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Lesson 9 - Receivable Financing Intermediate Accounting
Accountancy (101)
University of Luzon
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SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY Second Semester A. 2020-
Lesson 9 - Week 7: Receivable Financing
Topics: Receivable Financing
Learning Outcomes: At the end of this module, you are expected to: 1. Identify the sources of financing through receivables 2. Demonstrate the accounting for pledge of accounts receivable 3. Demonstrate the accounting for assignment of accounts receivable 4. Master the factoring of accounts receivable 5. Understand the classification and presentation of pledged, assigned amd factored accounts receivable
Lesson Proper:
Receivable financing
-is the financial flexibility or capability of an entity to raise money out of its receivables. It is the act of
inducing cash inflows from receivables other than from their normal or scheduled payments.
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 accounts receivable
Pledge of accounts receivable When loans are obtained from the bank or any lending institution, the accounts receivable may be pledged as collateral security for the payment of the loan. In pledging of accounts receivable there is no transfer of financial asset since the entity who pledge the accounts receivable retains the control over the pledge receivable.
No complex problems are involved in this form of financing except for the accounting for the loan. The loan is recorded by debiting cash and discount on note payable if loan is discounted and crediting note payable. With respect to the pledged accounts, no entry would be necessary. It is sufficient that the disclosure thereof is made in a note to financial statement.
Illustration On May 1, 2021 an entity borrowed P 1,000,000 from Philippine National Bank and issued a promissory note for the same. The entity pledged accounts receivable of P2,000,000 to secure the loan.
The entry to record the transaction on May 1, 2021 is as follows:
Cash 1,000, Loan Payable 1,000,
Only the loan transaction is recorded and the pledging of accounts receivable would only appear in to the note to financial statements.
Assignment of accounts receivable Assignment of accounts receivable means that a borrower called the assignor transfers the rights in some accounts receivable to a lender called the assignee in consideration for a loan.
Actually, assignment is a more formal type of pledging of accounts receivable. Assignment is secured borrowing evidenced by a financing agreement and promissory note which is signed by the assignor.
Compared to pledging, which is general because all accounts receivable serves as a collateral security for the loan, assignment is specific because in the financing agreement there is a specific account receivable indicated to serve as collateral for the loan.
Before entering to assignment, the assignee (bank or other lending institution) analyzes the borrower’s accounts receivable. The assignee usually lends only a certain percentage of the face value of the accounts assigned because the accounts may not be fully realized.
Forms of Assignment
Non-notification basis - when account receivables are assigned on a non-notification basis, as is usually the case, customers are not informed that their accounts have been assigned. As a result, the customers continue to make payment to the assignor who in turn remits the collections to the assignee.
Notification basis - when account receivables are assigned on a notification basis the customers are notified and therefore will make the payment directly to the assignee.
Illustration: (Non-notification basis) On April 1, 2021 an entity assigned P700,000 of accounts receivable to a bank. The bank advances 80% less service charge of P5,000. The entity signed a promissory note that provides for interest of 1% per month on the unpaid loan balance.
Transaction happened on April as follows:
- The entity issued a credit memo for sales return to a customer whose account was assigned, P20,
- Collected P300,000 of the assigned accounts less 2% discount.
The entry for the month of April is as follows:
**Non notification basis Notification basis
- To record the assignment of account receivable:** Accounts receivable- assigned 700, Accounts receivable 700,
1. To record the assignment of account receivable: Accounts receivable- assigned 700, Accounts receivable 700,
Commissions and interest charges The factor normally charges the transferor of a certain percentage of the receivables factored as a service fee or commission. Furthermore, interest is computed on a weighted average time to maturity of the receivables may also be charged.
Accounting for commissions and interest charges Factoring may take the form of the following:
- Casual Factoring – if the factoring is an isolated event or made on a casual basis, the transferor records the fees and interest charges as loss on sale of receivables.
- Factoring as a regular means of financing - services are recorded as regular expenses.
Illustration: without recourse An entity factored accounts receivable of P500,000 on a without course basis on April 1, 2021. The factor charged 5% service fee and retained 20% of the amount of the receivables factored to cover the sales return and allowances. The factor also charged 12% interest computed on a weighted average time to maturity of receivables of 80 days based on 365 days.
Requirements: (1) Proceeds from the factoring (2) Journal entries to record the factoring assuming it was made on (a) on a casual basis (b) regular means of financing (3) Cost of factoring.
**Solution:
- Proceed from factoring** Accounts receivable factored P500,
Service charge (500,000 x 5%) (25,000)
Factor’s holdback (20% x 500,000) (100,000)
Interest charged (500,000 x 12% x 73/365) (12,000)
Proceeds from factoring P463,
2. (a) Casual basis Cash 463, Receivable from factor 100, Loss on sale of receivables 37, Accounts receivable 500,
(b) Regular means of financing Cash 463, Receivable from factor 100, Service charge 25, Interest expense 12, Accounts receivable 500,
(c) Cost of factoring Casual basis Regular means of financing Loss on sale of A/R 37,000 Service charge 25, Interest expense 12, Cost of factoring 37,000 Cost of factoring 37,
Illustration: with recourse Assuming in the previous illustration the entity factored the receivables on a with recourse basis. The entity determines that the recourse obligation has a fair value of P15,000.
The entry to record the factoring is as follows:
a) Casual basis Cash 463, Receivable from factor 100, Loss on sale of receivables 52, Accounts receivable 500, Liability for recourse obligation 15.
(b) Regular means of financing Cash 463, Receivable from factor 100, Service charge 25, Interest expense 12, Loss on recourse obligation 15, Accounts receivable 500, Liability for recourse obligation 15, Cost of factoring: (a) If all receivables are collected Service charge 25,0 00 Interest expense 12, Cost of factoring 37,
(b) If not all the receivables are collected Service charge 25, Interest expense 12, Recourse obligation 15, Cost of factoring 52,
Discounting of notes receivables In this kind of receivable financing, the holder endorses the note to the bank in exchange for the maturity value of the note less discount. The bank will be the one to collect the maturity value of the note from the maker.
**Two kinds of discounting of notes:
- Discounting without recourse –** the holder is not held liable in case the maker fails to pay. The said note will be derecognized because it has been essentially sold outright 2. Discounting with recourse – the holder is held liable in case the maker fails to pay. The note discounted is not derecognized. The discounting is accounted for as either: a. Conditional sale - a contingent liability equal to the face amount of the note is disclosed only in the notes to financial statement b. Secured borrowing – a liability equal to the face amount of the note is recognized in the discounting
(Detailed discussion via lectures)
No. 5 - Factoring BlankPink Company provides financing to the other entities by purchasing accounts receivable on a nonrecourse basis. BlankPink Company charges the clients a commission of 15% on all accounts receivable factored.
In addition, BlankPink Company withholds 10% of accounts receivable factored as protection against sales returns or other adjustments.
BlankPink Company credits the 10% withheld to Clients Retainer account 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.
Experience has led BlankPink Company to establish an allowance for doubtful accounts of 4% of all unpaid accounts receivable purchased.
On December 1, BlankPink Company purchased accounts receivable from DTS Company totaling P3,000,000.
DTS Company had previously established an allowance for doubtful accounts for the accounts receivable at P100,000.
By December 31, BlankPink had collected P2,500,000 on the accounts receivable. Required: a. Prepare journal entries to record the transactions on the books of DTS Company (seller of accounts receivable). b. Prepare journal entries on the books of BlankPink Company (factor or buyer of accounts receivable)
No. 6 - Discounting Leiva Company provided the following transactions: Jan 1 The entity sold merchandise for P500,000 accepting a note for P500,000 for six months with interest to be paid at maturity at 12%. March 1 The entity discounted the note at the local bank at 15%. July 1 The customer paid the bank in full. Required: 1. Prepare the journal entries to record the transactions assuming the discounting is without recourse. 2. Prepare the journal entries to record the transactions assuming the discounting is with recourse accounted as: a. conditional sale b. Secured borrowing
No. 7 – Discounting Kilua Company provided the following transactions: March 14 Sale of merchandise, P2,050,000 to a customer, FOB destination 2/10, n/30. April 7 Receipt of a 60-day, 12% note dated April 5 from the customer. The face of the note was the amount of the invoice minus freight charge of P50,000 paid by the customer in connection with the March 14 sale. 20 The note of the customer was discounted with the bank at 15%. June 4 Receipt of notification from bank that the customer dishonored the note. Accordingly, the entity paid the bank the amount due including protest fee and other charges of P10,000. July 4 Receipt of cash from the customer for the full amount of indebtedness plus interest on the original face value.
Required: 1. Prepare the journal entries to record the transactions assuming the discounting is without recourse. 2. Prepare the journal entries to record the transactions assuming the discounting is with recourse accounted as: a. conditional sale b. Secured borrowing
REFERENCES
- Millan, Z. V. (2020) Intermediate Accounting Volume 1A, Baguio City: Bandolin Enterprise.
- Valix, C. and Peralta, J. (2019) Intermediate Accounting Volume 1, GIC Enterprises & Co., Inc., Manila
- Asuncion, D. O.(2018) Applied Auditing, Real Excellence Publishing, Aurora Hill, Baguio City 2600
Lesson 9 - Receivable Financing Intermediate Accounting
Course: Accountancy (101)
University: University of Luzon
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