FAR 8 - Chapter 8 PDF

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Geliemae G. Bajan A-Chapter 8. Receivable Financing Pledge, Assignment and Factoring Explain fully receivable financing.  Receivable financing is the financial flexibility or capability of an entity to raise money out of its receivables. It helps the entity to improve its ability to collect receiva...

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Geliemae G. Bajan

A-11

Chapter 8. Receivable Financing Pledge, Assignment and Factoring 1. Explain fully receivable financing.  Receivable financing is the financial flexibility or capability of an entity to raise money out of its receivables. It helps the entity to improve its ability to collect receivables in the nearer future. This allows the firm access to working capital immediately, which is significant particularly if the firm might have a cash flow problem. 2. Enumerate the four common forms of receivable financing.  The common forms of receivable financing are: a) Pledge of accounts receivable b) Assignment of accounts receivable c) Factoring of accounts receivable d) Discounting of note receivable 3. What are the forms of financing related to accounts receivable?  Pledge of accounts receivable  Assignment of accounts receivable  Factoring or accounts receivable 4. What is pledge of accounts receivable?  Pledge of accounts receivable means using the accounts receivable as a collateral security for the payment of the loan obtained from the bank or any lending institutions.  With respect to the pledged accounts, no entry would be necessary. It is sufficient that disclosure thereof is made in a note to financial statement. Initial record of loan: Cash Discount on note payable Note payable

Payment of loan: Note payable Cash

XX XX

XX XX

XX

5. What is assignment of accounts receivable?  Assignment of accounts receivable is a lending agreement where a borrower, called the assignor, transfers rights in some accounts receivable to a lender, called the assignee, in consideration for a loan. 6. Distinguish pledge and assignment of accounts receivable.  Actually, assignment is a more formal type of pledging of accounts receivable. It is a secured borrowing evidenced by a financing agreement and a promissory note both of which the assignor signs.  Pledging is general because all accounts receivable serve as collateral security for the loan, while the assignment is specific because specific accounts receivable serve as collateral security for the loan. 7. What is the meaning of nonnotification and notification basis with respect to assignment of accounts receivable?  Assignment of accounts receivable may be done either on a nonnotification or notification basis.  When accounts are assigned on nonnotification basis, customers are not informed that their accounts have been assigned. As a result, the customers continue to make payments to the assignor, who in turn remits the collections to the assignee.  When accounts are assigned on a notification basis, customers are notified to make their payments directly to the assignee. 8. What is factoring?  Factoring is a financial transaction whereby a borrowing entity sells its accounts receivable to a factor.  Factoring differs from an assignment in that an entity actually transfers ownership of the accounts receivable to the factor. Thus, the factor assumes responsibility for uncollectible factored accounts. In assignment, the assignor retains ownership of the accounts assigned.  Accordingly, a gain or loss is recognized for the difference between the proceeds received and the net carrying amount of the receivables factored. 9. Explain casual factoring and factoring as a continuing agreement.  Casual factoring happens when an entity may be forced to factor some or all of its accounts receivable at a substantial discount to a bank or a finance entity to obtain the much needed cash.  Factoring as a continuing agreement is involved when a finance entity purchases all of the accounts receivable of a certain entity.

10. What is a credit card?  A credit card is a plastic card which enables the holder to obtain credit up to a predetermined limit from the issuer of the card for the purchase of goods and services.  The credit card has enabled retailers and other businesses to continue to sell goods and services where the customers obtain possession of the goods immediately but do not have to pay for the goods for about a month.  Credit card sales: Payment from card issuer: Accounts receivable – Diners Club XX Cash XX Sales XX Credit card service charge XX Accounts receivable – Diners Club XX Problem 8-3. Savior Company provided the following transactions: May 1 Elegant Company assigned P800,000 of accounts receivable to a bank in consideration for a loan. A cash advance of 80% less service charge of P20,000 was made by the latter. It was agreed that the interest of 2% per month is to be made and that the assignor continues to make the collections. The entity signed a promissory note for the loan.

June

July

5

The entity issued a credit memo to a customer for returned merchandise, P30,000. The account is one of the assigned accounts.

10

Collections of P500,000 of the assigned accounts were made, less 2% discount.

1

Remitted the collections to the bank plus 2% interest for one month.

7

Assigned accounts of P10,000 proved to be worthless.

20

Collections of P200,000 for the accounts assigned were made.

1

Final settlement was made with the bank. Elegant Company accordingly remitted the total amount due the bank to pay off the loan plus interest charge.

Required: Prepare journal entries to record the transactions. May

1 1

5 10

June

1

7 20

July

1

Accounts receivable – assigned Accounts receivable Cash (640,000-20,000) Service charge Note payable – bank Sales return Accounts receivable – assigned Cash Sales Discount (2%500,000) Accounts receivable – assigned Note payable – bank Interest expense (2%640,000) Cash Allowance for doubtful accounts Accounts receivable – assigned Cash Accounts receivable – assigned Note payable – bank (640,000-490,000) Interest expense (2%150,000) Cash Accounts receivable Accounts receivable – assigned

Accounts receivable – assigned Less: Collections Sales Discount Sales return

800,000 800,000 620,000 20,000 640,000 30,000 30,000 490,000 10,000 500,000 490,000 12,800 502,800 10,000 10,000 200,000 200,000 150,000 3,000 153,000 60,000 60,000 800,000

690,000 10,000 30,000

Worthless accounts 10,000 Balance Chapter 9. Receivable Financing Discounting of Notes Receivable

740,000 60,000

1. Explain the discounting of note receivable.  Discounting of note receivable is a form of receivable financing which is specifically referred to notes receivable. Notes receivable is converted into cash by selling them to a financial institution at a discount. 2. Who are the original parties in a promissory note?  In a promissory note, the original parties are the maker and payee. The maker is the one liable and the payee is the one entitled to payment on the date of maturity. 3. Who are the parties involved after discounting of note receivable?  After discounting, the parties involved are the endorser and the endorsee. 4. Explain endorsement of a negotiable instrument.  Endorsement is the transfer of rights to a negotiable instrument by simply signing at the back of the instrument.  Endorsement may be with recourse which means that the endorser shall pay the endorsee if the maker dishonors the note. In the legal parlance, this is the secondary liability of the endorser. In the accounting parlance, this is the contingent liability of the endorser.  Endorsement may be without recourse which means that the endorser avoids future liability even if the maker refuses to pay the endorsee on the date of maturity.  In the absence of any evidence to the contrary, endorsement is assumed to be with recourse. 5. What is the formula in computing net proceeds from discounting of note receivable? Maturity value XX Discount (XX) Net proceeds XX 6. Explain maturity value.  Maturity value is the amount due on the note at the date of maturity. Principal plus interest equals the maturity value. 7. What is the formula in computing interest on the note receivable?  Interest = Principal  Rate  Time. 8. Explain discount in relation to discounting of note receivable.  Discount is the amount of interest deducted by the bank in advance. 9. What is the formula in computing discount?  Discount = Maturity value  discount rate  discount period 10. Explain the carrying amount of the note receivable upon discounting.  The carrying amount of the note receivable upon discounting is the principal amount of loan with the accrued interest receivable. 11. What is the formula in computing gain or loss on discounting of note receivable? Net Proceeds XX Carrying amount of notes receivable (XX) Gain or Loss XX 12. Explain discounting without recourse.  In discounting without recourse, there is no contingent liability or an obligation to pay an amount in the future when an uncertain event occurs like when then maker dishonors the note. The note receivable account is credited directly and the interest income is credited for the actual interest earned on the date of discounting. 13. Explain discounting with recourse accounted for as conditional sale.  If the discounting is treated as a conditional sale, the note receivable discounted account is deducted from the total notes receivable when preparing the statement of financial position with the disclosure of the contingent liability. Journal Entry: Note is dishonored by maker: Cash XX Payment: Loss on note receivable discounting XX Accounts receivable XX

Note receivable discounted

XX

cash

XX...