Handout: Notes Receivable, Loans Receivable & Receivable Financing FAR0_1st Sem_AY2019-20

Notes receivable refer to claims supported by formal promises to pay usually in the form of notes.

Measurement of Notes Receivable

Classification
1. Short-term note receivable
2. Long-term, interest-bearing note
receivable
3. Long-term, non-interest bearing
note receivable
*Conceptually, notes receivable are initially measured at present value and subsequently measured at amortized cost.
Initial Measurement Subsequent Measurement
Face amount Initially measured amount minus
principal repayment and reduction for
impairment or uncollectibility
Face amount Initially measured amount minus
principal repayment and reduction for
impairment or uncollectibility
Present value/ discounted value Initially measured amount minus
principal repayment, plus or minus
cumulative amortization of any
difference between the initial carrying
amount and the principal maturity
amount, minus reduction for
impairment or uncollectibility

Accounting for Long-term, Non-interest Bearing Notes

Present Value (PV) of the Unearned Interest Income
Particulars Method of Amortization
Note Receivable (NR) (UII) - Initial measurement
1. Note is payable in lump- PV of NR = cash equivalent UII = Face of NR – PV of Effective interest method
sum; cash equivalent price of the consideration NR
price for the received
consideration received is
available
2. Note is payable in lump- PV of NR = Face of NR UII = Face of NR – PV of Effective interest method
sum; cash equivalent multiply by the PVF of NR
price for the 1@rate for “n” periods
consideration received is
not available
3. Note is payable in equal PV of NR = cash equivalent UII = Face of NR – PV of Outstanding balance method
annual installments; cash price of the consideration NR
equivalent price for the received
consideration received is
available
4. Note is payable in equal PV of NR = annual UII – Face of NR – PV of Effective interest method
annual installments; cash installment multiply by the NR
equivalent price for the PVF of an ordinary annuity
consideration received is of 1@rate for “n” periods
not available
5. Note is payable in PV of NR = individual UII – Face of NR – PV of Effective interest method
uneven annual uneven installments multiply NR
installments; cash by the PVF of 1@rate for
equivalent price for the each “n” period
consideration received is
not available
*Amount to be credited to Sales (if item sold is inventory) or amount to be used as Selling Price in the determination of gain or
loss on sale (if item sold is other than inventory) = Down payment (if any) plus the PV of NR

Pro-forma entry on transactions involving long-term, non-interest bearing notes receivable:

Asset sold is an inventory; Asset sold is not an inventory; with a down payment
with a down payment Sale resulted to a gain on sale Sale resulted to a loss on sale
Entry to record the sale: Cash xx Cash xx
Cash xx Note receivable xx Note receivable xx
Notes receivable xx Accumulated depreciation xx Accumulated depreciation xx
Sales xx Depreciable asset xx Loss on sale xx
Unearned interest income xx Unearned interest income xx Depreciable asset xx
Gain on sale xx Unearned interest income xx
Entry to record subsequent collection:
Cash xx Entry to record subsequent collection: Entry to record subsequent collection:
Notes receivable xx Cash xx Cash xx
Notes receivable xx Notes receivable xx

Entry to record the amortization of Entry to record the amortization of Entry to record the amortization of
interest: interest: interest:
Unearned interest income xx Unearned interest income xx Unearned interest income xx
Interest income xx Interest income xx Interest income xx
Handout: Notes Receivable, Loans Receivable & Receivable Financing FAR0_1st Sem_AY2019-20

Loans receivable refer to financial assets arising from a loan granted by a bank or another financial institution to a borrower or
client.

Measurement of Loans Receivable

Initial Measurement Subsequent Measurement
Fair value plus transaction costs Initially measured amount minus principal repayment, plus or minus cumulative
amortization of any difference between the initial carrying amount and the
principal maturity amount, minus reduction for impairment or uncollectibility

Effects of Amortization
Case
1. Origination fees charged to the
borrower are equal to those
shouldered by the lender (bank)
2. Origination fees charged to the
borrower are more than those
shouldered by the lender (bank)
3. Origination fees charged to the
borrower are less than those
shouldered by the lender (bank)
Initial Carrying Amount (ICA) VS. Face Effects of Amortization
Amount (FA)
ICA = FA Not applicable
ICA < FA Increase in “Interest Income” and
“Subsequent Carrying Amount” of the
*The difference is recognized as Loans Receivable
“Unearned Interest Income” subject to
periodic amortization
ICA > FA Decrease in “Interest Income” and
“Subsequent Carrying Amount” of the
*The difference is recognized as “Direct Loans Receivable
Origination Costs” subject to periodic
amortization

Credit Risk and Impairment of Loans Receivable

Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to
discharge an obligation.

An entity shall recognize a loss allowance for expected credit losses on financial assets measured at amortized cost. Credit
losses are the present value of all cash shortfalls over the life of the financial instrument.

The amount of impairment loss can be measured as the difference between the carrying amount and the present value of
estimated future cash flows discounted at the original effective rate.

PRO-FORMA COMPUTATIONS: PRO-FORMA ENTRIES:

Face amount of the loan receivable xx Loan impairment loss xx
Add: Accrued interest (if previously recognized) xx Interest receivable (if accrued) xx
Total carrying amount xx Allowance for loan impairment xx
Less: Present value of future cash flows discounted
using the original effective rate xx Allowance for loan impairment xx
Loan impairment loss xx Interest income xx

RECEIVABLE FINANCING
It refers to the financial flexibility or capability of an entity to raise money out of its receivables other than from the usual
collection of the same.

Forms of Receivable Financing Transfer of Ownership Pro-forma entries

1. Pledging of accounts receivable 1. The borrower retains ownership Cash xx
over the accounts receivable which Discount on note payable xx
were pledged as collateral security Note payable – bank xx
for a loan.
2. Assignment of accounts receivable 2. The borrower retains ownership Entry to identify and segregate assigned
over the accounts receivable which accounts:
were assigned as collateral security Accounts receivable assigned xx
for a loan. Accounts receivable xx

a. Notification basis – customers *Unlike in pledging where all accounts

whose accounts are assigned as
security for a loan are advised
to pay directly to the assignee
b. Nonnotification basis –
customers whose accounts are
assigned as security for a loan
are not notified of the
financing arrangement; hence,
the former still pays to the
assignor
receivable are offered as collateral
security, assignment requires the
specific identification of accounts which
are assigned as security for a loan.
Entry to record the assignment:
Cash xx
Service charge xx
Note payable - bank xx
Handout: Notes Receivable, Loans Receivable & Receivable Financing FAR0_1st Sem_AY2019-20

3. Factoring of accounts receivable 3. Ownership over the factored Entry to record casual factoring:
accounts receivable is transferred to Cash xx
the factor. Allowance for doubtful accounts xx
Loss on factoring xx
a. Casual factoring - Loss on Accounts receivable xx
factoring, equal to the
difference between the selling Entry to record factoring as a
price and the net realizable continuing arrangement:
value of the factored accounts Cash xx
receivable, is recognized. Commission expense xx
Receivable from factor xx
b. Factoring as a continuing Accounts receivable xx
arrangement – No loss is
recognized. The fee charged by
the factor on the financing
arrangement is recorded as a
commission expense.

“Receivable from factor

(factor’s holdback)” – a
predetermined amount
withheld by the factor as a
protection against customer
returns and allowances and
other special adjustments.

4. Discounting of notes receivable 4. Transfer of ownership over the Entry to record discounting without
notes discounted is dependent on recourse:
the mode of discounting agreed Cash xx
upon by the parties. Loss on NR discounting xx
Note receivable xx
a. Discounting without recourse Interest income xx
–absolute derecognition of the
notes receivable account
Entry to record discounting with
b. Discounting with recourse, recourse – conditional sale:
accounted for as a Cash xx
conditional sale – the note Loss on NR discounting xx
receivable account is not Note receivable discounted xx
derecognized at the time of Interest income xx
discounting. A contra – asset
account, “Note Receivable
Discounted” account is Entry to record discounting with
recognized with disclosure of recourse – secured borrowing:
the contingent liability. Cash xx
Interest expense xx
c. Discounting with recourse, Liability for NR discounted xx
accounted for as a secured Interest income xx
borrowing - the note
receivable account is not
derecognized at the time of
discounting. An accounting
liability, “Liability for Note
Receivable Discounted”
account is recognized.

Computational Guidelines related to Note Receivable Discounting:

1. Maturity value = Principal + Interest
*Interest = Principal X Original Rate X Original Term
2. Discount = Maturity value X Discount Rate X Discount Term
3. Net proceeds = Maturity value – Discount
4. Carrying amount of NR = Principal + Interest
*Interest = Principal X Original Rate X Expired Term at the time of discounting
5. Loss on NR discounting (Interest Expense) = Carrying Amount of NR – Net Proceeds

DISHONORED NOTES – A note is said to be dishonored if payment is not made at the time of maturity. Theoretically,
dishonored notes should be transferred to Accounts Receivable at an amount equal to the face amount of the note plus interest
and other charges.