. 2,160,000
B. 2,224,800 D. 2,214,500
