Discounting - summary PDF

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Discounting of Notes Receivable (Summary)

Another form of receivable financing is discounting of notes receivable. The holder endorses the note to the bank in exchange for maturity value of the note less a discount. The bank collects the maturity value of the note from the maker. Note be discounted with or without recourse. Discounting With Recourse  In case if the maker fails to pay, the holder is held liable.  The note discounted is not derecognized.  The discounting is accounted for in either: o

Conditional sale of note receivable- contingent liability equal to face amount of the note discounted is disclosed only in the notes to financial statements Entry to record discounting: Cash on Hand

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Loss on Discounting

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Note Receivable Discounted

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Interest Income

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Entry to record collection: Note Receivable Discounted

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Note Receivable o

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Secured borrowing- liability equal to the face amount of the note discounted is recognized on the discounting Entry to record discounting: Cash on Hand

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Interest Expense

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Liability on Note Discounted

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Interest Income

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Entry to record collection: Liability on Note Discounted Note Receivable

Maturity Value = Principal + Interest for the full term of note

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Discount Period = Full Term – Expired Term Discount = Maturity Value × Discount rate × Discount period

Discounting Without Recourse  The holder is not held liable in case the maker fails to pay.  The note discounted has been sold outright thus derecognized. To record discounting: Cash on Hand

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Loss on Discounting

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Note Receivable

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Interest Income

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Formulas to be used: Net Proceeds = Maturity Value – Discount Maturity Value = Principal + Interest for the full term of note Discount = Maturity Value × Discount rate × Discount period o

Discount period- the remaining period to maturity date of note as of date of discounting; unexpired term of the note

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Discount rate- the rate at which the note is discounted with a bank

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Interest Income- the accrued interest as of the date of discounting

Dishonoured Notes  Note Receivable that are not collected at maturity.  When dishonoured, a note loses its negotiable characteristic and becomes an ordinary claim.  Transferred from Notes Receivable to Accounts Receivable.  Amount transferred is the maturity value of the note plus any costs directly attributable to the dishonour, the receivable is assessed for impairment.

Entry to record dishonoured note: Note Receivable Dishonoured

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Note Receivable Accounts Receivable

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Cash on Hand

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Discounting of Own Note  When entity borrows money from bank and discounts its own note means that the bank deducted in advance the interest on the loan.  Loan proceeds is equal to the principal less the interest deducted in advance.

To record own note discounted: Cash on Hand

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Discount on Note Payable

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Note Payable

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