You are on page 1of 4

DISCOUNTING OF CUSTOMER'S NOTE

As explained in the previous lesson, discounting is borrowing money with the


agreement that the cash proceeds will be net of the interest. However, the promissory note being
discounted with the bank in this transaction is the customer's note, not the borrower's note.

Discounting of the customer's note can be with recourse or without recourse


WITH RECOURSE - The borrower can be held liable and therefore will be required to pay in the event
the maker dishonors the note
WITHOUT RECOURSE - The borrower is free from obligation in the event
the maker dishonors the note

Because the borrower is NOT the maker of the note, there should be a previous transaction
to record the receipt of the promissory note from the customer.

EXAMPLE: Received P150,000 10% 60-day promissory note from MNG Trading for services
rendered on May 11.

In the book of the borrower, below are the journal entries


DATE ACCOUNT TITLES/ EXPLANATION PR DEBIT CREDIT
11-May Notes receivable - MNG Trading 150000
Service Income 150000
10% 60-day note for services rendered

Let's assume that on June 2, before the maturity date of the note (July 10), the company
needs cash. One way of raising the needed cash is to discount promissory notes of customers with
the bank.

EXAMPLE: Discounted MNG Trading's P150,000 10% 60-day promissory note with BPI at 12%

DATE ACCOUNT TITLES/ EXPLANATION PR DEBIT CREDIT


2-Jun Cash 150568.33
Interest expense 1931.67
Liability on discounted notes receivable 150000
Interest income 2500
Discounting of customer's note

Note: You need to do the following computations to record the proceeds from discounting of customer's
note
Interest income is the interest stated in the promissory note
I = Prt P = principal or face value of the note
r = interest rate stated in the note
t = term of the note
I 2500

Interest expense is the bank's interest


I = Prt P = maturity value of the note
r = interest rate charged by bank or the discount rate
t = remaining term of the note or the period from the date of discounting
to maturity date
I 1931.67

Cash proceeds = Maturity value - Discount


152500 - 1931.67
150568.3
Journal entries needed on maturity date:
DATE ACCOUNT TITLES/ EXPLANATION PR DEBIT CREDIT
10-Jul Liability on discounted notes receivable 150000
Notes receivable 150000
Customer honored the note

OR

If the customer dishonored the note and the bank charged protest fees of P500

10-Jul Accounts receivable 153000


Liability on discounted notes receivable 150000
Notes receivable 150000
Cash 153000
Customer dishonored the note

PRESENTATION IN THE FINANCIAL STATEMENTS


Liability on Discounted Notes Receivable is shown as a separate line item after trade and
other payables under current liablity in the statement of financial position
y in the event

s transaction

of customer's

discounting

You might also like