INTERMEDIATE ACCOUNTING PART 1

RECEIVABLES: ACCOUNTNG FOR RECEIVABLE FINANCING

Definition
Receivable financing is the financial flexibility or capability of the entity to raise money out of its receivables. A
company may find it necessary to accelerate cash inflows by either selling its receivables or using them as collateral
for loan arrangements.
Types
1. Pledge, hypothecation or general assignment of accounts receivable
 receivable is used as collateral to obtain loans or advances
 no reduction in accounts receivable balance
 receivable pledged is disclosed in the notes to financial statements
2. Specific assignment of accounts receivable
 non-notification or notification basis
 receivable assigned is segregated from unassigned receivables
 entity’s equity in assigned accounts is disclosed in the notes to financial statements
3. Factoring or sale of accounts receivable
 outright sale of receivable on a without recourse, notification basis
 receivable factored is derecognized and gain or loss from factoring is recognized (Proceeds – net carrying
amount of receivable).
 the factor may withhold a predetermined amount to cover probable sales discounts, returns and allowances
(factor’s holdback).
4. Discounting of notes receivable
 discounting without recourse (absolute sale)
 discounting with recourse (either conditional sale or secured borrowing)
 amount of note is ordinarily excluded from the amount shown as receivables and contingent liability must be
properly disclosed
PROBLEM SOLVING
Pledge and Assignment
1. On December 1, 2016 AAA Company assigned P1,500,000 of accounts receivable to Goo 2 Company as a security
for a loan of P900,000 which carries an interest rate of 10%. AAA Company charged a 0.5% commission on the
amount of the loan.
During December, AAA Company collected P220,000 on the assigned accounts after deducting discounts P1,500 of
discounts. AAA Company accepted returns of P2,700 and wrote off assigned accounts totaling P3,000
The carrying amount of the accounts receivable assigned is
a. P1,272,800 b. P1,274,300 c. P1,278,500 d. P1,280,000
2. On December 1, 2016 AAA Company assigned on a non-notification basis receivables of P4,200,000 to OKC Bank
for a loan equivalent to 80% of the receivables. A 5% service fee based on the assigned accounts shall be
deducted in advance aside from the stated interest of the loan which was 12% per annum.
AAA Company collected assigned accounts of P2,900,000 and remitted the collections to OKC Bank in partial
payment of the loan. OKC Company applied the loan first to the interest and the balance to the principal.
The notes payable amount in the December 31, 2016 balance sheet is
a. P394,900 b. P428,500 c. P460,000 d. P493,600
3. On October 30, 2016, AAA Company assigned P300,000 to BBB Finance Company, receiving an advance of 90%
less a service charge of P5,000. The loan carries an interest rate of 8%. At December 30, 2016, P225,000 of the
receivables were collected and was subsequently remitted to the finance company
The loan balance at December 31, 2016 is
a. P75,000 b. 78,600 c. P48,600 d. P45,000
Factoring
4. AAA Company factored P6,000,000 of its accounts receivables. The transfer is recorded as a sale by Bank
Company. Bank Company retained 5% for sales adjustments and charged a P120,000 finance fee.
The loss to be reported as a result of the transfer is
a. P420,000 b. P300,000 c. P120,000 d. P0
Use the following information to answer the next two questions
AAA Company factored P5,000,000 of accounts receivable to Phoenix Company on July 1, 2016. Control was
surrendered by AAA. Phoenix assessed a fee of 5% and retains a holdback equal to 20% of the accounts receivable. In
addition Phoenix charged 12% computed on a weighted average time to maturity of the receivables of 30 days.
5. AAA Company will receive and record cash of
a. P3,700,000 b. P3,700,685 c. P3,750,000 d. P4,700,685
6. Assuming all receivables are collected, AAA Company’s cost of factoring the receivables would be
a. P299,315 b. P250,000 c. P49,315 d. P0
7. AAA Company found itself in financial difficulties and decided to use its accounts receivable as a means of
obtaining cash to continue operations. On July 1, 2016, AAA factored P750,000 of accounts receivable for cash
proceeds of P695,000. No bad debt allowance was associated with these accounts.

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INTERMEDIATE ACCOUNTING PART 1

On December 17, 2016, AAA assigned the remainder of its accounts receivable, P2,500,000 as of that date, as
collateral on a P1,250,000, 12% annual interest rate loan from Mavs Company. AAA received P1,250,000 less 2%
finance charge.
Additional information:
Allowance for bad debts, 12/31/2016 P 32,000
Accounts receivable, excluding factored and assigned receivables 500,000
Estimated uncollectibles, 12/31/2016 (based on accounts receivable) 3%
None of the assigned accounts had been collected by the end of the year. How much were the proceeds from
factoring and general assignment of the accounts receivable?
a. P3,145,000 b. P1,920,000 c. P1,895,000 d. P1,225,000
Notes Discounting
8. On September 30, 2016, AAA Company discounted at the bank a customer’s P5,000,000 6-month 10% note
receivable dated June 30, 2016. The bank discounted the note at 12%. The proceeds from this discounted note
amounted to
a. P5,092,500 b. P5,250,000 c. P4,842,000 d. P5,170,000
9. On January 1, 2016 AAA Company received a 6-month, 10%, P6,000,000 face value note. On March 1, 2016 AAA
Company discounted the note at 12% without recourse. The loss on the note receivable discounting is
a. P48,000 b. P52,000 c. P60,000 d. P252,000
SELF-TEST QUIZZERS
1. AAA Company obtained a one-year loan of P5,000,000 from a bank on April 1, 2016. The loan was discounted at
12%. The company signed a note and pledged its accounts receivable of P5,000,000 as collateral for the loan. In
relation to the loan, AAA should report note payable on December 31, 2016 at
a. P4,400,000 b. P4,550,000 c. P4,850,000 d. P5,450,000
2. On December 1, 2016 AAA Company assigned on a nonnotification basis accounts receivable of P5,000,000 to a
bank in consideration for a loan of 90% of the receivables less a 5% service fee on the accounts assigned. AAA
signed a note for the bank loan. On December 31, 2016, AAA collected assigned accounts of P3,000,000 less
discount of P200,000. AAA 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. In its December 31, 2016 statement of financial position, AAA should report note payable as a
current liability at
a. P1,545,000 b. P1,700,000 c. P1,745,000 d. P2,250,000
3. AAA Company holds a portfolio of receivables with a carrying amount of P2,000,000. The company enters into a
factoring arrangement with BBB Company under which it transfers the portfolio via an assignment to BBB
Company in exchange for P1,800,000 of cash. All sums collected from debtors are paid by AAA Company to a
specifically nominated bank account opened by BBB Company. AAA Company agrees to reimburse BBB Company
in cash for any shortfall between the amount collected from the receivable and consideration of P1,800,000. Once
the receivables have been repaid, any sums collected above P1,800,000 less any interest on initial payment until
the date the debtors pay, will be paid to AAA Company.
The receivable to be recognize by AAA Company immediately after the transfer is
a. P2,000,000 b. P1,800,000 c. P200,000 d. P0
4. On October 31, 2016, AAA Company engaged in the following transactions.
 Obtained a P750,000, six-month loan from Wiz Bank, discounted at 12%. The company pledged P900,000 of
accounts receivable as security for the loan.
 Factored P1,000,000 of receivable without recourse on a non-notification basis with Bank Company. Bank
Company charged a factoring fee of 2% of the amount of receivables factored and withheld 10% of the
amount factored.
The total loss from the financing of the receivables
a. P20,000 b. P65,000 c. P120,000 d. P185,000
5. AAA Company provides financing to other companies by purchasing their accounts receivable on a non-recourse
basis. AAA Company charges a commission to its clients of 15% of all receivables factored. In addition, AAA
Company withholds 10% of receivables factored as protection against sales returns or other adjustments. AAA
Company records the 10% withheld to a Client Retainer and makes payments to clients at the end of each month
so that the balance in the retainer is equal to 10% of unpaid receivables at the end of the month. AAA recognizes
its 15% commissions as revenue at the time the receivables are factored. Also, experience has led AAA Company
to establish an Allowance for Bad Debts of 4% of all receivables purchased.
On January 2, 2016, AAA Company purchased receivables from BBB Company totaling P1,500,000. BBB Company
had previously established an Allowance for bad Debts for these receivables of P35,000. By January 31, AAA
Company had collected P1,2000,000 on these receivables.
The loss on factoring is
a. P225,000 b. P190,000 c. P150,000 d. P0
6. On December 31, 2016 AAA Company factors P450,000 of its receivables to BBB Company on a with recourse
basis. The agreement includes a factoring fee of 8% and a 10% holdback both based on the factored accounts.
BBB Company shall maintain the holdback account at 10% of the uncollected receivables and will make payments
to AAA Company at the end of each month for any excess. AAA Company had previously established an Allowance
for Doubtful Accounts for these receivables of P12,000. The recourse obligation has a fair value of 8,000.

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INTERMEDIATE ACCOUNTING PART 1

The loss arising from the factoring of the receivables

a. P24,000 b. P32,000 c. P35,040 d. P44,000
7. AAA Company accepted from a customer P5,000,000, 120-day, 12% note dated August 31, 2016. On September
30, 2016, AAA discounted the note at the Bucks Bank. However, the proceeds were not received until October 1,
2016. In the September 30, 2016 statement of financial position, the amount receivable from the bank includes
accrued interest revenue of
a. P200,000 b. P156,000 c. P44,000 d. P0
8. AAA Company received from a customer a one-year, P375,000 note bearing annual interest of 8%. After holding
the note for five months, AAA Company discounted the note at an effective interest rate of 10%. The amount
received by AAA Company from the note discounting is
a. P367,250 b. P369,600 c. P381,375 d. P388,125
9. On July 1, 2016, AAA Company sold equipment to Forevermore Company for P250,000. AAA Company accepted a
10% note receivable for the entire sales price. This note is payable in two equal installments of P125,000 plus
accrued interest on December 31,2016, and December 31,2017. On July 1, 2017, AAA Company discounted the
note at a bank at an interest rate of 12%. The cash received by AAA Company from the note discounting is
a. P246,750 b. P233,500 c. P129,250 d. P123,375
Suggested answers (CCAAB BCCC)
End of Handouts

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